Intrum AB

STO:INTRUM

Q1-2025 Earnings Call

[Operator]

Good morning, everyone. This is Andres Rubio. Good morning from a blue sky and sunny, although probably a bit chillier than everyone would hope, Stockholm. I'm here, as the moderator said, with Johan, our CFO, and thank you for dialing in to our quarterly results call.



I'm also happy before I jump into the results to say that, as usual, Jacob Hesslevik from SEB is first in line for questions, and we will be going through the business over the next, call it, 20 to 30 minutes, then opening it up for questions. And I see that not only him, but many others have already lined up for questions. We look forward to that.



If we can turn please to the first page, Page 3 of the presentation. The first quarter is a good set of numbers. As you can see in the top left, on an overall basis, our EBIT has more than doubled to more than SEK 1 billion. We have continued our focus on costs. We'll get into more of that later. And we have produced a positive net income quarter for the first time since 2023. That's a very important indicator that all of our collective efforts to refocus the business, refine the strategy, cut costs, become more effective and more efficient are starting to flow to the bottom line.



Our leverage ratio is stable as a result of many different factors, which Johan will go through later. But the real drivers of the business are the servicing and investing. So on servicing, our income was slightly down. I'll address that a little bit more later, but our EBIT on both a reported basis and adjusted basis are significantly up year-on-year. This is driven by the margin improvement.



As you can see here, our margin in the quarter was 21% in the first quarter of '25. In the equivalent first quarter of '24, it was 9%, not only is that an absolute increase that's very significant, 12 percentage points. But as you can see, it's broad-based. It's both across all 3 of our major regions, North, Middle and Southern Europe, have very, very meaningful margin expansion. And what it means is we have a more profitable and a stronger servicing business, I believe, than we've ever had.



On the investing side, bottom right, we have collected above active forecast. Our income is down merely because we have less assets. That is very mathematical. But ultimately, our EBIT is still strong because we continue to collect above active forecast, SEK 102 million in the quarter. And that SEK 102 million was equivalent to SEK 108 million of our original forecast, indicating the trend continues that when we originally make investments, we generally and consistently over history have outperformed that.



During the last few quarters, we have started ramping up, although we still have more to go on the ramp-up. Our investment management activities, specifically with Cerberus as our partner. And we've invested there, ultimately SEK 647 million, which our share was SEK 111 million at a very, very healthy IRR. And I'll talk more about IRRs and volumes in investing later in the presentation.



Very importantly, also during the quarter, we've had 2 important strategic initiatives. The recapitalization, I am very happy to say that effectively, we are turning the page on that chapter. We had a very favorable ruling, as everyone knows, in the U.S. on the last day of '24. And during the first quarter, that ruling was also confirmed and ratified by a positive ruling in the Swedish courts. We now have between now and closing merely conditions precedent, which are primarily regulatory approvals, and we expect to close recapitalization in the first week of July. So what has been effectively a year of this process, we can now close that chapter and move forward. What we get a result of it, and we're going to go into much more detail on that in the next quarter, is a realignment of our capital structure in line with our business plan.



And the other thing that's an important takeaway from that process is that, that process has ratified our future prospects as a business as a cash-generative business as a recurring business because we had the overwhelming support of all of our creditors. Other 2 things that we did more fundamentally on the business is sign the Cerberus partnership in the quarter. We had been working off of a term sheet since the middle of last year. That's an important milestone. And now you'll see we expect that to ramp up and then also, we continue to inculcate or roll out technology across our platform, both Ophelos and other AI tools are being rolled out, and I'll get into a little bit more detail on that later, but that is going to add to our margin momentum by improving our fundamental ability to deliver more collections and at a more profitable rate. Next page, please.



So during the quarter, we also put out our European payments report. This was a report that's incredibly useful. For those of you who have not seen it, I would encourage you to look at it. We put out a European payments report, which is focused on small- and medium-sized enterprises once a year and also a European consumer payments report that focuses on consumers. Here, you see and everything we see here means that -- or it has indicated to us that there is significant uncertainty in the marketplace, in the economic marketplace of Europe. There is a significant amount of value at risk in the terms of accounts payable and extended payments are still a persistent problem, which we directly assist companies with.



And also that technology is increasingly getting on people's agenda, getting on company's agenda as a way to interact with their customers. So not surprisingly, the need for our services is increasing and the recognition that technology plays a role in your interaction with your customers or clients, those 2 factors are both going to bode well for demand for our services going forward. Next page.



Now going into the various elements of the business, very similar or same themes, as I said earlier. It's all about margin on the top left. In the servicing business, incredible momentum. I think it's important also to recognize that the 21% that is in the quarter was higher than our entire year's margin last year in '24, which was a little bit above 19%. So it shows that this trend is both strong and continuing.



On the top right, we continue to have positive collections in our PI business. We would expect that to continue. And that's really evidence of the fact that we, as a servicer, can dedicate resources and manage returns on portfolios that we buy dynamically such that we always try to exceed our forecast. And we do so both on an active basis and an original basis.



And the cost focus continues on the bottom left. We have had 2 discrete cost reduction programs. We are now transitioning to management of our total cost base, which is at a more manageable level, driven by both processes as well as headcount reduction. And we now, on a continuous basis, we will manage our total cost basis to be more-and-more efficient going forward. And then on the milestone front on the bottom right, as I've already mentioned, during the quarter, we signed the service partnership agreement.



On Page 6, you see our servicing business. And you see in the top half of the page, the margin trend and the revenue trend through the end of '24 was positive on revenue, slightly negative on margin and then significant turnaround on margin and a stabilization of revenues into '25. There, you see the 9% last year in the Q1 '24 and the 21% this year in Q1 '25. So last year, we started at 9%, finished in the fourth quarter with 30% and a blend for the year was 19%. This year, we're starting at 21%. That bodes well for how we're going to go through the remaining quarters of 2025.



What you see also is that stabilization of revenues when you divide it up, you see in the bottom half of this page, both the margin improvements as well as the top line organic growth by region, by key region. You see that the North and middle are growing, although I'd like to see those numbers higher, frankly. And you still have the structural decline in assets in Southern Europe.



But you also see that all 3 areas or all 3 regions have improved their margins with Southern Europe, albeit in a structural decline being the highest margin region. So these trends are things that we want to directly address. We have been addressing the margin, which you see a broad-based improvement. We want to get the organic growth up higher in the North and the middle, and we want to mitigate that structural decline in Southern Europe.



Next page, on Page 7, you see a page we introduced a few quarters ago, which goes through AUM, recovery rate, conversion rate, servicing income closing balance. And you can see here that there's been incredible stability. Our collections during '24 and then on a trailing 12-month basis as of the end of the first quarter are quite consistent at around SEK 110 billion, and this is only external assets, to be clear. And our external servicing income is quite stable. So what we're recovering and how much we're getting paid per unit of recovery from our clients is quite stable. I would highlight only one thing between the RTM beginning of SEK 1,621 billion on the top right and the SEK 1,551 billion closing balance at the end of the first quarter, that is largely due to FX movements.



The next page, Page 8, is one of my favorite pages. We brought it back into the quarterly report this quarter. And this gives you a sense for the history and the trajectory and the performance of our investing business over time. And this goes back to 2004 when we really started to invest in any meaningful fashion. And over this entire 20-plus period, we've invested over EUR 8 billion, just to put it in context. And over that time period, we have collected against original forecast 107%. You can see that on the top left, against active forecast 105%. Since 2018, which is really when you see the large volumes being collected, which indicates large volumes also being invested, we've generated what I believe to be a very consistent and attractive unlevered return at 14% and a 2x gross money on money multiple.



I think the other element here is that long term, while the movements in terms of our collections rate, which is the blue part relative to active and original forecast has gone up and down, it is at very attractive averages and has only dipped below 100 once, that's during the pandemic and came right back very strongly.



The other element that's important to highlight, which is one of the reasons we have some headwinds on revenue in our investing business is the decline you see in the blue chart, which is our collections from '23 to now. That's partly the sale of the back book. That's also partly just we have less assets, so we collect less. That is something that I would expect to stabilize in the coming periods.



The next page is a very important point, which is how much we've done together with Cerberus to-date through the first quarter. As I said earlier, we have been operating on a term sheet basis, working together across our footprint since the middle of last year. We've agreed 14 deals, actually closed and funded 11, about SEK 2.5 billion-plus, of which we've done over SEK 750 million of our share. And what's really interesting is that we have completed investments at a very attractive investing return. Here, you indicate on the third bullet point, the 1.9 net money multiple that's expected by the end of Q1 2025.



But what's very important is that this model generates investment management revenues and servicing revenues, which are equivalent to not more than ultimately our investing returns. So that's the beauty of the model that we invest with a partner. We have our share of investing returns. We make decisions on investments based on investment return. And then we have the added benefit to our model of investment management fees and servicing revenue. And again, we signed the definitive document regarding this at the beginning of April. And ultimately, what this means is that we now we believe over the coming quarters, we want to scale up our volumes done in this partnership.



The next page goes through a fundamental point here, which is the diffusion and inclusion and use of technology in our platform. Ophelos, as many of you know, is the autonomous debt resolution platform that we purchased in 2023. It is now in 6 countries, U.K., Ireland, Spain, France, Belgium and Netherlands. It's not going to be in Portugal and Italy in the coming months. By the end of the year, we'll be in 4 other countries, Greece, Germany, Sweden and potentially Norway. And there, where we have it rolled out, you see a very common theme and a very consistent impact, higher collections relative to our legacy collections capability, better customer experience and lower cost, so higher margin for us.



For a company that ultimately has 30 million consumers almost EUR 200 billion or SEK 2 trillion of assets under management, including our own and client assets and takes 160 million actions a year, you can imagine what that kind of potential impact could be when rolled out across the entire platform. Our objective is between now and the end of the year to not only get into these 4 additional countries, but ramp up volumes in the countries where Ophelos does exist. And we will see a tangible run rate impact at the end of this year and going into next year.



In addition, just anecdotally, on the bottom left, during the quarter, we launched Olivia, which is our AI voice agent to make fully automated, AI automated outbound calls. We are making about 10,000 a month in Spain related to our real estate business. That's going to go up by several multiples in the coming weeks. And what we've seen is that this agent, AI agent, which fully identifies itself as an AI agent is actually more effective at getting to a positive conclusion phone call than human agents. Again, going back to -- if you look at that and then put it in relation to the 5,000 to 6,000 people we have in over 40 call centers, the potential is quite dramatic.



Next page. Again, we are incredibly privileged to play an important societal role. We continue to help people who are in a very difficult situation, who are in debt that they can't potentially address directly and they're looking for solutions. We provide them with those solutions. We deal with them in a very delicate time, and we provide them with solutions on an industrial scale. So we helped 4.6 million people over the last 12 months become debt free. These are individuals, you've heard me say this many times, but it's one of the privileges of our function as a company. These individuals now can reintegrate into financial society because they are excluded until they are able to deal with this debt.



And despite dealing with them at a very delicate time, we get very positive ratings. And all of this activity leads to delivering also for our clients, which we consistently over the last 12 months continue to deliver in large scale at SEK 119 billion total, about 9% or so, a little bit less is for our own book. The rest are for clients.



So the last point I'll make, and this is deliberately the last point in the main section because hopefully, going forward, we won't even have to have a page like this. But the recapitalization, as I said earlier, we've turned the page. It is effectively concluded. The court processes were all concluded and in our favor. We have overwhelming creditor support. Now what's left is regulatory approvals, which are conditions precedent, and we expect to close it at the beginning of July.



So with that.

[Johan Akerblom, executive]

And maybe on that, today, actually -- yesterday was the last day of appeal in the Swedish Court, which means that effective from today, the court ruling is fully in place.

[Andres Rubio, executive]

Wonderful. And hand it over to you, Johan.

[Johan Akerblom, executive]

Which is what we expected. So thank you, Andres. So talking about the financials on the group level, I mean, we improve on every line, except for the income side, where we're slightly down, and we will go through that a little bit more later on. I think the EBIT uptick and the discipline that we showed basically brings us to deliver a net income in this quarter, which is the first time since Q4 2023. And I think the things that we have highlighted during the fall, which is around making the service margin increase, continuing to extract value on the investing side, ramping up the partnership with Cerberus.



However, that hopefully should be accelerating now, being strict on cost, not being very, very disciplined when it comes to taking extraordinary costs. I think all of those things are delivered in the first quarter. And I think that's a testament to what we actually -- that we are now doing -- we're sort of starting to find a pace and a cadence in our business along with the markets that is fully aligned.



The leverage ratio stays flat at 4.5 we do have tailwinds from the FX side, but we also do have headwinds because the discontinued business rolls out every quarter. And I think that's sort of the summary from the first page.



We go to the next page. This just illustrates how our cost has emerged over time. And you can see that the cost level we put in Q3 remains flat, i.e., we're basically able to compensate for any increases by being more efficient. We will continue to focus on cost. We will continue to focus on structural measures to continue to take the cost down and also to compensate for any investments that we need to make.



On top of that, we have the whole impact from Ophelos and other technologies that will also help us on the cost side. And you can see that our [FTEs] are continuing down, which they have been for many quarters now.



Going to the next page on servicing. I mean, first of all, starting the year off on an adjusted margin of 21% gives us a very, very strong platform for the rest of the year. I think if you look at the servicing business, we have very different dynamics in the different regions. And I think Anders showed you the fundamentals.



In North and Middle, we will continue to focus on the adjusted -- the margin going up and continue to grow the top line. In the South, we have a nice margin. There, the issue is that we need to now get back to growing top line, and that's going to be one of the main things that we work with going forward throughout the year. And that's mainly related to Spain and Greece. Italy, we see actually that we can extract income in that market.



And then the IECs that we have, which are fairly small, but they're still there, they relate to U.K. and Spain, where we still are working heavily on the transition and the transformation. But we're getting sort of we've been past the peak, but we will continue to improve both those countries as it relates to the M&A effects and the integrations. And I think it's quite telling. I mean, an EBIT increase of more than 2x on an adjusted basis just shows that our servicing business has a very, very good traction.



On the investing side, of course, we would like to invest more. We would like to extract -- we like to invest more, but at the same time, the investing business is not something you do on a targeted investing metric. You invest on. And if we don't see those returns, we have to stay disciplined. And I think this is more a testament that we actually have the discipline to not deploy money where we shouldn't. Of course, now we having signed a partnership, we want to see those volumes ramping up, but we are also partly depending on where the market is here.



We are continuing to extract good money from the back book. We do suffer a little bit from higher costs in the quarter, and that is mainly the reason why the ROI goes down. And we will have to look into how we can be even more efficient in our collection to avoid those extra costs going forward. But there's also -- part of this is also legal costs that will come back with higher collections.



On the net debt, we do have some -- I mean, we do have SEK 1.6 billion of operating cash flow, lowering the net debt. Then we have a bit of finance net going the other way. We have investing, which is lower than expected as we discussed. And then the FX is obviously a big tailwind here.



On the other hand, when we look at the leverage ratio, as I said, the discontinued business is now only included with 1 quarter, and it will fully exit as for Q2. And we expect that the IRR levels for the new investments to remain at the high level. We are not going to sacrifice the IRR going forward for volume.



Page 19 is essentially a repeat of what we showed before. It's the new maturity profile. I'm not going to comment too much on that. I think what is worth mentioning is that the cash and cash equivalent has gone up to SEK 3.2 billion from SEK 2.5 billion. So we're improving our cash position on a quarter-to-quarter basis.



And then finally, on the financial targets, I mean, the CAGR on the external servicing is pretty much in line. We need to work to continue to keep that around 10%. The service margin, we're not going to celebrate that yet, but it's moving clearly in the right direction, and we feel quite comfortable that we can meet that target going forward.



On the investing book, I think here, it's more a question on how we can actually get the book to shrink less, and that's something that we have on the agenda. So we basically want to stabilize the book as much as possible. And then last, on the leverage ratio, we are stable, and we're targeting for that to continue to go down.

[Andres Rubio, executive]

Great. So if we can go to Page 22, I'll just make some very brief summary comments, and then we'll open it up to questions. But the first quarter, which was a very active quarter, it is also seasonally our slowest quarter or our seasonally most conservative quarter. And so therefore, to have the kind of results we have sets us up, as Johan just said a few minutes ago, very nicely for the rest of the year.



During the quarter, top left on Page 22, we have the Swedish reorganization confirmed. That is effectively the final step towards turning the page on our recapitalization, which we've done. We continue to focus on cost, and we've now transitioned from 2 discrete cost reduction and targeted cost reduction programs that we've successfully completed to now managing our total cost base, which was evident on Johan's page and continually improving that.



We continue to utilize and include technology in our business. I gave you some ideas earlier in prior sessions as well as to the potential impact of that. We now need to execute on that impact over the coming periods. And ultimately, its margin improvement and address the top line in servicing and investing collections above forecast while we ramp up our partnership model. So that's in sum, what the quarter is. And I think what it also demonstrates finally, and then I'll turn it to questions is the strength of the platform and the strength of the people.



We had an incredibly active last year with many fronts open and for the company to operate with these kind of results, while we're going through a recapitalization, while we're trying to reorient the strategy, etc., is just a testament to the quality of the people, not just on this call, but all 10,000 people or 9,000 people in the platform. And I'm incredibly proud of how the platform has performed during this period. We are now entering a new chapter. We're going to put the recapitalization behind us, and we're going to attack the business.



We have the largest commercial footprint. We have a large capital base and the #1 NPL investor as our capital partner, and we're including technology. I think that, I believe, will lead to success in the periods to come.



So with that, we can go off to Q&A, operator, and Jacob will be the first one as always.

[Operator]

The next question comes from Jacob Hesslevik from SEB.

[Jacob Hesslevik, analyst]

If we start with the servicing side, I mean, the EBIT improvement, it seems that expense is finally under control, which is comforting. Should we expect the current staff cost to be the new running rate? Is there further reductions to come in future quarters from layoffs made late in 2024? And also what reductions do you see from Ophelos being rolled out in Portugal and Italy?

[Johan Akerblom, executive]

So I think that if you look at the -- there is a slight run rate effect that will come throughout the year. But then in terms of technology and sort of Ophelos, the true impact of that will probably be seen more into 2026 rather than 2025 because we're still ramping it up, and we need to see that we can fully scale it. And to be fair, I mean, we have rolled out in many markets, but the full scalability we're doing on a more selective basis.



And then when it comes to Olivia, that effect will be seen probably already this year, but it's not going to be material on a group level because we need to sort of make sure that it works properly. So yes, that's probably also more of '26. But yes, we expect that the cost at the end of the year will, on a run rate be lower than at the beginning of the year. And then going into '26, it should continue.

[Andres Rubio, executive]

Absolutely. I mean I think, Jacob, we started the year last year at 9%, ended at 19%. We start the year this year at 21%. That means I'm comfortable with the 25% target. And also, it's very tactical. It's not fundamental, as Jacob just indicated. What we really see is the Ophelos impact beyond this year into next year and further to be more fundamental improvement. And so we needed to do the tactical, as you indicated. And now we're going to, through this year, continue to benefit from that, and you'll see the fundamental on top of that.

[Johan Akerblom, executive]

Servicing, just to add to that, Jacob, I mean, one thing is to get the cost down. Another thing is to get the full scalability on the platform, and we need to work on both because we can decrease the cost. But then as we want to grow, we also need to make sure we don't add back cost every time we get new contracts. So I think that's another sort of area that we focus on a lot to both be more efficient but also create scalability on the business we run.

[Jacob Hesslevik, analyst]

Yes, that's a good point. And talking about scalability, I mean, margins within investing used to be at lower levels given the slightly higher cost, which Johan stated before. Is it due to the book becoming too small and that you're losing the scale benefits you once had within this segment? Or is it just that the back book is becoming too old?



And second, do you have any plans for reducing the cost base in this segment going forward?

[Johan Akerblom, executive]

So I think, first of all, it's not the first, it's the latter. Basically, the book is getting older-and-older. And the older book that gets, the more effort we have to put on collections or on efforts to collect. And I mean, we definitely have -- we are looking through our PI structure and how we can make that more efficient as well.

[Andres Rubio, executive]

Yes. I mean, again, the back book is decaying, but also we have 3 elements to our PI book. We have the true back book that we own 100% of, which is getting older and costing us more to collect. That's the primary driver of what you're seeing. Then we have Orange, which is what we did with service, the back book sale, which we still own a meaningful levered stake that is actually performing quite well and in line with expectations. And then we have what we call Project Blue, which is the service partnership, which is going to ramp up and be at higher IRRs and give us all the other benefits. The mix of all that is you'll see the ROI going up, but we still have to deal with the aging assets, which costs more to collect. That's just a fact.

[Jacob Hesslevik, analyst]

That's good. And then my very last question is on the leverage ratio, which was flat despite the tailwind from FX. But as you talked about the cash EBITDA decreasing and will probably decrease also the next quarter from the discontinued operations. But are you still confident to reach your leverage target by the end of next calendar year? Was the restructuring time line changed anything when it comes to deleveraging as business momentum is probably not on top of your mind right now with all the legal proceedings?

[Johan Akerblom, executive]

So I mean, we will have a new covenant structure once we close the transaction. And that will have a slightly new definition of the leverage ratio. So I think we will look at that, obviously, much more than we look at this one in particular because that's going to be the new reality we live in. And that's a covenant level that we definitely will make sure that we have good sort of gap towards. And I think when we present the Q2 and we close the transaction, I think we can come back to this question at all. But until then, the 3.5 is the target that we're working towards.

[Jacob Hesslevik, analyst]

But even if you change the definition, will we be able to follow and track you on the 3.5?

[Johan Akerblom, executive]

Of course.

[Jacob Hesslevik, analyst]

As is today, yes.

[Johan Akerblom, executive]

Yes. I mean leverage ratio today, but there will be a new definition as well.

[Operator]

The next question comes from Ermin Keric from Carnegie.

[Ermin Keric, analyst]

So maybe if I start on the servicing margin, do you think you can be at the 25% level for the full-year in 2025 already given the good start you've had in Q1? And then if I just do all the questions right away.



The second question is on, you said that you wish to stop the investment book to -- from shrinking anymore. How much do you think that you will be investing per annum then to be able to do that? Is the current [inaudible] kind of just how you get to those figures?

[Andres Rubio, executive]

Sure. And thank you for your questions, Ermin. So first off, we had an expectation to approach the 25%, which meant we were not going to get there, but we were going to get close this year. We've obviously outperformed in the first quarter. So we'll see how that ripples into the second, third and fourth quarter. So I mean, I think ultimately, as I said earlier, we're comfortable with that target. And how we're getting there is more tactical and fundamental. So you can derive the appropriate messages from that statement.



On the second point, we would love to stop the back book from shrinking. We have a targeted investment of about SEK 2 billion a year. Replacement CapEx against our existing book is above SEK 3 billion. We're not going to be SEK 3 billion over the near term because we want to also delever. So we have to balance managing and scaling up our investment book with deleveraging as well. And so we have to balance those 2, which is why your third question is a very logical question. The service partnership is fundamental to it.



Well, every euro or SEK, if you will, that we invest, we not only get the return on that investment, which is typically high teens. In this quarter, it was above 20. But then we also get fees when we close the deal on their capital invested. Every year fees on what we collect on their behalf and then ultimately, fees based on their long-term return.



And then on top of that, we get servicing over the life of those assets. And so that SEK 650 million is a combination of the investment management fees, which are upfront and ongoing and then back ended, plus our servicing revenue over life of it. It is an incredibly favorable model in terms of giving us operating leverage. We are an investor, but also just as importantly, if not more importantly, a large operating platform that collects on these assets. Cerberus is a capital partner that brings capital and sophistication and discipline. And I think this model works very well for both of us and is incredibly complementary. And over time, as we scale it up, we will provide a much higher return on our capital invested than we had historically, where we had 100% proprietary book as opposed to now an investment management model. Hopefully, that addressed your questions, Ermin.

[Johan Akerblom, executive]

Yes. Maybe on the first one, Ermin, I mean, the 25%, we want to improve the servicing as much as possible. If that means that we hit the 25% already this year that would be a great benefit. But as I think Anders said, I mean, we work to get as good as possible and then the result of that, we'll have to see.

[Andres Rubio, executive]

Correct.

[Johan Akerblom, executive]

We wouldn't hold off on the 25% just because we said it will happen next year. If we get there, we get there.

[Andres Rubio, executive]

Yes. And when we get there, we're not going to stop. We're going to continue.

[Operator]

The next question comes from Angeliki Bairaktari from JPMorgan.

[Angeliki Bairaktari, analyst]

Three questions from me. Just 3 from me, please. First of all, just to come back to the Cerberus partnership. When should we expect to see those management fees and potentially also performance fees like a more meaningful contribution from those with income line? Because I mean, obviously, you don't break it down at the moment, but I would expect it's probably immaterial this year something more material next year as you ramp up the investments there? And have you considered doing similar capital partnerships with other players outside of Cerberus?



Then secondly, with regards to servicing, I was wondering in which areas do you actually see growth in Northern and Middle Europe? And are those clients that you're servicing there, the new clients that you're bringing on mostly banking clients or sort of clients of utilities or commerce? And how is the pipeline looking for client wins? I think in the past, you were giving us the annual contract value development, which I don't think you have included in the presentation this time. So if you can give some color there, that would be great?



And then with regard the investing division again, just with regards to the EBIT margin, which fell quite a bit to 48% in the first quarter. I heard your comment about sort of the King aging book, which is harder to collect. How should we think about the evolution of the margin there in that division going forward?

[Andres Rubio, executive]

Sure. Thank you. So let's first talk about the service partnership. You're correct that this still needs to ramp up and that you're going to see some level of both what we call execution fees, which are done when we close the transaction and then ongoing performance management fees, which are based on collections this year, but you're really not going to see that until be meaningful until we ramp up significantly, which will be more next year event than this year event. But we are going to start disclosing this in a discrete fashion in the second half of this year, in line with our transition from a proprietary investor to an investment management platform.



On your question of other capital partnerships, we are approached on a regular basis by many capital sources to access this asset class. They have to come through us because of the nature of the asset class and who we are. Cerberus is our primary and exclusive partner in consumer unsecured, but we are in dialogues and always are open to dialogues with other capital partners. And long term, our objective is not to have a single partner, but to have many partners and also to have a broad-based, even LP-based, Limited Partner-based investing business down the road.



On servicing, it is broad-based. In the North and middle Europe, it is very broad-based. It is roughly 50-50 banks and industrial clients. Industrial clients, we manage invoices for banks, we manage loans for. And also in Southern Europe, although there's a structural decline, Italy, as Johan pointed out earlier, doesn't have the same effect. And this is a part of the evolution of the southern markets in that when you have very large onetime transfers and also a very quick creation of an industry such it was in Spain more than 10 years ago, but now in Greece more recently, 5, 6 years ago, you do have the structural decline and then it develops.



Italy has had a very developed servicing market for decades, and that's why you see stability to growth in Italy. And you will see this process in the future in the other 2 markets, but it takes time, and you need to work off the traditional assets. But ultimately, we want to raise our growth in the North and Middle Europe, and we will do that. And we want to mitigate the near-term decline, structural decline in Southern Europe.



And then in investing, yes, the EBIT margin has come down because of the age of the book. As you see the service partnership ramp up on the investing book itself, the IRR should come up and the ROI should come up. And then it's related to your first point as well, the fees will start flowing into this business, and you'll look at it and see that on a totality basis, per unit of invested capital, we're getting a much, much better return across the entire company.

[Johan Akerblom, executive]

Yes. And at one point, we will actually start showing our businesses in 3 lines. So we would have then the servicing, we would have our pure investment business and the balance sheet, and then we would have our asset management. We're not there yet, but because it's still not fully meaningful, but we will.



And on the investing side, I'd also like to add, I mean, if you look at the investing results, I mean, on our own book, it's kind of in line with last year. It's just that the book is slightly smaller. So the income is lower, but the costs are also slightly lower. But the biggest delta is on the JVs. On the JV line, you see we had roughly SEK 200 million of contribution last year. Now we have SEK 72 million. Out of that SEK 72 million, basically, we have SEK 125 million coming from our JVs with Cerberus, orange and blue, and then the rest is actually negative.



But if you remember that the old JVs, they are more of a, let's say, secure type of asset character. So they will have swings. So you will also see going forward that some quarters, they will be better and some quarters, they will be worse because they don't have a constant flow. So I think that's also something that actually is a negative in this quarter that the old JVs are not performing -- well, they're performing on a collections basis, but on a profit basis, we don't get the full P&L effect given the structure.

[Angeliki Bairaktari, analyst]

There was a question on -- I mean, I just wanted to check if you want to disclose that number. You used to disclose it. I don't think you disclosed it didn't, Johan.

[Johan Akerblom, executive]

No. So we are basically reviewing the whole ACV setup. And especially, we're trying to figure out how we can better track the ACV into real revenue. And for the moment, until that work is ongoing, we have decided not to disclose the ACVs, not to make sure that's not misleading. You do have the ACV -- or you have the assets under management, which is a different thing, but the ACVs, we have decided to not disclose for the time being.

[Operator]

The next question comes from [Mikel Luma] from Bain Capital.

[Unknown Analyst]

Could you discuss the terms of the settlement with the short end notes?

[Andres Rubio, executive]

I'm not sure we have publicly disclosed them. I can tell you right now that effectively, we call it a settlement, but it is effectively, and I will say this openly in any forum, it was a capitulation on their part that we were going to be successful. So we covered a minor portion of their fees, and they agreed to support in every forum. They agreed to withdraw their opposition and support in both the U.S. and in Europe.

[Johan Akerblom, executive]

Yes. Well, it's a settlement but effectively, basically, we covered some of the cost more or less. That's it.

[Unknown Analyst]

So it would be maybe a single-digit million?

[Andres Rubio, executive]

I mean you're not far off. It was minor, I can say it's right there.

[Unknown Analyst]

And maybe following up on Angeliki's question on the margin on investing and the decay on the book. I didn't really understand how -- if the margin on the back book is getting worse because the book is getting older, why unit economics are going to get better? I didn't really follow that. If you could maybe explain that again, please?

[Andres Rubio, executive]

So let me start with, as you have a pool of assets that gets older, it costs more to collect. The same unit of collections against that original investment costs more. That's our interim back book. Then we have Orange, which, as Johan said, which is the back book we sold to Cerberus, which is performing quite well, is levered. It's important to know that it's levered, and we are getting a return there that's quite attractive, and that contributes to the margin. And then ultimately, we have the new partnership with Cerberus, which is both collecting at a higher rate and now ramping up and at a higher IRR. So the blend of those 3, you should see the ROI improving going forward, and that's not even including the benefits of Cerberus partnership to investment management and to servicing. I hope that addresses your question.

[Unknown Analyst]

So with the blend of the 3, it should get better. But if we look at the back book itself, it should continue to get better.

[Andres Rubio, executive]

Yes. That is the nature of these assets.

[Unknown Analyst]

And what should be the magnitude of the -- if we think that you are going to continue investing at below replenishment at maybe a similar rate as what you are investing now and the book is going to continue to decline and the book is going to continue getting old. Where do we think margins could get? Maybe like in the low 30s? Is it in the 20s? Or is it still high 30s? Where is the trough for collections margins?

[Andres Rubio, executive]

No. listen, I think that the new -- so we're going to -- we have a target investment rate of SEK 2 billion a year. Replenishment is above SEK 3 billion. That delta doesn't mean that the book is going to decline massively. It's going to decline very gradually going forward because it is a large book. And therefore, you'll see some moderation. And on purely the back book, you'll see some moderation and reduction in collection margin. It will be more than offset with return on the levered joint venture with Cerberus and the other joint ventures as they come back, they're lumpy now, but they come back.



And then with the new investments, as those gain higher IRRs, that will also contribute to the return on this business, not to mention the other benefits of the Cerberus partnership. So listen, I think there's going to be -- we don't anticipate our margin to decline significantly.

[Unknown Analyst]

Okay. And I mean you have touched on this, but in general, on servicing, organic growth continues to be a challenge. I think Southern Europe has been a challenge for a while and the rest of Europe is barely breakeven on an organic basis. So what should we expect for the next few quarters?



And in Middle and Northern Europe, where you have grown at 2% price volume, what has driven that 2% growth?

[Andres Rubio, executive]

So we expect -- and you've hit upon one of our primary areas of focus right now, which is we want to regain an overall growth trajectory to what today is on a blended basis, effectively stable to slightly down top line in servicing. We fundamentally have to do that. In the North and Middle Europe, it's 2%, as we indicated in the presentation on a trailing 12-month basis. That's come from improvements in number of clients and AUM as well as slight improvement in conversion margin in those 2 regions.



Southern Europe, as we indicated, when you disaggregate it, it's really Spain and Greece that have headwinds on the top line. Italy is actually quite favorable and the Italian platform continues to carve out a bigger-and-bigger revenue out of that market. And so when we look at the blend of this, our goal is to improve the middle and North, which we are doing and to mitigate the Southern European decay. The blend of which should be higher than flat. We want to regain a growth trajectory over the coming quarters. That is our objective.

[Johan Akerblom, executive]

And also as part of the sort of the exercise to increase the margins, we've actually said no to quite some business, and we actually have terminated a number of client contracts. So that also has a negative effect on our top line. It does help us on the margin because we take out cost at the same time, but it doesn't help us on the top line. So now when we've sort of been washing through the portfolio and getting to an end of that, even though this is a continuous process, but the big exercise has been done, it will also help us to then regain again top line growth because we will then not have any more washouts. We will basically continue to work with existing clients that are on the margin, which is okay and then attract new clients and new contracts.



And then also on top of that, if we can get performance, we can probably shift even more volumes onto our platform from other platforms where we already have an existing relationship.

[Andres Rubio, executive]

I think that last point is actually a very, very good point. I mean, fundamentally, how do we grow? We grow with getting more clients and more assets or selling them new services. But also, let's keep in mind that we are the #1 and #2 servicer in every market we operate in. There's a lot of other servicers because of financial difficulties or regulation that are falling away. That business will naturally come to us over time. We are cleaning up our revenue base, as Johan said. But ultimately, we have a plan to sell more and to sell new. We will also benefit from the environmental struggles that some of our direct competitors have, and we'll work through this washing out effect of bad clients, which impacts negatively our top line, but improves our EBIT line.

[Johan Akerblom, executive]

And to be fair also, I mean, still, there are -- a lot of the -- let's say, a big part of the market is wanting to do a pure play on the investing side, but they still sit on servicing. And that's also something that we see that there are still a number of exits that hasn't happened, and that will help us because that's a business that we can take over as some of the other players transition fully into investing.

[Unknown Analyst]

Yes. And yes, to be fair, your margins have been surprisingly good this quarter. So that's showing in the numbers. But I think the question on prime volume has not been answered. So if you could follow up on that?

[Andres Rubio, executive]

Sorry, can you restate the question? I thought we had addressed your questions. Can you just restate it for us, please?

[Unknown Analyst]

Yes. If you could break down the 2% organic growth in Northern and Middle European price and volume?

[Andres Rubio, executive]

I don't have those figures.

[Unknown Analyst]

Are volumes or...

[Andres Rubio, executive]

It is both. It is both. We have more clients, more assets, and we have a slightly better conversion rate.

[Operator]

The next question comes from [Noel].

[Wolfgang Felix, analyst]

Wolfgang Felix here from Sarria. I meant to ask, what is your duration now on that Orange book? If I follow your color coding correctly, that's the book you're sharing. What's your average duration of that book versus, I guess, book?

[Andres Rubio, executive]

I think, again, it's going to be skewed in terms of its translation into our results because it is levered. But that has a typical duration of kind of -- there's going to be collections over the next 15 years there. It's going to be skewed as all our books to a weighted average that will be slightly less than 5 years. But that's a weighted average. Remember that our asset class, by definition has significant earnings, but then it's almost asymptotic into the long term, and it will have a very long tail. So we'll be collecting on that book for many, many, many, many years. But the lion's share of the going-forward ERC is going to be in the next -- the majority of the ERC is going to be in the next 5 years. And it's going to be levered. So it's going to provide us with a significant return. And let's be clear that, that book is a cross-section of our entire book. So it actually is very representative of the asset class in general.

[Wolfgang Felix, analyst]

So it doesn't have a shorter duration than your old book?

[Andres Rubio, executive]

It does not.

[Johan Akerblom, executive]

Fundamental difference between the Orange book and our back book.

[Wolfgang Felix, analyst]

And as regards to the back book now becoming, I guess, naturally more expensive to collect. We are in a higher interest rate environment, and you're about to come out the other end of your restructuring. Should we for a bit of a write-down there to bring that profitability back in line with, I guess, the business required to collect it? Is there something we should be looking forward to?

[Andres Rubio, executive]

We would not anticipate that. But obviously, we look at this on a continuous basis. Let's not forget that going back to my presentation, over the life of our assets, we have collected at 107%, 108% of our original forecast. That's what drives write-downs or write-ups, so to speak. Our active forecast collection is always lower than our original forecast, and that's going to be true for the back book. That's going to be true as we add to the back book with the new assets in the new partnership with Cerberus. So I wouldn't say that you should anticipate any meaningful write-downs over the medium term. But again, we look at this on a continual basis.

[Operator]

No more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Andres Rubio, executive]

Excellent. Thank you. Listen, I want to just thank everyone for listening to us today for your very good questions. Hopefully, this has been illuminating as to kind of the quality of our efforts of the business, the results of our efforts. We continue to be available after this call for any of you. So please reach out to us through the normal channels. And thank you again for following the company. We will talk again next quarter. And with some of you, we may speak before then. We're always available to address any and all questions. So thank you again, and have a good day.