Intrum AB
STO:INTRUM
Intrum AB
STO:INTRUM
Price:
26.62 SEK
-2.42%
Updated:
May 21, 2024
Section:
Earnings Call Analysis
Summary
Q3-2023
Q3-2023
Intrum's Multiyear Journey to Boost Margins
Intrum, amid a challenging collection and cost environment, experienced a 14% growth in external income, albeit with servicing margins under pressure. The company is dedicated to improving these margins and targets an adjusted EBIT margin of over 25% by 2026. Cash income and EBITDA rose by 8% and 13% respectively, with a steady return on investment at 14%. Investment pace has notably slowed, aligning with strategy, with net cash extraction at SEK 2.25 billion this quarter. External servicing growth stood at 13%, while the pro forma leverage ratio decreased to 4.4x. Intrum embarks on a promising multiyear journey to enhance stakeholder value through revenue growth, cost reductions, and deleveraging efforts.
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Good morning, everyone. This is Andres Rubio, as indicated by the operator, and I'm here with Michael Ladurner, our Chief Financial Officer. Thank you for joining us this morning to discuss our third quarter results and where we stand today as a company. Before we get into the presentation, I will be making some overarching comments, but then I will go through some overview as to our performance during the quarter. Michael will conduct a more detailed financial review of the performance during the quarter. I will provide some concluding remarks, and then we will open it up for Q&A.Before I get into the presentation, I wanted to make some, again, overarching comments about our performance for the quarter. I think the performance during the quarter, which is traditionally a slow quarter, is one that witnessed a tremendous amount of activity for the company and activity that is very emblematic of where we are in our development journey. What do I mean by that? Theperformance during the quarter is characterized by tremendously positive revenue performance and revenue prospects that's driven fundamentally by the quality of our service, which is second to none in the credit management space as well as the need, the increasing need of our services by our clients given the general macro backdrop, which I will get into. But despite the positive top line trends and prospects, we face realities. We are not immune to the environment. We face realities of the inflationary environment, growing our cost faster than we're comfortable with, which we are directly addressing with the cost reduction program we announced earlier this year. I'll give an update on that. And we also, as we communicated in our Capital Markets Day, need to continue to extract as much organic cash flow and dedicate all that cash flow to debt reduction, which we also made progress during the quarter and our highlight.Near term, we have the privilege of a very positive top line. We have the direct challenges of cost and leverage, which we want to reduce. And we are doing all that, and at the same time, developing the company, both organically as well as through acquisitions of technology platforms like we did two in the last 3 months, as well as never losing focus on what our purpose is, which is helping consumers extract themselves from a very difficult situation and in the process, collect on behalf of our clients. So now if we can turn to Page 3. The next 3 pages will be a bit of a reminder for everyone as to what we communicated at our Capital Markets Day on the 13th of September. Page 3, we highlight the near-term and long-term goals. Near term, we are going to reduce leverage, lower the risk around our platform. Long term, we want to grow profit. We want to create the leading servicer and I would actually say, enhance our leading servicing position more appropriately, but also create a capital-light asset management platform from what is today fundamentally a proprietary investment platform. What are we doing specifically on the top in terms of the near term, you'll see evidence of these to different degrees during the quarterly performance, but lower proprietary investments so that we can liquidate and collect against our back book without reinvesting at our normal replenishment rate, which drives a net extraction of cash, which we will then use to reduce leverage and derisk our platform.Cost reduction. We're going to give some very specific figures as to our progress and our ultimate aims in this regard, but that cost reduction is already partially implemented, and we'll see more to come in the next 1 to 2 quarters. We are evaluating selected potential exits of markets as well as tactically selling a back book, all of which will raise proceeds, which we will then again, dedicate to lowering our leverage over the near term, all of which, given the environment will reduce the risk and reduce the leverage. Ultimately, long term, you have to have your foot on the accelerator as well as the break. And the accelerator is to drive the development of the business. We want to be a tech-driven company. In fact, I want to be a tech company that does collections as opposed to a collections company that utilizes tech. We made 2 important acquisitions in eCollect and Ophelos, both of which are going to enhance our customer value proposition, make us more effective at collecting, as well as make us more efficient operationally. We want an intense commercial focus. We are already seeing this, and that's probably the factor on this page that's most evident in this quarter's performance, where we have a tremendous revenue performance, and we've laid the groundwork and planted the seeds for significant revenue improvement going forward, where our commercial area is probably in the best area it's ever been.We want to, over time, leverage third-party capital. We are making progress in that regard in selected discussions with third parties to increase our investing activity without increasing our balance sheet and more to come in the coming quarters on that. And we are implementing, in contrast to the one Intrum previous goal, we're implementing a more simplified and a more balanced local as well as central operating model, which will be more effective and provide more decision-making power closer to our clients and our customers. All of those will, again, grow profit and create the leading servicing platform as well as create a capital-light asset management platform that can grow without growing our balance sheet. Next page.Just on Page 4, the lens with which we look at all of these things are these 3 pillars: operational excellence, which is tech-driven all of the activities that Annette Kumlien highlighted in our Capital Markets Day, client focus, intense focus on providing the best possible solution to our clients, in the end, will lead to significant revenue growth and ultimately, profit and deleveraging. So there, you heard from George, Georgakopoulos in the Capital Markets Day, and we're already seeing significant benefits from our reorganization in our sales and commercial area. And then capital light. We want to extract capital over the near term, which, as I said, we'll use for deleveraging as well as ultimately, over time, pivot to a capital-light, more efficient and better return investing platform business.On Page 5, here you see, and later on, Michael is going to give you a progress report on how we did in the quarter against these targets. But we have some very clear targets over the next 3 years. We want to grow servicing, particularly external servicing with third-party clients more than 10% a year. We want to get to 25% margin, we want to lower our balance sheet intensity, which because we are going to do so by extracting value from our back book means our proprietary investment book value will come down. We want to get to 3.5 leverage. We made a very small step towards that this quarter, but we want to get to that by '25 and into '26. And then with all of that, our intention is to continue or to resume rewarding our shareholders for holding our stock once we get to the more appropriate leverage level of 3.5x. I'm happy to say, and I don't want to steal Michael's thunder, but we've made progress on almost all of these fronts during the quarter, but it is the beginning of a journey that's going to take the next 2 to 3 years to get to where we'd like to be.On Page 6, you see where we stand on the quarter. So progress on strategic initiatives. I'm happy to report that despite the headwind that we face on accelerating costs due to inflation, FX and the like, we are making significant progress towards the previously announced cost target. We announced in the second quarter SEK 600 million. We expanded that during the Capital Markets Day to SEK 800 million expectation. To date, we've implemented SEK 350 million on a run rate basis, which means that as of today going forward, we should see on a like-for-like basis, our cost reducing on an annualized basis by SEK 350 million. So we will see that run rate during the fourth quarter. By the end of the year, we expect to get in excess of our SEK 800 million target on a run rate basis, all of which will be reflected in our 24 cost progression. We had a record ACV signings and win rate in the quarter. I'll go through that in a little bit later, but we are in the best place we've ever been on the commercial signing. We've exceeded last year already 3, 3 quarters, and we're going to have the best year ever, and we're planting the seeds for significant commercial growth, particularly on servicing in the years to come. And we are progressing on back book disposal as well as market exits. More to come on that in the next quarter or two. And so those are all the strategic initiatives over the near term, and we've made significant progress on all and more to come.During the quarter, on the top right, you see that the top line growth reflective of my comments on how we've done very well commercially has been significant, 9% year-on-year, coming from both businesses. We do have record high ACV sales, and we've extracted SEK 4.8 billion from investing in the last 12 months. That compares to SEK 1.3 billion in the prior period. And during the quarter, we extracted SEK 2.3 billion. So our extraction, our lowering of our investment levels and extraction of cash is actually accelerating consistent with the message we delivered at the Capital Markets Day. And our leverage ratio did increase, although modestly to 4.4%, which is a step in the right direction. On the bottom, how we progress more in more detailed initiatives. Operational scorecards have been integrated into all our monthly business review. This allows markets to compare themselves not just with their past performance but also to other markets, very important benchmarking and a very important step in a cultural mindset shift towards performance management. We rolled out a new contact center platform in Finland, one of our most important markets, which has the greatest number of clients in the entire platform, 20,000 actually. And we are launching a leadership acceleration program because we need to make sure that we understand that although we want to be a tech company, we are fundamentally driven by our people, and we need to invest and develop our people in order to continue the progress towards a more successful future. Over the near term as well, we hit some very important milestones.We closed -- in fact, last week, the Ophelos acquisition. It is the only AI-driven debt resolution platform that exists. We're now matching the leading AI-based collections platform with the leading collections platform in the world, us, Intrum. The combination of which will lead to a better customer value proposition, more efficient operations and better collections capability. We also signed our first few clients with eCollect, which is an invoice reminder services and invoice management services business, a very important element of the value chain for clients, particularly in the middle and the north of Europe. And that's already off and running as part of the Intrum family. Specifically, servicing and investing, our AUM is growing consistent with the environment and consistent with the recent quarterly trends. Our win rate has gone from 49% to 56%. We continue to win in the marketplace, and we win because we provide the best service. We increased our income in servicing, which is our top line under our new disclosure. We call top line of revenue and servicing income. That has driven 11%, driven by both FX and M&A. And our EBIT margin is not where we want to be. It was high 17% last quarter. It is now low 17% partly because of the headwind on costs that we're talking about. But I'm incredibly confident that we're going to be progressing and we're going to achieve our mid-20s, specifically 25% target in the next 2 to 3 years. On investing, despite the incredibly difficult environment, we did collect at 100% of our active forecast. Our cash income increased, our cash EBITDA increased, and we lowered our run rate investments to about SEK 0.5 billion a quarter, which until we changed structurally that business in the form of a capital partnership or something else, we will remain at that SEK 2 billion roughly annual rate or roughly SEK 0.5 billion a quarter run rate, which will lead to an extraction of cash on a consistent basis. Moving to Page 7. What's going on in the environment? The environment is one where the consumer and the small and medium enterprise is under more pressure than we've seen in recent history. What do I mean specifically? We put out our consumer payments report recently, we're actually officially putting it out in the next few weeks. We've put out exerts thus far, but the numbers are quite stark and quite serious and concerning. 24% of European consumers that is, across all of Europe, every month, spend more, have greater costs than they have income. In fact, 50% breakeven. So you're talking about 74% of all consumers across Europe, either just cover their costs or are in deficit. As a result, more than 1/3, the highest number we have seen since we started compiling these figures 5 or 6 years ago, have failed to make one payment, deliberately could not make a payment in the last 12 months. And these consumers do not have a lot of cushion to fall back on. 50% roughly of European consumers have 1 month of income or less of savings, 20% have no savings. So not surprising, these consumers are taking on new credit to meet their current cost needs, and they're asking for a raise, which only serves to exacerbate the problem of indebtedness, deficit spending as well as overall inflation.From the corporate side, as we put out a few months back in our payment report that focuses on small and medium enterprises, this extends to that arena as well. 2/3 of SMEs are being asked to extend payment terms to collect on invoices. We see it because we see an acceleration of our AUM. People are not getting paid on their invoices. And this, as you saw in our payment report is a drag in total. When you look at the number of days every small and medium enterprise spends trying to collect on their revenue, and you extrapolate that across the entirety of Europe, we're talking about an economic drag of nearly EUR 300 billion. Very, very systemically important drag on our productivity. And bankruptcies, it's unfortunate, but it has to be recognized that they continue to accelerate, and they hit the highest levels since 2015 in Europe. All of which means that the consumer and companies are under difficulty, and clients need us more than ever to help them collect on their invoices or collect on their loans.Let's switch over to servicing and then investing for a few pages. On Page 8, here you see the acceleration, our pipeline on the top and our win rate. So as you can see, in the last 2 years, we've gone from 46% to 49% to an all-time high of 56%. We win more than half the times when we compete for new client business. our pipeline hit an all-time high in Q2 and it's still at one of our highest levels ever at 2.4. And the drop is not because there's less business out there, it's because we've signed more business than we expected in the fourth quarter, a significant amount which is the bottom half of this page. And here, you can see that our ACV has hit an all-time high. Through 3 quarters this year, through the end of September, we are at SEK 1.1 billion of new contract signings. That's the annual contract value, the annual revenue that we should expect from these signings that we've done in the first 3 quarters. That is our annual target, which is already achieved 3 quarters into the year, and it's 60% above last year, where we experienced through the full year, only SEK 690 million of new ACV signing. So again, the numbers bear out the fact that our clients need us more than ever. And our service is the best in the marketplace. We've had some very specific great wins. We won a very large contract with Building Center, which is the real estate arm of CaixaBank in Spain, where we are now the servicer for 100% of all of their real estate exposures as an institution. We won a very large hospital contract in Norway, and we've recently expanded our activities with Virgin Money. These are just a few larger and more prominent, well-known company client examples of an overall trend of increasing commercial activity. And because of this, because of the pipeline, because of our signings and because of these new contracts to come in, and the Q3 was the best quarter we ever had, and 2023 will be the best year we have. We're planting the seeds for revenue growth for the next 1, 2 and 3 years.On the next page, on Page 9, you can see that ultimately, our adjusted income as well as our top line is stronger than ever, but we do face a margin challenge here. And this is where our cost program is going to come in and have a dramatic impact from now going forward. We spent the better part of the last 2 quarters really scoping out designing and beginning to implement the cost program. We, as I said earlier, have already realized SEK 350 million. We expect to get to in excess of the SEK 800 million on a run rate basis by the end of the year, and we will feel all of that next year. So that margin, I'm very confident will continue a more positive trend in the coming quarters. But our servicing revenue, based on everything I just said, not surprisingly, is at a great top line level, and we can work with that to improve our margin. But the other point that I wanted to make on this is that when we include technology, and this is a very specific example, which I think when you apply it across the entire company, shows the potential benefit, not just to us, not just to our customers, but to society as a whole of implementing technology. So this case study on the bottom of the dialogue box on the right is in Denmark. Every year, we send 3 million physical letters out in Denmark historically. As of earlier this year, we transitioned to sending 80% of those letters in a digital form. On a like-for-like basis, the impact has been incredible. So on a like-for-like basis, on an annual basis, despite the fact that we went from physical letters to digital letters, which, by the way, a lot of our jurisdictions require us to send out physical letters because they think it's better for the customer. Our customer response rate has gone up 700%. So this tells you something. This tells you that it is actually digital is not only more efficient, but it is better for the customer. You get a better response rate from the customer.In the process of that, we lowered our cost by 70%, and we've lowered our CO2 emissions, which this says 70%. But specifically, we're talking of, I believe, about 60 tons of CO2 that we avoided having producing by virtue of not having to print the letters, not having to mail the letters, not having to deliver the letters. So think about this. This is an example of how just a very simple change, and this is not terribly sophisticated. This is just going from a physical letter to an electronic letter. This is technology that's existed for decades. But just doing that lowers our cost, dramatically improves the response rate for customers and services them better, and is better for the planet. Now this is one small example, but when you look at the bottom half of the page, you see that from a digital penetration perspective, we are at extremely low levels. Overall, of our 133 million activities that we conduct every year, self-service digital interfaces with consumers is less than 1%. Overall digital activity, you can see here, is high in Northern Europe relative to the other regions, but is low on an absolute basis at less than 15%. And most of that is in Finland and a little bit of that is in Sweden. In the other markets, we have very limited to no digital activity. So imagine the impact of this one very modest-sized but targeted effort in Denmark extrapolated across our 20 markets, extrapolated across our SEK 133 million collections actions every year, extrapolated across our SEK 97 billion of collections. The potential for impact from technology, and this isn't even sophisticated technology is vast, and we will see that in the coming years.Let's transition over to investing. Page 10. Here, you see that during the quarter, we had a very strong EBITDA of SEK 2.8 billion, we invested SEK 0.5 billion for a net extraction of SEK 2.3 billion. The net extraction of cash, that's cash flow coming off of the book versus less investments over the last 12 months, has accelerated to SEK 4.8 billion. And this is something that I highlighted in the Capital Markets Day that I don't think is fully appreciated by the markets and perhaps it's not fully understood by the markets. But we have a tremendously flexible asset base here that's incredibly granular that ultimately, if we just cut back on investments, our book auto liquidates because our collections activity is continuous and granular across all our markets. And ultimately, our book throws off cash. And if we invest less, it ultimately throws off excess cash that we can divert and we can dedicate to other activities. In our case, as we said in the Capital Markets Day, over the next 2 plus or minus years, we're going to dedicate 100% of our organic cash flow plus any cash flows from our tactical measures to lowering our leverage. And this book, the extraction of cash from our back book is the most important source of cash generation, in addition to also the important noncapital-intensive EBITDA of our servicing business.On the next page, on Page 11, you see that despite the very difficult environment, collectibility is getting harder. There is no doubt about it. And in some markets harder than others, but we still hit 100% of active forecast in Q3, and our gross cash collections on a rolling 12-month basis is an all-time high. So again, collectibility because of our industrial capability, because of our history and experience, we get better over time. And that results in all-time high collections and very good performance against active forecasts. This is one of the reasons why you've seen in our industry, some players have write-downs when we have not necessarily had any write-downs recently despite the significantly worsening macro conditions.Finally, on Page 12, and then I'll hand it over to Michael. This is our bragging slide. And from an ESG perspective, I'm happy to state that over the last 12 months, we have helped 5.2 million individuals become debt free with us. These are individuals who have fallen on difficult times, have had to enter into some kind of a payment plan, and ultimately have extinguished their past due debt. And during that time frame are excluded from the financial system, but can now attempt to reintegrate into the financial system, gain new credit, gain in new bank account, et cetera. That number was a year ago, 4 million. So not only are we helping more people, not only are there more people who need our help, that's the macro environment, but we are being very successful in helping more people. evidence, again, that our services are more necessary now than they have been and will continue to be more necessary going forward. Overall, we deal with individuals in a very difficult time, a very sensitive time, yet we have a very high customer satisfaction rating. That's reflective of the fact that we deal with individuals with a solutions-oriented mindset in a very empathetic fashion.And despite ultimately dealing with people who are in a very difficult situation, we offer solutions, and we help them extract themselves from that, and that's reflected in their satisfaction. And we do that at scale. And this is -- the headline of this page, I failed to mention at the beginning is something I stole from my partner Annette Kumlien, who in the Capital Markets Day, called what we do on an operational basis, empathy at scale. And that is actually very, very appropriate. We do this to many people across a lot of collections. We help a lot of people and in the process, collect them for our clients. And this is now increasing. This level of impact, I mean we're not an industrial company. Although the Denmark example did have an environmental benefit, which we're going to continue to highlight, our real impact from a societal perspective, the S in ESG is this, is helping individuals become debt free. And external institutions are starting to recognize that. And you see on the right-hand side that during the quarter, Nordea improved our ESG rating from BB to BBB. I think you're going to see more and more recognition of this importance of this role we play for our society in the coming years as we continue to highlight it, as well as the environment worsens and the consumer needs it more than ever. I think these institutions, third-party institutions are going to increasingly reflect that and give us credit for that. With those comments, I'll hand it over to Michael for the financials.
Thank you, Andres. And before I dive into the numbers, I would like to walk you through how we plan to report on the cost program from year-end 2023 and the new financial disclosure. So please turn to Page 14. The chart on the left illustrates what information we will disclose in the next quarter. So from left to right, our baseline costs as of Q1 2023 can be divided into 3 parts: fully addressable costs, costs that are not production-related, potentially addressable costs, production costs that are not directly related to our clients, and customers and nonaddressable costs. Production costs that are directly related to our clients and customers. And to remind everyone, our tactical cost program focused principally on the first part, nonproduction costs to safeguard the revenue trajectory with a total savings target in excess of SEK 800 million per annum. But going back to the chart. The first bar in the waterfall will represent savings already visible in the P&L as well as savings achieved on a run rate basis. And the other 3 bars show factors affecting the underlying cost base to bridge the actual costs incurred on a rolling 12-month basis. These items include changes in volume, cost inflation, such as, for example, increases in salaries and other changes such as the impact of foreign exchange movements. We will start sharing this disclosure from next quarter as we expect to achieve the majority of our cost savings target by the end of this year on a run rate basis.In terms of progress to date, we have achieved run rate savings of circa SEK 300 million, SEK 350 million, which will gradually become visible in the results over the coming quarters. The savings are mainly from reductions in workforce, but also from contract renegotiations and terminations. Costs to achieve incurred to date total SEK 105 million. And given the progress on the program during the quarter, we have also provisioned an additional SEK 583 million in Q3. Now turning to Page 15. As briefly mentioned during the Capital Markets Day, in combination with the new segmentation and financial targets, we have now also updated our financial disclosure. Our new reporting structure is fully aligned with the updated segmentation and strategy with reporting focus on the 2 businesses, servicing and investing as well as the 4 regions: Northern, Middle and Southern Europe plus tactical markets. Our new reporting structure is transparent. The new reporting format gives the reader a much improved view on underlying trends and drivers, cost developments and profitability and across the businesses and geographies. We have tried to make our reporting structure easy to use. We now have a matrix format where you can add across the businesses to give you the group's total performance, the costs will be allocated down to the EBIT level. We have also implemented the most recent technical accounting guidance. For example, you will now find gains and losses on portfolio investments below the income line.But now moving on to our Q3 performance numbers. So please turn to Page 16. The underlying trend of growing income continues for the third consecutive quarter. Q3 2023 adjusted income was SEK 4.96 billion, up 9% compared to the same quarter last year. On the other hand, adjusted EBITDA is down 13%, emphasizing the relevance of our cost program with savings expected to become visible in the 2024 results. The adjusted cost base, excluding items affecting comparability, has increased 15% to SEK 3.6 billion in the quarter. About 2/3 of this increase is driven by FX movements with inflation and increased cost base from M&A activities also contributing compared to last year. Adjusted net financials and tax came in at SEK 1.1 billion, up 84% from last year, which reflects higher interest rate on gross debt, which currently stands at circa 5% and an increase in the absolute level of debt by circa SEK 5 billion. The leverage ratio decreased by 0.2x in the quarter to 4.4x, mainly driven by the inclusion of higher real estates and favorable FX movements.Turning to Page 17. In servicing, we had positive income growth from M&A and FX movements. However, the margin remains under pressure due to the more challenging collection and cost environment we are currently experiencing. External income grew by 14%, driven by M&A and FX, with a positive contribution from all regions other than Northern Europe. The bottom line for the servicing business is clearly under pressure, and I cannot emphasize enough our focus on improving the margins through the cost program as well as the more fundamental improvements to our operating efficiency that we presented at the Capital Markets Day. Which also undermine our targets to improve the servicing adjusted EBIT margin to more than 25% by the end of 2026. In terms of numbers, adjusted EBIT is down 25% and the adjusted EBIT margin in the quarter is down 6 percentage points. On a positive note, this quarter was the most successful in Intrum's history when it comes to new signings with ACV of SEK 594 million added, including the transformational contract with Building Center in Spain. Total AUM is also up 12% compared to last year.I'm now looking at Page 18 and our investing business. Cash collections continue to be resilient, and we have started to extract value from the back book as discussed at the Capital Markets Day. Cash income and cash EBITDA increased 8% and 13%, respectively, while adjusted EBIT is flat compared to the same quarter last year. Collection performance in the quarter came in at 100% versus active forecast, and we delivered a stable ROI of 14%. In the quarter, we made new portfolio investments of SEK 530 million, in line with the communicated significant reduction in investment pace. These investments came at an unlevered underwriting IRR of 18%. Net cash extraction, cash EBITDA less new investments was SEK 2.25 billion for the quarter. Page 19. In the top left corner, you will see the net debt development. Cash flow is offset by capital deployed this quarter. Capital deployed includes investing in portfolios and M&A activities, including the closing of the Arrow Real Estate acquisition in Spain. Q3 net debt also benefited from favorable FX movements. The return gap between unlevered underwriting IRRs and cost of funds remains just below 3x. Also, as stated at the Capital Markets Day or termed out liability structure, together with our cash flow generation and the other measures introduced at the CMD make us comfortable about our nearer-term maturities.Finally, turning to Page 20. Here, we have our new medium-term financial targets, and this is how we will follow up on our progress going forward. Even though we only announced the targets a couple of weeks ago, here is the development. External servicing growth is 13% based on the annualized growth rate from Q2 2023. Servicing adjusted EBIT margin is at 17%. Our proprietary investment book, excluding revaluations, has decreased to SEK 39 billion, and the reported pro forma leverage ratio is 4.4x. And with that, I hand it back to you, Andres, for some final remarks.
Good morning, everyone. Apologies for the technical difficulties. I hope you all can hear me now. This is Andres Rubio. I wanted to just make on Page 22, some final comments, and then we're going to open it up for Q&A. And apologies again for the technical glitches. But ultimately, we look at this page on Page 22 as what we measure ourselves against over the near term in terms of our tactical measures to derisk and to reduce leverage, but ultimately, at the same time, focus on long-term development of the company to grow profit and to create the leading servicer and asset manager. I think as you saw in particular, on the last page in Michael's session, we've made some modest progress, but we are at the very beginning of a multiyear journey, which we believe we're completely on the right track to achieve a significant benefit for all our stakeholders, for our clients, continue to deliver for them, continue to help customers in the process, improve and drive our revenue. Cost reductions are going to then lead to disproportionate profit and that, combined with deleveraging is going to allow us to deliver for our shareholders and our bondholders. So with that, I'll conclude and open it up for questions. And again, apologies for the technical glitches.
[Operator Instructions]. The next question comes from Jacob Hesslevik from SEB.
Good morning, everyone. I have a few questions, but I'll try to limit myself to 3. So first of all, can you help us with central cost. I was wondering how much of the SEK 1,084 million is related to the cost program and how much you're expecting this row to decrease going forward with the cost program in effect from next year? And also how large part of the IAC of SEK 653 million is related to the cost program.
Michael, would you like to address that? All right. Well, I guess we don't have Michael. Jacob, I hope you can hear me.
Sorry, can you hear me now?
Yes, Michael. Go ahead, please.
Okay. So terribly sorry about that. We had to juggle a bit given the technical glitch. So what I was saying, Jacob, and thank you for the question, is you see that we have IACs of SEK 653 million in the central column. And a vast majority of that SEK 583 million is the provision that we took against execution costs or costs to achieve for the program. On top of that, we also have a little bit extra in terms of already incurred costs to achieve, and that goes across servicing and investing. And obviously, that is going to roll off as the program gets executed and gets included into the P&L, given that the cost to achieve is somewhat front-loaded. But to give you a sense, the SEK 583 million is the provision in the quarter. In total, outside the provision, we've already incurred SEK 105 million cost to achieve most of that in Q3. And there is a number of other elements, and this is going into a little bit more detail on the IAC disclosure. So in terms of group restructuring, we obviously have a number of elements outside program, which are quite small, mainly related to the actions we are taking in Spain and in the U.K. in terms of bringing our new acquisitions on board and some other activities in terms of restructuring. But the main bulk of it is really all related to the cost program. And then the other IACs that we have are really principally related to IT transformation costs where we are continuing to upgrade the various systems and platforms that we operate in.
And then, Jacob, this is Andres. To answer the more fundamental question as to the breakdown between Central and other across the entire cost reduction program where we ultimately land above SEK 800 million roughly speaking, half is in the markets. Roughly speaking, half will be experienced or witnessed in central functions.
All right. That's very clear. And if we just move over a few columns to servicing. The EBIT margin may be not the best this quarter, but it seems it's really affected by the higher indirect costs. So does that also then include anything related to the cost savings program? Or is it anything with M&A cost related to the higher acquisitions? And where do you think the run rate will be going forward?
Jacob, again, very good question. As you can see, there is about SEK 18 millions of items affecting comparability. That is to a part or a good part related to what we are doing on the cost program and also other activities in terms of making our operations more effective and efficient. So we will see that coming down. And obviously, our goal is to particularly impact the indirect costs with the activities we are taking and then over time, also making the direct costs more effective, e.g through more digitalization. So I would obviously expect, on a relative basis, so relative to the volume of income that we have, both of those to come down into 2024, which drives the margin improvement where we've laid out the trajectory to the end of 2026 with our target of more than 25% adjusted EBIT margin.
But I think it's important also to highlight the fact that this cost reduction program is not focused on direct production costs. It's focused on nonproduction costs, which are common costs and indirect costs. So the vast majority of the program will be felt in those line items in the markets as well as in Central, as I said earlier.
That's very clear. And just the last question. On the seasonality effect we have in the past been discussing the strategic markets being the most hit, i.e., Southern Europe in the new reporting structure. But it also seems that Northern Europe is underperforming during this quarter as well. Could you give any more color on the decline in EBIT to SEK 277 million from SEK 367 million there?
Andres, do you want me to take that?
Yes, please.
We've seen challenges in Northern Europe for a little while. So we see smaller claims. We see cost pressure and we also see the environment. But on the flip side of that, we're signing up new clients at good volumes and good margins. And it's also, in many ways, the region that benefits the most, not just from the cost program in terms of adjusting that indirect cost base, but also from all the other actions we are taking around revamping our technological stack and the way we operate. I think it goes back to what Andres said before. In terms of the kind of claims we operate there and the level of digitalization and society, I think between the cost program and between changing our operating model, that is one of the areas where, over time, we can do the most about affecting our margin with these steps.
But I think the other point on that, Jacob, and it's a good question. I mean the new ACV signings that we talked about take time to come through. All of the new ACVs, as we highlighted very specifically in the Capital Markets Day, is coming in at a higher margin than current because that we've set up hurdle rates on the servicing side, well above our current run rates to make sure that we're improving on the margin front. And our cost program is coming in from now going forward. But our overall costs continue to progress. So I would see these trends as reversing, and they impact different regions differently. There's more flow in the north. It has a structurally lower margin because it deals with lower claims and more industrial claims. So I'm not surprising, these effects that I'm talking about, about real-time ongoing cost increases and then the time to see these new ACVs and the cost programs take effect, have an impact in the North, of course.
I hear what you're saying there, Mr. Rubio on the ACV signings taking time to come through, but can you give us any time line on when the new higher-margin contracts will be seen in the financial?
Yes. And you can call me Andres. You don't need to be so formal. ACB, generally speaking, once we sign it, it's a run rate revenue that takes between 6 and 12 months to get up to speed. So we should be seeing these ACV signings in '24, get up to run rates of the levels that we're talking about and correspondingly, the higher level of margins. So that's what it takes time. Now remember, we've had a record ACV year. We started signing back in the first quarter, although the third quarter was the best. You will see these coming in, in the coming 2 to 4 quarters.
All right. That's very clear. I will let my colleagues ask some questions, too.
The next question comes from Patrik Brattelius from ABG.
Yes, a couple of questions from my side. If we start off, given the worsening collection performance that we have seen now, how do you assess the write-down risk of your portfolios?
Michael, would you like me to address that orr would you like to take it?
Maybe I'd start. When we look at our portfolios, we always take the most up-to-date view of our forecast into account. And I think generally, historically, the level at which we are collecting versus active forecast has been pretty well correlated with the movements in our revaluations. Now we call them credit gains and losses. So if we collect above 100%, we expect a moderate move up. If we collect below, we expect a moderate move down. But I think from what we can see now, is that we are collecting just around expectations, and that's also on the back of having had sequential write-ups on our own balance sheet book over the last couple of years. So in terms of looking into what we see in the business now, yes, it's a bit harder to collect. Yes, the larger settlements in the more difficult environment have come down somewhat, but we're still very much collecting on that line that on average has been revalued up quite a bit. So from that perspective and what I can see near term talking to the business is that we'll continue on that trajectory, and we'll continue to extract cash as we've done for many periods from the back book that we have. That is also very highly diversified and high quality just to mention that.
So I'll just give you a more qualitative answer, Patrik. So ultimately, we have the most extensive industrial platform to collect with the longest history collecting. That is something we fall back on in difficult times at times, we need to collect more. We have an independent organization led by our risk department, which revalues every single portfolio on a continuous basis. It's independent, it's robust. And then we have the inherent stability of our book in that it's incredibly granular, over 20,000 portfolios, and it's also geographically diversified. So all of that makes me comfortable that there are not significant write-downs in the horizon despite the worsening macro.
And another question is regard to the net financials line. It was a little bit higher than what I had anticipated in the quarter. It seems to be a significantly step-up compared to what we see in the last quarters. Is this a new level? Or are there any one-off on that particular line that I should be aware of?
Patrik, in my mind, no particular one-offs. I mean it really is, as I said in my presentation, a combination of the interest rate environments that is dragging up our cost of funds, which is around about 5.5% on an RTM basis. And then obviously, the overall level of debt, which went up SEK 5 billion, if I compare it to the same quarter a year ago. But obviously, that is something with all the measures that we talked about at the Capital Markets Day, including a partial disposal of our back book and so forth, that will come down. So from that perspective, it's really a reflection of the market environment of our funding structure that is mostly fixed rate and termed out, but has a variable rate component and then the absolute level of gross debt.
And my last question is in regards to you came with new details of how you will segment your different regions. So I try to understand here, if I look at the EBIT margin in Northern Europe and Middle Europe and look at the EBIT margin on a rolling 12-month basis, it seems to be trending down significantly more in these regions than in the other 2 regions. Can you please elaborate and help me understand what is driving this?
Again, Patrik, it's what I said earlier to Jacob's question, which is the southern markets are stock markets i.e., there's a stock of unpaid loans or unpaid claims that we're working through. The middle of the North Europe are more flow. They're smaller ticket on average, and they have structurally slightly lower margins. And then we have the fact that costs continue to increase on an actual basis, but it takes time for the new contract values, which is evenly distributed across the platform. It exists in the north and the middle and the South. And for that, those revenues to come in at a higher margin and also for the cost program to kick in, which is also distributed proportionately across our regions to come in. And it's more of a timing issue that you're going to see these trends reverse over the coming quarters by virtue of the new business coming in at higher margin and our cost program kicking in, but over the medium term until those do kick in, not surprisingly, the medium and the north are more susceptible to near-term deterioration.
I think, Andres, just to add a little bit. There's additional factor, a bit on the fringes, where obviously, in the middle, we've added the Arrow U.K. platforms, very happy with that acquisition. But obviously, we've only just started working on the synergies. So on a like-for-like basis, that's also going to obviously help the margin. And the same applies for IO Real Estate in Spain that we only had on the books for just about a month in the context of Q3. So at the margin, that's also going to help in terms of driving the margin picture as we realize those synergies.
The next question comes from Lars from Deutsche Bank.
I have also a few questions today. So first of all, if I look into Q3, I see that the underlying levered free cash flow before disposals, acquisitions, whether that's through cash flow from investing or in the financing segment. It was around SEK 913 million on my numbers. So that's obviously a vast improvement driven by the reduction in purchases. The question really relates here to how do you think this will evolve in Q4 Because Q4, we know is seasonally a much stronger quarter. It's the strongest for you guys in the year. It's also the smaller cash interest-paying quarter. And purchases will be again a lot lower, even though I think sequentially, they will be up only invested through the cash flow line at least SEK 273 million, it looks in Q3. So probably you will be around, call it, SEK 700 million in Q4 to get to SEK 1 billion run rate roughly, which you have guided to. So can you just comment a bit on that, how we should think about free cash flow in Q4?
Lars, it's a very good question. You're absolutely right. Q3 is usually the strongest quarter in the year. It's the sprint into the year-end for lack of a better expression. I would expect that to happen this year again. Last year, we had a particularly strong one. So I think that's a tough comparison. But I think I do expect Q4 to be the strongest one in this year relative to the other quarters. From an investing perspective, there is always a bit of a lag between an acquisition getting signed when it goes into the disclosure and when it actually gets paid. The other elements that go into this is obviously the dividends because we have to pay the second installment in the fourth quarter. In terms of M&A, all we've done, and that's already closed is Ophelos, which has been done a couple of days ago. So from that perspective, I do expect to be cash flow in Q4 to be stronger, but obviously impacted by all these items I've just laid out.
But overall, also fair to assume in line with historical patterns that you will sequentially delever again, right?
Barring changes to the FX movement, that is clearly our ambition. What I would be a little bit cautious about and I'm the cautious CFO here, is that obviously, we have a very, very strong comparison quarter in cash EBITDA in terms of Q4 of last year. But in terms of the absolute level, obviously, that's what we're working toward.
Okay. And then moving on maybe to another important building block of this SEK 20 billion of organic and inorganic free cash flow you want to generate over the next 2 years, SEK 6 billion of it is asset sales, as you said, on the CMD. I think you were quite clear on the CMD itself and said this is something which you try to announce by year-end, early '24, the latest. You also talked around indications you received in terms of valuation marker relative to book value. So can you maybe just give an update there 6 weeks later now after the CMD, is still everything in line with what you said there or were there any changes to call out?
No. I think we're very comfortable -- this is Andres. We're very comfortable with the SEK 6 billion figure across either back book sales or tactical market exits.And we are still talking about things that are in the range of book value. We are going to be disciplined and selective in what we do, and we're not going to do anything that destroys value, but we're very comfortable with that SEK 6 billion figure, Lars. And the timing the timing as well -- apologies. The timing is the same as I indicated, sometime in the fourth quarter or first quarter of next year, we should come back to the market with an update.
Appreciate that. And then maybe last, but not least drilling into these segments. If I look into Q4, talking about investing here, all the leading indicators I look into for collection performance, whether that's unemployment rate or credit card delinquencies, all of that seems to be still in check. And yes, it is normalizing. But far from levels we have seen even before COVID or if you want to be using a more brutal comparator in the GFC, obviously, a very, very different setup. So is it fair to assume that you see a continuation of this collection performance in Q4 around 100% of forecast?
Yes. I mean, again, the macro is worsening. You're correct in that certain indicators are not deteriorating as much as you would expect and certainly not in comparison to the global financial crisis or the sovereign debt crisis that occurred a few years later here in Europe. This crisis is very different than past crises. This is not an unemployment crisis yet, but it is an income shortage crisis. As I highlighted in my comments, people have jobs, they don't have enough income and they have increasing costs. And so that leads to a different dynamic, but it is inevitable. Stage 2 loans are increasing. They're going to inevitably lead to nonperforming loans increasing. And we're going to see flows coming in over the coming years into servicing first and then to provide opportunity for investing. In terms of collectibility, it is a difficult environment, but we always aim to and we're confident that we'll be in and around 100% of active forecast.
And then on the servicing side, how shall we think about Q4? Obviously, there's the seasonality. Revenue-wise, I think income wise, you were in line with consensus, if I'm not mistaken, even in Q3. So it really is, again, more of a mix problem maybe or cost related, clearly. How can we think about that in Q4 given the seasonality will help, obviously, with the operating leverage in that segment, will we see a continuation of the trends in terms of margin loss or margin decline year-over-year?
I think the fourth quarter is traditionally the case is going to be a strong quarter. Inherently, clients also want to deal with things before the end of the year. They want to put things in place before the end of the year into next year, et cetera. That benefits us traditionally. We have, as Michael has indicated a couple of times, a very difficult comparable with last year where a lot of things that were scheduled on some clear counterparties for the beginning of this year were put into the fourth quarter of last year by them, and there was an upfront loading of activity. So that makes it a difficult comparable. We still expect our servicing business to continue to benefit, and we expect some impact, although it's only on a run rate basis and the numbers we quote on our cost program are annual figures, and we only have one left quarter, but we do have that factor working in favor of more stabilizing and improving margin. But we think the revenue will be stronger, and we think some of these cost effects will be reflected in the margin. So we hope that our margin is stable to slightly better.
Okay. And on an organic basis, if I compare it on that metric, Will that be more impacted due to what you said that, obviously, it was a very tough comp? Or can we expect a similar kind of number there, minus 6%, I think it was in Q3, right?
I apologize, but I don't follow the question. Maybe, Michael, you did.
No. Look, it's a very good question. And obviously, into the end of last year, as Andrew said, we had some specific items that were fairly large that from an expectation perspective, could have happened either last year or early this year. The vast majority of them happened last year. So that makes the comparison tough. Q4, obviously, I'm not going to comment on FX. We'll see where that moves. The other element is we'll see more of IO Real Estate coming into the numbers. So that's going to help drive the top line as well. Again, we haven't started extracting the synergies yet. That's going to very much come into next year. And then the other element is the sort of purely organic comparison. And again, we try to drive it as hard as we can, but we have a tough comparator. In terms of the cost picture, obviously, it's a challenging one. It's developing. We're very much countersteering with what we're doing in the cost savings program, and that's starting to come into the P&L, but it's really going to become visible into the 2024 results.
The next question comes from Ermin Keric from Carnegie.
It will be a few follow-ups and clarification questions perhaps. So just if we start on the organic growth or a decline of 6% on the servicing. If we just look on Slide #8 and the ACV, I mean, if we look on a rolling 12 months basis to compare where we are currently compared to 1 year ago, even if it takes some time to ramp up new contracts, how come we haven't started to see more of that on the organic growth by now? Because it's not the first quarter, you're seeing strong success on new contract signings.
You're right. I mean, on Page 8, we've had strong pipeline. We've had accelerating on the bottom half, ACV signings. These things take 6 to 12 months to incorporate. We had a very good Q1 2022, which is one of the reasons that we're benefiting now from the growth that we're experiencing. And as you can see, Q1, Q2 and Q3, in particular, this year, are meaningfully above anything in recent history. So that's what I'm talking about in terms of acceleration. We are seeing an improvement in servicing top line growth, and we expect that to accelerate over the coming quarters.
Just maybe something to add and this goes back to the Capital Markets Day. I think George, at the time showed a slide where he showed not just the progression in ACV signings, but also the progression in terms of how we've been able to limit churn. So last year, we had higher churn. And obviously, those effects are phasing into this year, and you see that a little bit on the margin. Whereas this year, we've also really been able to limit churn. So on a net basis, that gives us a much better transmission of those ACV signings into next year, I would argue.
Let's put it like this. When do you expect to be able to post positive organic growth in servicing?
I would hope certainly into next year. I think this is very much the change over year as we've said before. And it's also a change in focus as we've laid out at the Capital Markets Day in terms of where the principal attention of the management is, and that's very much on driving that servicing business, extracting the cash from the back book and decreasing risk and deleveraging, right?
That's fair. And then just to understand correctly, you're basically saying that you would expect cash EBITDA to be down year-on-year in Q4, even including the M&A contribution and benefit of the cost program.
What we're saying is that on an organic like-for-like basis, we had a very strong fourth quarter last year, which given the worsening environment in general is going to be challenging to match. And then we have our M&A, which we're integrating and we are still integrating and that will have some impact. So ultimately, on a like-for-like basis, I don't believe we're going to hit the same top line growth we had last fourth quarter.
But if not necessarily down year-on-year in reported numbers when we include the inorganic part then?
But again, that's the quarter. We'll see when we get there, Ermin. But my point here is, on a like-for-like basis, organically, last fourth quarter was significantly stronger than I anticipate, given the worsening environment given our visibility today will be this fourth quarter, although it will be a seasonally strong quarter.
Perfect. And then just on the one-offs. I think you tried to be quite clear on it in initial -- I'm sorry, the Q&A, but just simplify it for me. How much of the cost program budget has now been taken, what is left? And what, if anything, of the other one-offs like the IT transformation and other group restructuring, should we expect to recur in Q4 and potentially in Q1?
That's a good question. I'll take that one. In terms of the budget per se, as we said before, the total cost to achieve, we expect to be in the range of 0.75x to 1.25x the recurring benefits. So obviously, we've said we want to achieve more than SEK 800 million. But I would argue that, that cost to achieve will be linked to the final number that we actually managed to achieve. And we're trying to drive that up each and every single day. I think it's very important for us that we do as much as we can in this tactical cost program to really make sure that we compensate the underlying picture as much as possible and also give us the best possible ramp into all the other measures, including getting better operationally, becoming more digital, et cetera, that we've laid out at the Capital Markets Day. Now in terms of looking at this, and we've tried to be as clear as possible in our updated and more detailed IAC disclosure. So we have a provision of SEK 583 million in the quarter. That comes out of group restructuring ISVs of 681. They also include some of the SEK 105 million of the already incurred on the program. On top of that, in that, call it, SEK 9 million delta, you also have a little bit of IACs relating to the activities around the U.K. where we've bought the AUK platforms, and we're obviously working very hard on integrating them the best possible way as well as extracting synergies. And then there is very much marginal items around some of the changes we're making, for example, in finance, where we are bringing in a new ERP system.Now in terms of other IACs, the bigger item is IT transformational costs. That's a total of SEK 74 million in the quarter, and that really relates to all the activities that we've outdoor that Nata has outlined at the Capital Markets Day. So in terms of the IT transformational costs, those I would expect to continue. In terms of group restructuring costs or ISC is the vast majority of those, I would expect to phase out together with the cost program. But again, I think in terms of the next 1 or 2 quarters, we may see a little bit more as we deliver more savings. And obviously, as I've laid out, we'll have very detailed reporting on what we already see in the P&L and what we've achieved on a run rate basis and how that ties to the overall cost progression. And obviously, then the final accounting on the cost to achieve needs to be in line with the savings that we deliver, and we very much expect that to be the case.
Excellent. Anything else? I mean, we have a long list. We're happy to catch up separately as well. We have a long list of people who want to ask questions.
The next question comes from Angeliki Bairaktari from JP Morgan.
First of all, you may have already explained that, but I just wanted to double check. Within the external income in servicing of SEK 2,785 million, how much is coming from Arrow and Hayain Q3? And second question, in terms of the annual contract value, is that reflective of new clients signing contracts with you? Or could that also include existing clients who are perhaps updating or rolling over their contracts?
I'll start with the first one, and I'll leave the second one to Andres. So on the first one, if you go to our presentation on Slide 17, where we talk about servicing, we split out organic, acquired and FX-related elements of the external income growth and the acquired element is 10%. And that very much reflects a 1/4 of the Arrow U.K. platforms and about a month of Haya Real Estate.
The ACV that you see on Page 8 on the bottom is new clients as well as new contracts signed with existing clients. It's all new business that will translate into incremental new revenue over the coming periods. Okay? I just wanted to be clear about that for the prior caller. Go ahead, Michail, please.
So I wanted to tell you on the cash flow statement, there is an outflow from repayment of borrowings of SEK 10.5 billion, of which, I think SEK 3 billion comes from the refinancing of the bonds and around SEK 2.5 billion comes from the euro RCF repayment, what does the other SEK 5 million relate to? Can you help me tie that?
Michail, why don't we take the details off-line, then we can talk you through the exact breakdown.
Okay. And second question, which is related, your liquidity declined from SEK 30 million to SEK 9 million, like quarter-on-quarter. Can you explain what are the drivers of this, which is related to the other question, but it would be good to understand what's happened there?
No, happy to. I think in terms of the liquidity, obviously, we use some of that in terms of all the various actions we took. Also, in terms of the liquidity as we define it in Q3, we've not taken the back-up RCF into account. That's another delta, which is around about SEK 2 billion of the difference.
Okay. So like-for-like would be SEK11 million compared to SEK 30 million. Perfect. That makes sense. Where would you expect liquidity to trend in the coming quarters? I mean, do you expect more cash generation, organic generation, et cetera, but given that we had those outflows in this quarter from the borrowing repayments, et cetera. Do you expect that to continue in the next few quarters? Or should liquidity actually increase?
From my perspective, I think there's an answer to have. The first one is if I look into the next quarter, I see it as relatively flat because obviously, we have cash generation, but we also have the dividends. We have some investments. We're paying Ophelos. There is going to be some actual cash out from the cost savings program in terms of all the actions we are taking. So I would expect that to be relatively flat to up. I think going forward, that very much then depends on how we progress and execute on the measures we talked about at the Capital Markets Day in terms of, for example, a partial back book sale. I think the second half to the answer is in the past, we've obviously kept a very, very high liquidity buffer also because we were an investor that put up to EUR 1 billion into portfolios and other activities a year. So I think as we move much more towards being a servicer and have a much more subdued investing trajectory, I think the overall liquidity requirements compared to the levels that we've seen in the past comes down somewhat given the change in strategy and business model effectively.
That makes sense. And that would imply that you use your cash to repay your maturities even that you are not paying dividends, you plan to deliver, right?
Absolutely. I think what we try to say to convey at the Capital Markets Day and putting it into a nutshell is that we use all the cash that we generate to really bring down the liability side of the balance sheet over the next 2 years. That's really the principal focus. So it's absolute deleveraging and then also in conjunction with our ratio deleveraging as we focus and grow our servicing business and then improve profitability with the margin trajectory that we've laid out at the Capital Markets Day over the coming years.
I want to be very clear on that also, M ichail, that we had the recent acquisitions as well as the dividend payment that we had to finish this year. Obviously, we're not going to pay a dividend next year, that cash allocation is going to go towards deleveraging. And there's no meaningful M&A on the horizon. So all of our organic cash flow as well as any tactically generated cash flows, as I mentioned earlier, are going to go to delever.
The next question comes from Wolfgang Felix from Sarria.
I also wanted to look forward a little bit towards next year, summer '24. If I'm not mistaken, you have some bonds that want to be refinanced or at least repaid around that time. And I believe you still want to or we still need to take care of your RCF by that time. And I was wondering what the targets were around that. I understand differentiating between maybe absolute versus ratio deleveraging. If you're selling part of your back book and if you're growing overall your collections or trying to, I can see how that raises ultimately the churn of your back book or how you're eating your cake faster, if you will. But I don't know if you think that between now and then, you'll be managing to delever from an LTV perspective in any way. I was wondering if you had any ideas around that and ultimately, if your target is to maybe refi the summer '24 maturities? And with what kind of level of drawing of RCF you think you can deal around that time?
I'll address it conceptually, and then Michael will add more specifics around the numbers for you, Wolfgang. But we have an objective on a leverage ratio basis to get down to 3.5x or lower by the end of '25 into '26. That objective remains the same to be clear.
That's cash EBITDA, is it?
That is, yes, cash EBITDA, correct. That's a leverage ratio basis. So right now, we're at 4.4%. We were at 4.6% because of the fourth quarter closing of Ophelos and the dividend and other things, we don't suspect that's going to meaningfully drop in the fourth quarter. In fact, it will probably stay flat to slightly up. But into next year, you're going to see the deleveraging hit. With our organic cash flow with organic cash flow, with the tactical measures, which we do have to complete, we have all of the maturities for '24 and '25 over. That doesn't mean we're not going to be in the market. We're going to selectively be in the market if we can. And obviously, the market recently has softened a little bit or opened up a little bit more to certain issues. We will see what happens when we get closer, and we will dynamically manage that. But ultimately, we intend to not depend on market participation and market access over the next 2 years. But Michael, I'm sure you have more specifics as it relates to how the RCF interplays with our bond maturities and the like.
No, absolutely. Look, it's a very good question. In terms of what we're going to do in terms of market activity, obviously, that depends on the environment. I think the general point that I also tried to convey at the Capital Markets Day is in the past being an investing focused company, we effectively had a need to refinance EUR 1 billion or more a year, right? With the changes that we're making, that drops to half of that or less. And obviously, over the next months, as Andres said, with the measures we are taking, we are covering us, we're covering ourselves. In terms of next year, my expectation would be that we address the Eurobond that is coming due in the middle of the year out of organic cash flow generation as well as in the context or partially in the context of the back book transaction we've talked about. And obviously, that back book transaction then also supports to start addressing either more of the 25s or the RCF, and we'll obviously manage that dynamically as we progress through 2024. But I think the key message is really also what we tried to convey at the Capital Markets Day that in terms of the generation that we expect organically and what we are planning to do, what we have in flight to do from actions on our back book, we really cover an amount equivalent to the maturities we have into 2024 and 2025.
One more comment, and then I'll get out of the line. We're using Zoom phonesand the operator you're using has always issues with that we get tossed out all the time. We can't ask questions. I'm calling you from my mobile now. If you can possibly look at exchanging the operator next time, that would be wonderful. But that's it.
Thank you, Wolfgang. And sorry for the technical difficulties. Obviously, today has not been the smoothest call technically.
The next question comes from Christopher Naby from Chenavari.
My question has already been answered, so we can move on to the next one.
The next question comes from Sabahi from Spread Research.
I just had one question regarding the organic numbers in terms of cash income and EBITDA, on extracting the back book sale that you've made. So I understand that the ARCs dropped sequentially declined from SEK 86 billion to SEK 81 billion and that the book value also decreased sequentially. But my question relates to what is accounted in Q3 numbers regarding the earlier sales of ERC because obviously, you know that it's a key question when you look at lower numbers when they report the numbers. I was just wondering how much you have in terms of cash and EBITDA on an organic basis, excluding this cash extraction.
Yes. And Michael can fill in a little more details. But so we have not done a back book sale yet. So none of the numbers you've seen for the third quarter of prior have any asset sales. They only have ongoing collections in terms of the movement of liquidating the book, net of the lower investment, we've extracted cash during the third quarter. So we had organic EBITDA of SEK 2.8 billion, minus 0.5, the net SEK 2.3 million is the extraction of cash. There has been no asset sales in the third quarter. I want to be clear about that. And if that's not clear, that's our fault for not being clear previously.
Sorry, Andres, very, very minimal correction. We've closed 2 countries out of the Baltics that we've communicated before we're exiting. So there is a minimal impact. But again, those numbers were in... They're very, very small.
Those are de minimis in the context of the 2.8 versus 2.5. But my fundamental point still stands.
The next question comes from Harris Papadopoulos from Bank of America.
So two questions on my side. You might have answered the first one actually, but I just wanted to confirm. So a large part of the RCF has been drawn now and this actually resulted on the unsecured by one of the agencies. So I was wondering when should we expect a major repayment there?
Just one point of debate or correction. So I think you're referring to Moody's. It's actually not related to the actual drawings, their model once you get notched assumes a higher utilization, which then subordinates the seniors. So it's not related to the actual drawing. It's related to the Moody's rating methodology. On the other hand, you're right, we have a higher drawing. Obviously, we haven't been that active in the market, but we also call it at an inflection point. So you can see that during the first half, we still invested at a higher pace, which was largely driven by transactions we'd already locked in towards the end of last year. And now we're seeing those investments coming down. So it's really that changeover and all the actions we are taking in terms of deleveraging and derisking on an absolute basis, that will also be part of addressing the RCF.
And then secondly, I think you said that a part of the back book and the tactical markets. specifically, you're also evaluating other asset sales. What would these assets be?
We are only evaluating the potential exit of those three markets we indicated previously as well as a potential sale of a piece of our back book to be determined to what size. There's nothing else on the horizon.
The next question comes from Rickard Hellman from Nordea.
So yes, some short questions to start with. I didn't find the replenishment CapEx in your report. Is that something you have ceased with reporting or can you give us that?
If I may, we ceased reporting that because we've revamped our disclosure and aligned it with the segmentation and strategy that we currently work under? And also, I think the other point is, in terms of replenishment CapEx, the point historically was very much about a growing investing franchise, whereas now it's very much about cash extraction, and we will decrease that book. In fact, we have an explicit target on decreasing that book. But to give you a sense, the RTM money-on-money multiple in Q3 2023 was 2.29%, so around about 2.3%. – On the investing side, the cash collections, if you give me a second, they were around about SEK 3.5 billion. So this gives you a sense of what the replenishment of our CapEx in the quarter would have been if you divide one by the other.
Yes, from my point, at least I use it a lot, but that's just my personal view on the replenishment CapEx. Also, a quick question around your cash flow. You have a pretty large increase in repayment of leases going from SEK 58 million last year to SEK 318 million. Is that something that relates to acquisitions? And will it remain going forward?
It partially does. Again, what I would recommend is we can talk you through in detail offline.
. My final question, if you can give some color or at least some trend on the collection performance within the quarter, how it has developed?
From my perspective, and Andres, please add. But from my perspective, it's been pretty consistent. It's been at 100% very consistently throughout the quarter. And it's very much in line with us having adjusted the book value upwards over the last couple of quarters when we saw that bounds coming out of COVID where disposable incomes and savings balances were actually quite high. And now as we are in a more challenging environment, we're very much performing in line with that active forecast that is reflective of the EC as stated.
Okay. And there are no markets that stands out in immediate direction either.
I mean every -- we don't comment specifically on eCollect by market. Every market is different. I've often been quoted as telling people that we act across 20 countries. And obviously, there are countries that are in more difficult situation than others. And that -- this is the weighted average of that. And obviously, there are some above and there are some slightly below. But I think it's been, as Michael correctly said, very consistent. And book value, to be clear.
This could become a very long answer. But obviously, that performance splits out over 20,000 portfolios. So you have a very, very strong diversification effect. So across such a large number of portfolios, you always have some that are over and some that are under, but in aggregate, we're at or above if you look at the last couple of years, the expectation that at any given point in time, embedded in ERC, which is effectively our active forecast as it unwinds.
Thank you, Rickard. I believe that's our last question, but we'll let the operator confirm.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Excellent. Well, thank you, everyone, for listening, for participating. We're putting up with the technical glitches and for your questions. We look forward to follow-up discussions with you directly in separate one-on-ones or group sessions and we're available for anything you need. So please reach out. Thank you, and have a good day.
Thank you.