Intrum AB
STO:INTRUM
Intrum AB
STO:INTRUM
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Good morning, everyone, from a gray and slightly chilly Stockholm. Thank you for joining us here this morning. As the operator said, I'm here with Emil. And we're here to present the results for the first quarter of 2024. So with no further ado, I'll jump into the presentation and obviously, at the end, as always, we will have time for Q&A. But starting on Page 3, I would characterize the quarter as being one where we delivered good results despite this being a seasonally slow quarter, and in particular this year, because this year, Easter holiday fell in the first quarter, and it more typically falls in the second quarter as it did last year. So comparatively, our figures are that much more impressive in my opinion. Top left, overall, top line growth of 8% and EBIT growth of 8%, EBITDA growth of 2%. This has been driven by M&A as well as organic growth that we'll get into. We continue to extract cash from our back book and our leverage ratio was stable, but would have declined Had it not been for some headwinds on the FX front. Looking at the 2 businesses on the bottom half of the page, bottom left, external top line is growing 16% in servicing, again, driven by M&A, but as well as organic growth in North and Middle Europe. And also that growth is also being driven by last year having been a record year for new contracts. Some of those are starting to filter into our revenue and driving the top line. And as you can see, even though last year was a record year for new contract or annual contract value, ACV signings, the first quarter, quarter-on-quarter is still up 11%, so we are compounding our new contract volumes on what was a record year last year, demonstrating the significant momentum in this business. The margin for the quarter was structurally low because first quarters are traditionally lower margins, but year-on-year, it was flat. I'll remind you that for the prior 3 or 4 quarters, the year-on-year comparison has been in a negative trend. It looks like we're stabilizing that and setting ourselves up for a second half of the year where we get back up to high teens, and I'll get into that more on a later page. But servicing is driven by significant momentum. Investing bottom right, despite it being a very difficult situation for the consumer, a very difficult economic conditions in the real world, we collected 100% of our active or updated forecast. So that is a very good outcome, in my opinion. I'll remind everyone that active forecast is an updated forecast, but these levels of collections that we realized in the quarter are actually 109% versus our original underwriting forecast. So we continue to significantly outperform our original forecast at the time of purchase of our portfolios. We did increase slightly our cash EBITDA -- sorry, our top line and decreased slightly our cash EBITDA, but largely speaking, that business was flat from a top line and EBITDA perspective. And we did invest SEK 371 million, a little bit below the typical SEK 500 million quarterly rate as of the middle of last year, but we did so at a higher IRR '17 versus last year, which was 16%. Top right, we need to be mindful of continually of developing the business and also being mindful of costs. With regard to cost, there's both tactical and a fundamental element to this. Last year, we announced SEK 800 million that was expanded from SEK 600 million of cost savings, through the end of the first quarter, we realized SEK 500 million of it. The remainder will be realized throughout 2024. On top of that, we have identified -- are beginning to implement and expect to realize a little bit more than half this year and the remainder of next year of an additional SEK 700 million. So when you look at all of our tactical cost reduction programs, the SEK 800 million and the SEK 700 million, we have SEK 1.5 billion that began last year and will be fully concluded during 2025. That's near term and that's tactical, and that's necessary, frankly. But long term, if we're going to structurally improve our cost competitiveness while at the same time, improving our service quality, it has to come down to technology and I'm very, very happy to announce an important milestone where we have gone live in the Netherlands with Ophelos, which is our AI-based autonomous debt resolution platform we acquired last year. Early indications, as I'll give you a little bit more detail later on in the presentation are quite encouraging. And then ultimately, on our financial front, I'm sure many of you are going to be eager to ask questions, but I'll preempt them now. We are in the discussions with our various creditors. Those discussions are ongoing. I would characterize them as constructive and solutions-oriented. As I've stated in the past, we have liquidity for this year and for next year but beyond that, given where the market is -- the market levels are right now on our bonds, in particular, we cannot be assured of continued market access on acceptable levels. So therefore, we are proactively and holistically initiating a dialogue to reshape and realign our capital structure with our business and allow us to perform and deliver on our business plan. Those discussions, as are the front book discussions, which I've referred to many times in the past, are ongoing. When there is more to report, we will come back to the market. On Page 4, the market, the environment. The environment continues, particularly as it relates to figures coming out of the financial system favor the demand for our services. So top left, EU NPLs, both in aggregate as well as on a ratio basis have increased going into the end of last year. Stage 2 loans, which are a precursor to nonperforming loans continue to increase in the second half of last year. Top right, you're seeing this economic slowdown, which we're in the midst of. We're not out of it by any means and obviously, from an interest rate cycle, you're seeing that we're now going into an easing cycle, which indicates that we have significant softness economically, that economic slowdown is starting to creep into unemployment. It had not yet, this had been a crisis which was impacted by people having jobs and income but having too many costs. Now we see some uptick in unemployment, which would add another leg to this economic downturn and another element of pressure on the consumer. And then also, as you can see, while we are at the point where more expectations are for rate cuts going forward, particularly in Europe relative to the global central banks, that still doesn't mean that we're out of the woods, we still haven't fully felt the brunt of the original inflation as well as the original increase in interest rates. So the headline here is that the pressure on the consumer is not abating, and it will lead to continued pressure on companies to collect on their invoices and banks to collect on their loans, which means there will be continued demand for our services going forward. And you see that in our new contract volume and our AUM trends. Now looking at Page 5, let's look directly at servicing. Here, we've attempted to, I think, for the first time, to connect some of the key metrics and operating drivers with our revenue evolution. So on the top half, you see -- and I've said this before publicly, but I want to demonstrate it very explicitly geographically, we have AUM, which is the nominal value of the claims that we manage, the claims that we collect against, and these are external claims. That's SEK 970 billion. It was a bit higher than SEK 1 trillion a year ago. But we collect against those. How much we collect is that ratio in the middle, so it was 11% this year, it was 9% last year, so we collected more against our total collectible value, or AUM. That generates collections during the period of 102%, out of which we gain a commission, which is consistent at 11% and [Nirzar] 11.4%. So that was our revenue in '23. And the year prior, you see the progression of SEK 1.15 trillion, SEK 91 [million] at 9% and 10.4%. So you see right there, just a mirror increase in our collections rate, even though our AUM declined a bit led to a significant increase in revenue. That's more of a top-down view of the revenue evolution. When you look down below, we look at it period-on-period. And here, you see the SEK 9.7million the bottom left, which was the top line in '21. You add to it our new annual contract value that was put on the books and actually realized during '21 of -- or during '22, excuse me, over SEK 0.5 billion, and then you have an additional one-off of SEK 0.3 million and you get to the SEK 10.4 million in '22. You add to it another SEK 0.5 billion of annual contract value, which was signed in '21, but realized during -- sorry, signed in '22 and realized during '23 and you add our M&A with some one-offs and you get to the 11.4%. What's great about this is another indication of the momentum in this business is, last year was a record year for annual contract value. Net of churn was SEK 1.4 billion, almost 3x the prior 2 years run rate. So we expect that to start floating into our revenue during '24, and again, lead to probably another record year and a significant uplift to that SEK 11.4 million. The next page looks at the same progression, but also looks at margin. I already referred to margin during the quarter being flat 10% this quarter versus 10% a year ago. This reverses a trend or stabilizes, I should say, a trend of the prior 4 quarters, which you can see here very clearly, of having the RTM margin declined from 19% to 15%. We believe that by the end of the year, we will reverse that trend and get into the high teens, and we continue to be committed to our goal of getting that margin very significantly into the 20s by 2026. Why do we believe that? In part because of the data on the bottom half of the page. Organic growth in Northern Europe was 2%, although in the first quarter, I think partly because of the Easter Holiday, also partly because of other issues, it was negative, but on a trailing 12-month basis, Northern Europe organic growth was 2%. Middle Europe, which is our largest economic catchment area grew a very healthy 11% on an organic basis. And then while the negative 5% looks disappointing at face value, that last quarter was negative 6%. So -- and that region of South is our largest revenue region, our largest stock AUM region and so a small decline or a small improvement from minus 6 to minus 5 actually yields a significant amount of improved bottom line. And that's being driven across all the markets, but in particular, because our Italian business had a banner first quarter and looks to have an exceptional 2024. Why are we comfortable on margins? You can see the bottom half of that bottom part of the graph. So our new business, starting with last year's SEK 1.4 billion and continuing during the first quarter, we grew 11% year-on-year. So it's continuing to accelerate our new contracts are all at significantly higher margins. So we see here that historically, Northern Europe, the margins were 15%. Our newly underwritten business in the last 12 months was around 38%. Middle Europe, similar 15% historically, looking forward, 31%. And then roughly, it's a little bit below, but it goes up and below and it goes roughly above or below historical numbers in Southern Europe. These improved contract-specific margins, plus the cost cutting I mentioned about earlier are both going to drive that margin up. And it looks like the decline is stemming -- stabilizing and hopefully we're at an inflection point. Next page, Page 7, we're investing. This is the same picture it has been since the middle of last year, dramatically less investments, net extraction and in the last 12 months, we've extracted SEK 6.4 billion dnd ultimately, that was a lot less that was less than SEK 3 billion before on an equivalent -- trailing 12 months as of last year. So we are net extracting cash, and this is consistent with our strategy of downsizing our direct portfolio in the future coming up with a third-party capital solution to continue to ramp up our investments without ramping up our proprietary balance sheet and ultimately taking that cash flow and addressing our capital structure. When you look at the next Page 8, you see continued collections momentum. This is not just an evidence of a larger portfolio, but it's an evidence of an ability to collect, we, as an industrial collector can manage these things dynamically and as a result, we manage and hit active forecast, but we significantly exceed historically for us. So as you can see, this is just a statistical demonstration of how difficult it is to collect because in '21 and in '22, even against active forecast, our ability to collect was a bit ahead of active forecast, which is continually updated. Right now, in '23, you see it's been stay at or around 100%, which shows we're still doing a very good job, we're being dynamic, we're dedicating resources to make sure we collect what we expect, but we're not having that marginal performance that we had historically in active forecast, which is a demonstration of the difficulties in collecting in the current environment. Finally, on Page 9, as it works to -- as it relates to ESG. On the carbon disclosure project, we have a very high score higher than our sector, higher than the global average, somewhat expected, but still were higher than averages because we're not an industrial company. Bottom left, we continue to get significantly high customer satisfaction ratings. These are customers or consumers despite the fact that we're interacting with them in very large scale as well as at a very difficult moment for them, a testament to our solutions orientation of our collection strategy. We continue to collect at record levels, SEK 120 billion, I think, is an all-time high in terms of our collections, both on behalf of our clients as well as our own book. And then the top right, again, the number I'm very proud of, just under 5 million people, we helped to become debt-free and ultimately, allowing them to reintegrate into financial society or the financial infrastructure on a very, very important role. We don't just collect and make money off of it, we also help people on large scale. So with that, I'll turn it over to Emil who will deal with some of the financials, and then I'm going to come back with 2 or 3 key messages, and then we'll go to Q&A.
Thank you, Andres. Please go to Page 11. So this is the fifth consecutive quarter with growing adjusted income and adjusted income was SEK 4.9 billion in the quarter or up 8% compared to last year. And as mentioned, this is primarily driven by our servicing segment. And despite the challenging operating environment as described and adjusting the EBIT for costs related to the cost initiatives and M&As we executed on during 2020. We do see a corresponding increase in adjusted EBIT, up to 8% or SEK 1.2 billion for the quarter. The increase in adjusted net financials reflect higher interest rates and higher gross debt. So our effective interest rate is up 80 basis points in the quarter and an average gross debt is up -- sorry, SEK 3.7 billion. In the net financial items in the report, you'll also find a positive impact from the bond tender offer we executed in February, which resulted in a positive effect of SEK 196 million from the fourth quarter. The leverage ratio remained at 4.4x during the quarter. Adjusted for the unfavorable FX movement, the leverage ratio would have been 4.3% net debt to cash EBITDA by the end of the first quarter. I'm now looking at Page 12, our servicing segment. In the first quarter, we saw a significant increase in external income amounting to SEK 2.9 billion or an increase of 16% compared to last year. The increase is mainly driven by the acquisition [Indiscernible]. But also, as you saw on Page 16, on an RTM basis, we grew 2% in Northern Europe, 11% in Middle Europe. And for the full segment, we had a flat organic growth on a trailing 12-month basis. In the quarter and taking into account the seasonality effect of the Easter -- sorry, the calendar effect of Easter, we had a negative organic growth of 2% in the segment. Adjusted EBIT is up 8% versus first quarter 2023, translating into a flat margin of 10%. Costs continue to be a focus, and we have been, and I want to reiterate what Andres said before, we expect the initiatives that we made by the end of 2023 and now during the beginning of 2024 to come into effect in the margin by the second half of this year. Turning to Page 13 and our investing business. As a function of the slower investment base, we will have a natural reduction in the income and also the adjusted EBIT, so the adjusted income decreased 3% and the adjusted EBIT decreased 6% during the quarter. And again, reiterating, we had a tough environment, but we continue to deliver 100% versus active forecast. And remember, again, versus the original underwriting, we delivered 109% of the forecast during the quarter. The new investment we made during the quarter was approximately SEK 400 million. It's in line with the reduced investment pay that we announced during the second quarter last year, and they were made at an underwriting IRR of [17]%. During the first quarter, we did expect a bit more than SEK 2 billion of net cash from the segment. Now turning to Page 14 and the follow-up of the cost initiatives we took -- we launched in Q2 last year. So to date, we have realized the majority of the cost programs. The target was to achieve more than SEK 800 million in annual cost savings. To date, we have realized SEK 500 million and expect the remaining to be realized during 2024. In the graph, we are trying to visualize the effect on -- compared to the baseline cash cost, which was the first quarter of 2022. The first 4 is the actual realized savings of SEK 500 million. The second bar shows that the like-for-like organic reduction in our income has reduced the cost further with SEK 500 million. And as we acquired [Hint] platforms in U.K. in 2022, the cost we have increased by SEK 1.3 billion. and reverse the realized savings from volumes and executed cost savings initiatives. And on top of that, we have the fourth in the fifth [Indiscernible], which represents inflation and the currency effect. All these are adding to an increase in the cash cost of SEK 1.2 billion -- sorry, SEK 1.6 billion. And as this been top for the last couple of quarters, we continue to monitor the cost development, and we have identified a further SEK 700 million that we will implement and execute during '24 and '25. So turning to Page 15. I would like to walk you through the net debt development. So the cash flow that we have generated in the quarter of SEK 1.2 billion has been used to invest approximately SEK 400 million and repaid debt. However, as I said before, the adverse FX movement increased the reported net debt by SEK 1.3 billion to SEK 57.9 billion. And in the bottom left corner, you can see that there is a healthy -- still a healthy return gap for our trailing 12 months underwriting IRRs compared to our average cost of funds, and it's approximately 3x larger. So with that, Andres, I hand it back to you for some concluding remarks.
Perfect. Thank you very much, Emil. I wanted to -- before I wrap up the presentation and move to Q&A, talk about 2 trends which are important trends, long-term secular trends, which are going to impact us and our industry directly, both of which are also going to be significantly favorable for Intrum. Those 2 trends are regulation and technology. So now turning to Page 17, you have a very brief overview of the NPL directive. Many of you know that the EU has implemented an NPL directive to assist banks in how they deal with their NPLs. There's a bit of an explanation on the left-hand page. Banks can either sell NPLs to credit purchasers or utilize licensed credit servicers to collect on their behalf. The directive specifically requires both credit servicers and credit purchasers to be licensed in all jurisdictions. We act in both capacities as a purchaser and a servicer, and we act in almost all jurisdictions in Europe. So this clearly is going to have a very direct impact on our operations. Directive specifically regulates customer protection, complaints, information duties, internal controls, rules for outsourcing, reporting, supervision and cooperation with the regulatory authorities. It is important to note that while we are being regulated more like a bank, the capital and liquidity requirements put on the bank are not extending to us as an industry. And this is being implemented across all of our markets. Why is this beneficial to us? This puts a heightened burden and sensitivity and requirement when a bank takes a step towards dealing with its NPLs either by selling it or by handing it over to someone else to collect against those claims on their behalf. That is a heightened level of scrutiny, that is a heightened level of required regulatory robustness on the part of the counterparty, which for us, having been in this industry, in some cases, for a century in almost all cases for decades and having been operating in all the different markets, we provide a much safer and more stable and reliable counterparty than almost all of our competitors. We are already today by virtue of historically already adopting a high level of governance, almost bank style governance as well as operating in all of these countries in large scale and with regulated entities, counterparties. We are already compliant with the directive in almost all our countries. This is also going to be important that it's going to harmonize processes, which is also to our benefit because we can deal with more counterparties in a more consistent fashion, which helps us deal with them more effectively and also be more cost effective and efficient in our own processes. And this is going to require anyone who's outside of the EU to have an on-the-ground representative who is licensed in whatever jurisdiction we're dealing with, either as a service or as an investor, which will -- and as the market leader, we will be the logical candidate for any major player, external or outside the EU, who wants to go into the EU in either capacity, benefiting both our investing business and our servicing business long term. So this is, I've said it before, more regulation is good for us because it differentiates us, it limits our competitors who do not have the capacity to portray this level of reliability or invest in the level of compliance or regulatory compliance that we do. And ultimately, over long terms, it means we're going to be able to win more business as well as price our business more favorably. Now on Page 18, we see technology. As I said earlier, we launched Ophelos in the Netherlands, it is extremely early days, but the indications are positive. Here, you see 3 individual cases where from a specific client, in this case, a BNPL lender who uploads automatically to us between 5 and 50 cases per day. Their average claims are EUR 90. So very small claims, which if we have high cost can eat into the net collections for our clients and also our revenue. So it's very important that we're efficient with smaller to claim. Here, you see 3 cases: One, all of which where we within minutes of receiving the claim, analyze the consumer, analyze the claim sent an e-mail with a link to a portal. In the top case within minutes, we had a full payment on a EUR 81 claim. In the middle case, we had a consumer go to the portal on a delayed basis and then ultimately enter into a partial payment. And then in the bottom, we also had a case where on a very large claim, EUR 385 the email was sent with a delay of a few days, the customer did go into the portal and with a delay of a few days after that, they paid in full. So it shows the effective -- it demonstrates the effectiveness of the digital path to insight collections activities even on a delayed basis. Even if it's not immediate, they come back to it. It makes it easier for the customer to pay, the customer has a better experience, and there is no human interaction. It's 100% managed by technology. And all of the data points, all of the clicks from when they open the e-mail, to when they go to the portal, to where they click in the portal to where their mouse hovers in the portal, we gather data, which then is fed back into our algorithm, which allows us to more accurately predict how future consumers of similar profiles will act. I get incredibly excited, as you can tell from the tone in my voice when I see this, it is extremely early days. But if you look at this impact and a projected across the 159 million actions we take, of which 97% are not self-serve, of which more than half are more traditional phone calls and less physical letters, it is vast. When you look at this impact on the 6,000 people, we have in 41 call centers, the potential here is vast to not only improve our efficiency of collection, reduce our cost to collect, but improve our ability to serve, improve the product, both of which are going to structurally improve our company over the medium to long term. So I'm incredibly excited about this. Wrapping it up on Page 19. We had, again, a good quarter, delivering good results in what was a seasonally low -- seasonally slow quarter, which also included again, Easter during the first quarter rather than second quarter, so our results, I think, are that much more impressive. You do see the beginnings and the direction of our strategy of being more operationally efficient, tech-driven, being more client-centric and being more capital light. And we reiterate and commit -- reiterate our commitment to our targets as set out at the Capital Markets Day last year. So we are growing at levels higher than what we anticipated and will continue to grow at high levels of top line external servicing income. We are moving towards that very solidly, mid-20s margin, and we believe we are absolutely going to get there. We have already pro forma for the servers deal, although this figure is yet to have that impact but performance for the service deal, we've already hit a lower level of portfolio balance on our proprietary portfolio. And while in the quarter, it was stable, it would have declined a little bit, we're a little bit below -- we're about 0.2 below last year, we are directionally correct, but it's still early days, but we are committed to delever between now and 2026 to the 3.5% level and importantly, beyond that to continue to delever, to continue to lower that ratio. So hopefully, 3 and below in the subsequent years to 2026. So with that, I -- we can turn it over to Q&A. One thing before we start Q&A and as always, Jacob will be the first question. So thank you, Jacob, for always being first in line, but I want to preempt again and repeat something I said earlier. As it relates to any possible realignment reshaping, restructuring, however, you want to call it, of our capital structure. Those discussions are ongoing. We do not have anything to report yet and so I'm going to be very limited in anything I can comment on it. I'm sure you'll still try to ask, but I want to preempt you and when we have something to report, we will come back and report on it. But with that, I think, operator, we can open it up for Q&A.
If you wish to ask a question, [Operator instructions]. The next question comes from Jacob Hesslevik from SEB.
If we skip my first question, as you won't give us any time line on the capital structure, are you also looking at potential M&A solutions for Intrum, or is the Board only focused on Intrum reaching a solution with credit owners?
I can tell you right now, we're not contemplating any major M&A activity.
Okay. Good. On the P&L, can you comment on the indirect cost, which increased substantially within -- especially investing in the quarter?
I think that's a factor of the inflationary environment we've seen in FX compared to last year. I mean do you have the same sequencing as when we go through the cost program.
Okay. And if we look on servicing, I mean, I read your comment on direct costs stating that you're handling higher volumes than a year ago on top line but if we compare to Q4, I mean, income is down SEK 400 million, but the record cost is more or less flat.
Well, that -- go ahead, [Neil], if you'd like, what I can add. I mean I think you need to understand that while the first and the third quarters are slow, the second and the fourth quarters are strong. Our costs -- there are some costs that are quite linear, but our activity raises and lower. So that phenomenon is not terribly surprising to me because you have higher margins in the second and the fourth quarter traditionally, which again just shows you that the revenue comes in at a much higher incremental margin because you have certain costs that just happen every month, but other costs that are directly tied to activities. So that's not entirely surprising. The fourth quarter is our highest margin month -- quarter -- excuse me, the first quarter is one of our lowest, if not the lowest, actually.
Okay. That's fair enough. But if we look on Page 14, I mean, cost in acquired businesses rose by SEK 500 million to SEK 1.3 billion from just a quarter ago. So how do you expect these costs to develop during the rest of the year?
You mean in the presentation, so the cost bridge?
Yes, exactly.
No, I think the cost for acquired business, you know when we closed the -- it was June and September last year, and this is on an RTM basis. So they acquired the third bar will increase a bit. But on the right-hand side of the dash line, you will have reduced inflationary pressure on the costs. And then FX is obviously completely out of the [Indiscernible].
I mean we did 2 acquisitions last year, 1 in Spain, 1 in the U.K. to make us market leaders. What market leadership allows us to do is it gives us a much larger revenue base, a much broader client base, it allows us also to affect synergies, which have not been in those numbers as well as affect the cost reductions and margin improvements that we're doing across the entire company. So again, on our margin, which is just directly relates to it, we have a trailing 12-month margin of 15%. It's come down from 19% the year prior. I believe that's stabilizing and ready for return in the second half, which I said earlier, back up to the high teens, and then we're still committed to our mid-20s target in '26. We do not anticipate any additional M&A for now and those were the 2 large acquisitions. In addition to last year, we did do eCollect and Ophelos, which are going to be felt more over time and more structurally and fundamentally, like I described earlier on my page.
Okay. And just lastly, can you help me understand why you have allocated more income towards Northern Europe, while decreasing income impactable markets?
Poland, Poland is now part of Nordea.
It's a good question. It's a structural shift for us. We have moved Poland into Northern Europe as a region, previously was in Eastern Europe or tactical markets. we're going to keep it there. Historically, it was part of Northern Europe as well, so it is along with Denmark, Sweden, Norway and Finland, we've added Poland. Poland is an important economy, it's one that's growing significantly that in many respects, could be one of the biggest in Europe a decade from now. So it's an important economy for us, an important market for us. That is actually dramatically improving over last year versus -- this year versus last year. On the tactical markets, I will also comment on it. We are not exiting those markets, we -- after the larger service deal, we do not feel a need for liquidity purposes to sell any more assets. And those markets are high return, frankly, higher risk but also higher return and very high cash flow markets. They're almost 99% to 100% PI or investing markets, the platforms exist to manage our own books and we have now decided to retain them. We have named the new head of that region, which we're going to rename from technical markets to Central and Eastern Europe. But more to come on that next quarter as that set that new structure settles in.
And you also answered my next question, which was my final one.
The next question comes from Patrik Brattelius from ABG.
Thank you. Good morning. Can you hear me? Okay. So I start with the divestment of [Celebrus]. Can you please share any updates on time line and also any update of your latest expectations or one-off effects driven by this transaction?
So on timing, I'll address timing and Emil can address one-off effect. On timing, it is pending one regulatory approval. We have been in active dialogue with the regulator, we actually visited with the regulator. It's in Poland last week. We should be closing it in the next 1 to 2 months. They've assured us of that timing but obviously, it's a regulator so you never know until it happens, but that is the only requirement and the only remaining condition to close.
Yes. And on the onetime effect, I mean you have a couple of components, but you have the discount of 2% on the -- versus the book value, which is a fixed effect and then you have the P&L effect building up since the economic transfer date, which is the 1st of October last year. So it increases with approximately SEK 200 million per quarter. And then the unknown is the FX effect because we have an embedded FX positions into our selling companies, that is currently reporting in other comprehensive income that will go through the P&L, which will offset that negative effect. But the magnitude of the FX effect, it's too early to say since we don't have a final closing date.
When this transaction is finalized, will you send out a press release detailing out the different one-offs?
We will explain its final impact on liquidity, and it's effect on accounting at the time of closing, yes.
Perfect. And then within servicing, it sounds like a theme across the debt collection space to go this route. Can you please elaborate what you have seen in terms of competition for the last 6, 9 months?
Just -- I don't curiosity, I don't know exactly what you mean by go this route. I mean I can comment on competition, but I just want to get proper context for your question, please?
Well, within the space, I hear more and more debt collectors saying that they are focusing on servicing and just like you are. So I wanted to see how you view the competition, how that has developed for the last 6 to 9 months?
Sure. And I can certainly comment on competition. And I have to tell you that I don't necessarily see that same trend of everyone turning towards servicing. However, for the last, call it, 6 to 18 months, our win rate when we go and compete for client mandates has increased from approximately 40% to above 50%. We had disclosed some of that in the past quarters actually, and that trend continues. And I would say that, that trend also is not a factor of being the lowest priced, we are not the lowest priced almost consistently across the board. We are providing a more comprehensive and reliable service, we are providing now a more technological phase, to our project to our service offering, and we're underwriting them with a better margin such that we can be more precise in our pricing. So we, if anything, we are feeling that we are more competitive, although that doesn't mean the competition don't exist. Competition is very much market by market. It is not comprehensive across the board. We don't have the same competitors in Spain or in Greece that we do in Denmark or Finland and Norway. But as I said earlier, we are consistently in all those markets, we're the only one in all those markets really. And as I said earlier, on the NPL directive, that's going to further fuel our competitive advantage because competitors is not going to be able to invest or convey the level of reliability that we can to banks, where now it's a much bigger decision whether you outsource or whether you sell.
And then as a follow-up then, in which regions do you see your competitive advantage being stronger versus where it's weaker?
Well, I mean, I think there -- it's not necessarily weak versus strong, I would say they're structurally different markets. In South of Europe, we are the biggest so we have all these inflows, but their stock market. So our overall business is more related to collecting against very large stocks as opposed to having a lot of new business come in. In the middle and the north, that's completely different. In the middle of the north, we're incredibly competitive. It's a business that renews itself more regularly, so that competition and competitive position is tested more regularly, and that's where we're strongest, because there's more competitive activity, if I'm explaining myself. But ultimately, we are incredibly strong in the middle and the north, but that business requires us to continually tender. In the South, we're the strongest, but there's not that much competitive tender -- client tender activity.
I understand. That was all my questions.
The next question comes from Ermin Keric from Carnegie.
So maybe if we start on Slide #14, just to understand that one a little bit more. So how do you expect that inflation will look 1 year from now if we look at that bar, just to get a sense for what are the net cuts and what's more just offsetting underlying inflation from the ongoing and new cost program?
Thank you. I mean, I'll address it conceptually. Maybe Emil wants to add to something more numerically, but that bar is one of my biggest sources of frustration because we're cutting all these costs, but I feel like we're running in place in part. Now that's partly because we haven't fully realized we've only realized SEK 500 million out of what is now SEK 1.5 billion of targeted cost cutting. So we are going to outstrip inflation significantly when it's fully realized, and we're going to structurally lower our cost. But it feels like we're running in place because we still have a very large cost base even after these cost cuts, that is subject to inflation. That's why things like Ophelos are so fundamentally important and that no amount of estimation for us over time can really properly prognosticate the impact of that technology and structural change, but that 0.6 is very frustrating. Obviously, it's going to abate, I don't want to preempt to Emil, but it's going to abate because inflation is coming down, but it's still going to be a significant number and I think you're going to see an outweighing of cost-cutting versus inflation but it's going to take some time. And we still have to deal with the structural competitiveness, both from a cost perspective and a quality of service perspective of our offering, which is really down to technology, not tactical cost cutting. But go ahead, Emil, please.
No. I mean, to echo that, I mean, it will come down the inflationary impact, and it comes -- it hits our platform with a lag of approximately 6 months as well. So you have a bit of DK when you see it in the general economic environment compared to when we observative as an actual costs achieved. And going forward, let's see on how to report on the inflation when it comes to the starting point, but that has an impact and now we have reported versus the baseline cost which was the first quarter in 2023.
Thank you, that's helpful. Then a question on Slide #5. So just to understand how come the AUM is actually down year-over-year despite M&A and that you've had quite first call momentum on the ACV signings?
Yes. I mean you're right in that we have -- we've done M&A, we've done other things, but also in the first quarter of last year, technically speaking, we still had [Sareb] on the books, and that's what distorts the picture a bit. I would focus more on the much higher collections Ermin, if I would you, but on the AUM, yes, it's slightly down because Sareb was in the old number and isn't in the new number so that, by definition, is left. We lost that contract, we were not making money -- significant money on that contract. It was a good thing that we -- that was granted to someone else. And we had last year, even when you pro-forma that, our AUM did grow actually, ex Sareb, to be clear.
Okay. But then continue on the same slide, the conversion rate, that stayed flat, and I would think Sareb was a further low conversion rate and you're winning contracts with higher margin and my understanding has been that that's been on pricing rather than including your own internal efficiency measures. So why aren't we seeing the conversion rate coming up?
The conversion rate, I don't know if it's rounding or not, it is trending up, but we're talking about a very large base of assets and a very small amount of incremental collections or a very small amount of incremental conversion rate leads to a significant amount of incremental revenue. But you're right, you should see that conversion rate come up somewhat, but I would say the underwriting of the new business is somewhat related to pricing, but it's also much more related to our more precise underwriting on the cost side and making sure that we're not doing unnecessary actions. So because historically, we focused more on actions than the results, we're turning that around, which means we can look at a much higher margin given the same level of revenue. So you're going to see some movement, and these are big variables across 20 countries, all of which are different and move in different directions. But you're going to see some movement in that, but it's not going to be as much as you think.
Great. Thank you. And then one final question would just be -- I mean, you're talking a lot about the IT transformation and the possibilities of Ophelos, et cetera. Is there any balancing that needs to be made between kind of pushing for this because it's going to future proof the business versus kind of trying to save up liquidity for future maturities, et cetera?
Well, thankfully, technology is also not capital-intensive necessarily. We have to roll out Ophelos to our countries. We're rolling it out later on this year to 2 other major markets after the Belgium and Netherlands launch. It was launched in the Netherlands, it's now being launched this week, I think, in Belgium. Those markets will run in conjunction under our structure and then it's next to go to Spain and then it's going to go to France. But that's not a capital-intensive activity, it's actually a very critical industrial activity, reshaping our operations and providing much lower cost in a digital form as the evidence shows, but that's not in lieu of cash flow. If anything, over once it settles in, it will improve our cash flow actually. So that's not -- I'm not trading off dealing with maturities by developing technology. I did spend, okay, that we did, we did spend several tens of millions of euros in buying these 2 acquisitions but that's going to more and more than pay off, I mean by many, many, many multiples over a short period of time. And this is an example also, Ermin, you need to develop and deal with your challenges. You need to deal with your challenges and deal with like tactical costs, but at the same time, develop the company. You call it future proof, however you want to call it, but I think we need to do both. You need to have -- one of my shareholders once said to me, you need to have your foot on the brake and the accelerate at the same time. That's often the case, and this is evidence of that.
The next question comes from Wolfgang Felix from Sarria.
I'm probably dwelling again on the same 2 slides, 5 and 6, to try and understand the growth in your servicing business. I mean, obviously, that's what we're focusing on most, I think, now. Can you -- in part, the question was just being asked already, so we've had that decrease in AUM, you're out of Sareb, now how should I think of that ACV development going forward? And also in light of you were saying that the northern markets have more churn than the southern markets on the bottom of Page 6, I think if I'm correct, that ties in with that and so if that is so, and we're having this slightly increasing conversion rate that you were talking about, obviously, with cost inflation, et cetera, but how should I sort of project that I guess the way I would marry your business would be off of AUM first. And then I'm not entirely sure I fully grasped how to model the ACV of that and how I should be looking at that going forward, possibly by region or however.
Again, what we've tried to do here is give you a top-down as well as a year-on-year incremental analysis out of the evolution of our revenue. You're right, in that you should look at AUM, recovery rate and conversion rate to get to a revenue, and we've given you the example here at the top. And yes, so red kind of muddies the waters a bit in terms of the analysis, but we can come back to you offline and kind of show you. [Indiscernible]. But I would look at the bottom as ACV typically takes, call it, 6 to more -- 6 months to more than a year to fully hit because we need to onboard and then we need to ramp up clients, so I would look at the ACV of the SEK 1.4 billion is coming in partly during '24 and then fully into during '25, that's the way it works. And ultimately, sometimes we don't hit full ACV sometimes for whatever reason, the projections originally. In some cases, we outperformed some because we underperform, but net-net, it's probably a slight underperformance relative to pure ACV. But that would give you an idea that 11.4% is going to be squarely into the high 11s into the 12s on a subsequent period. We can come back to you. We do not have a projection of our AUM so to speak, and we can talk to you offline may help you understand this better and we'll also talk to the other analysts to understand this better, but this was our attempt to give you an ability to more easily project and understand our evolution, but also project it.
That's very much appreciated. And then the growth that you're showing in the SLEs on the bottom of Page 6, are you anticipating that kind of growth rate going forward? Are you anticipating these kind of margins going forward, particularly in Northern and middle Europe? And how should I think of Southern Europe, if this is more of a stock market and you're not reinvesting as much?
So the Northern and Middle Europe, as that ACV comes into effect, you're going to see the increase in the northern and Middle Europe margins come into effect. It's not going to be in total because you still have the legacy, you still have some very large existing clients who are at structurally lower margins, but it is going to contribute disproportionately where incremental unit of revenue is going to bring a much higher unit of SLE and then ultimately, EBIT in the North and middle. And I would expect organic growth to continue in this proportion, very strongly in middle less so -- and the first quarter was a bit of an anomaly, but less so, but still positive, meaningfully positive organic growth in the North. The South eventually will twist, now will turn, but let me explain what I mean by that. So the South was really characterized by initially Spain, then Italy, then Greece, very large onetime transfers to the servicer market. So you have a massive amount of assets that are transferred at one time, such that the collections against that stock outweigh any new inflows, new inflows exist in those markets, by the way. So there is -- there are new inflows. They're just not fully offset by collections, so they're not exceeding collections yet. At some point, they will once we work through it but you're talking about very large stock markets where probably our collections rate is not 11, it's probably 5, 6, 7. So you've got a long time to work off that stock and you have a long time to make revenue off of it. That will -- I was very encouraged by the minus 6% going to minus 5% because that has a big impact. I'm very encouraged about what's going on in Italy. But Italy, Spain and Greece are our highest cash flow markets, and any movement in these things have a significant proportion -- or a significant impact in our overall profitability. But that top line dynamic still exists, which is different than the middle in Europe, where you might have countries with 30% or 40% recovery rates who turn over every 2 years, whereas in the South, it probably turns over every 20 years, just to give you an idea.
Yes. Okay. Thank you very much, and good luck over the next weeks.
The next question comes from Angeliki Bairaktari from JPMorgan.
If I may follow up on Slide 6 as well. You mentioned there for Southern Europe minus 5% but if I look at the [food note], you say that adjusted for extraordinary items, it was actually minus 13%. And I think that's still an improvement. I think last quarter, it was minus 14%. But nevertheless, I just wanted to understand that minus 13% organic, is that coming mainly from Greece? So which market is actually seeing that decline in the organic revenue growth? And secondly, can you break down the servicing margin in Southern Europe into sort of the margin that you -- that you have seen historically in Greece versus Italy versus Spain so that we can understand sort of the different dynamics of how the organic top line growth is translating into sort of EBIT developments? And then another question on investing. Out of the last 12-month collections of around SEK 14 billion, how much came from portfolios purchased over the past 2 years and how much from portfolios purchased in 2018 or earlier? I'm just trying to understand out of sort of a year of collections in the investing business, how much is attributable to the sort of older purchase portfolios?
Great. So you asked 3 questions there. Emil?
Yes. If I start with -- try to take them in order. The onetime effect, and we commented on that on the first quarter earnings call, it was one-off settlements in Italy and Greece in Q4 2022. And then we don't give details on margin per country levels.
We do on a regional basis, and that's in our disclosure, but we don't do it individually between Greece, Spain, Italy or Portugal, for example, in the Southern region.
Can I ask, is there a big difference? Can you at least guide us in that? Like is it that one would be at like 40% and the other one at 10%? Or are they all kind of like similar close to the 24% that we see there in the slide?
No, I would say Greece is higher, Spain and Italy are lower. And that's actually part of the evolution in these markets. Again, and I've talked about this a lot. These are stock markets where also they were externalized and they were contract purchases. Spain was first in the early part of the 2010s, most if not all of that financial effect, which translates to a higher margin is gone in Spain. We've now won the building center contract without any upfront payment. We've also extended existing contracts that originally had a financial payment but on a lower margin but extended them without any further payment, which just is an evolution. It's an industrialization of the market as opposed to initially in all 3 of these markets. They were industrial as well as financial transactions. In Italy, we are performing exceptionally well, higher margin than in Spain But still, because it's the most recent transaction, it's one of the largest -- the one in Greece. Greece is the highest margin of the 3 big markets. There's obviously, Portugal, and Portugal is different. Portugal doesn't behave in the same way as the other 3 large markets. Hopefully, that gives you enough color and some help.
Yes, very helpful.
Okay. Great.
And sorry, on the collections?
Collections?
Sorry [Indiscernible]. It was in the portfolio investments, right?
Yes, exactly. So out of the sort of 1 year of gross collections that you have within the investing business, I was just wondering, it was full -- if I look at the last 12 months, it's around SEK 14 billion. So I was just wondering how much of that is coming from recently purchased portfolios like over the past 2 years? And how much is actually coming from portfolios that were purchased before 2018? And I'm asking that question because when I look at your annual report, I can see that 36% of the receivables were -- that are still sort of in the book in terms of ERC reflects portfolios purchased before 2018.
I think we tend not to discuss those details, but the general guidance on how I would look at it from an external perspective is to look at the ERC curve and the DK, and that represents the full portfolio, obviously, so you have to make assumptions on the composition of the ERC in terms of percentage of the vintages that I think you have from the annual report. [Indiscernible]. And then I think we have -- you collect probably half of the expected cash flow from a single portfolio in the first 3 to 4 years year basis.
I mean tails are important, and you're bringing that up. And to the degree 1/3 of our portfolio is older than 2018, those do contribute, but they don't contribute 36% of ERC. As Emil said, there are distinct curves, which are actually quite uniform. And if you look at our current book value pro forma for the service deal, I think it's SEK 25 billion or SEK 26 billion I think that's going to yield a little bit over SEK 50 billion of estimated remaining gross collections, but the weighted average life of that ERC curve is like 4 years and a bit. So you're going to get half of it in the next 4 years. That gives you a sense and to the degree -- and that may extend a bit because we're underinvesting relative to replenishment, but it doesn't extend that much because we're talking about a very granular and vast portfolio. So hopefully, that gives you some color as to how to look at the profile of the investing portfolio.
Can I ask a follow-up on that? Is there -- do you ever write off whatever you have bought, if the tail is not able to be collected within a reasonable time frame, would you then write that off?
We do so not on a portfolio level basis, but on -- sorry, on an overall portfolio basis, we do on a specific portfolio basis, such as an example, in the fall of '22, we saw the tail coming down in Italy, and we wrote it down. So we do do that, and that's part of the continual evaluation. So our annual -- our active forecast updates for overperformance and underperformance and so we continually view it. We only adjust relative to expected volumes, we don't adjust if the interest rate environment changes or anything like that that we don't. We only look at if we're going to collect more, we write it up if we're going to collect less, we write it down. We do that on an individual portfolio basis. In Italy, it was quite sizable. So that had an overall impact. But generally speaking, the net adjustments are upwards because we outperform as evidenced by this quarter, where we're 109% of underwriting forecast.
One last question, sorry, on the first question. It was actually Spain and Italy that are one affecting [Indiscernible] not very [Indiscernible].
All right. I think we're on to our last question.
The next question comes from Jacob Hesslevik from SEB.
I just have one more question. Looking at employees, it's down from Q3, Q4, but still up year-over-year and especially if we go at an additional year back. And I hear your comments on Ophelos and the cost saving program, but shouldn't there be a huge potential here to do additional cuts?
So the whole point of this is -- you're absolutely right. And the whole point of it is the M&A, for example, Spain, we now have 2,000 people in Spain. We're conducting a very large reduction in force, which is part of the original SEK 800 million of cost savings, which cannot take effect until the second quarter of this year. So you're going to see that number start declining quite dramatically going forward, but you're 100% correct. That is more tactical, and then you have the fundamental change over the coming years of something like introducing Ophelos, where some of our easiest -- a very large proportion of our cases are going to be managed without any human interaction, which will naturally lead to further reductions in human personnel. But you're right, that's a timing issue, what you've noticed because of timing M&A added, but we haven't fully implemented all the headcount reductions. But over time, we should implement even more due to the fundamental change, due to technology.
But how much do you think we could pick out 1,000 people, 2,000?
I think that's an important question. I think one of our operational priorities is put tech in and get people out. We have 6,000 people in 41 call centers plus a whole bunch of other people in ops and IT. I think a very meaningful reduction of that number as possible over the next 3 to 5 years. And what by very meaningful could be half.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you, operator, and thank you, everyone, for your Q&A and for your double question, we have them. As always, we've a very active participant in our calls, and we appreciate that. But again, we have -- I do want to wrap it up for 2 seconds. We have a distinct journey ahead of us. We're transforming the company from an industrial perspective, from a commercial perspective, from an operating perspective. We're transforming the company from a financial perspective, we're adjusting the capital structure, we're bringing in third-party capital. We have a long journey ahead of us. I think we're already demonstrating on a directional basis the returns on that new strategy and I continue to be impressed by my colleagues internally who come to -- or are highly skilled, but also more importantly, highly motivated in our new vision. And I want to just thank all the external stakeholders in following us and accompanying us on this journey, we are extremely confident that when we come up to the other side of the vast majority of this transformation activity, you never stop transforming, but it's going to be very intense for the coming years, but we will emerge as a much better company that's going to provide a better service to our clients. It's going to be more efficient and there will provide a better return to our shareholders, but also be a better place to work. So thank you all, and we will talk next quarter.