Intrum AB (publ) (INTRUM) Earnings Call Transcript

Please begin.

Thank you. Hello, and good afternoon. This is Mikael Ericson, the CEO of Intrum. First of all, I would like to say that it was a little bit unfortunate today. But due to a human error, we -- and as a consequence, we suspected that the report had, you can say, left the building or leaked and, hence, we notified the stock exchange, who immediately decided to seize the trading in our stock. And we, as a consequence, of course, decided to release the report immediately or as soon as we could. So I'm very pleased to welcome you to this call in the afternoon, and you've made all of yourselves available for this update. And Anders and I will take you through the report in more detail. I will start with some initial highlights of the quarter and the year and give you some general comments on the market and an outlook for the months to come. Anders, our CFO, will take you through the numbers in detail. And finally, I will conclude with our priorities for 2020 and before we open up for Q&A. I expect the presentation will take around 30 minutes. We will leave approximately 30 minutes for questions. Before I kick off, I would like to say that I think the organization has done a great job during the second half of 2019 executing on an efficiency program and preparing the company for 2020. This has resulted in a number of adjustments on the balance sheet that Anders will cover in more detail later on. But at the same time, the organization has been able to keep up the momentum, and we have never collected the amount of money as we collected in December. A really strong finish to the year. And now over to the presentation, and I turn to Slide #2. EBIT Q4 highlights. The adjusted EBIT in Q4 2019 grew by 47% compared to the fourth quarter in 2018. The growth was supported by the partnerships in Italy, Spain and Greece. The partnership in Greece with Piraeus Bank is off to a good start, and we reiterate our ambition for 2020 of an EBITDA contribution of between EUR 90 million and EUR 110 million from our Greek partnership or joint venture. Overall, we see strong performance in investments and solid underlying delivery from CMS, impacted though by seasonality and the strike in the northern region. Our leverage ratio came in at a satisfying level, 4.3, below what we have communicated earlier, driven by strong cash EBITDA. And we, again, reiterate our ambition, to be within 2.5 to 3.5 net debt-to-EBITDA by the end of 2020. As we have communicated several times during the last 18 months, we have faced strong headwinds in Spain driven by changing market conditions. The team in Spain has done a great job trying to mitigate loss of high-margin contracts. In 2018, 20% of our staff left the organization. In 2019, we allocated 1/3 of the efficiency program to Spain, resulting to an additional 20% reduction in store. It was natural, as a consequence of the efficiency program, to also review the balance sheet. This resulted in an impairment of SEK 2.9 billion, noncash. But despite that, we are very pleased with all the hard work in Spain, and we actually expect a stable EBIT level in Spain between 2019 and 2020. We think that we have now reached a platform where we continue to operate and will give us possibilities to grow in the future. During the autumn, we also introduced a new organizational structure in the group abolishing the regional layer. As a consequence, I'm pleased to introduce 2 new members to our group management team, George Georgakopoulos, Managing Director in Greece; and Javier Aranguren, our new Chief Investment Officers. Both will report directly to me, and of course, it's -- for me, it's pleasing to note that both of them comes from internal in the organization, even though George has been part of the Piraeus Bank for the last number of years. But we both welcome them to the management team, and I'm very certain that they will contribute to the continued development and growth of Intrum. An important event in the last quarter was to finalize the renegotiations of our revolving credit facility, which now includes 14 banks and a majority -- maturity of 5 plus 1 year. We are very pleased with that situation, and Andres will cover all the activities that we have been through in the capital markets over the last 6 months in more detail later on. But we are very comfortable with our structure of the liabilities on the balance sheet now. We continue to work on our CSR agenda. During the quarter, we released our European Consumer Payment report and we have also established an internal governance structure for all CSR questions, which is a natural next step in our ambition in this area. I'll now turn over to Slide #3, which is a little bit of a reflections of 2019. We can look back on a very active 2019. In the beginning of the year, we entered the partnership with Intesa Sanpaolo. As you know, first quarter was a bit slow. But during the year, the partnership has developed very well and reached the targeted EBIT contribution of close to EUR 150 million for 2019. During the year, as you know, we have also established joint ventures with Banco Sabadell in Spain and Piraeus Bank in Greece, you can say, cementing our position as a preferred speaking partner for large financial institutions throughout Europe. In the summer, we launched an efficiency program, targeting an EBIT improvement of EUR 60 million for 2020. I'm also very pleased to note that the organization has delivered, and we will see the targeted improvement in 2020. It has been hard work, as you all can realize, in all areas of the organization in the second half of 2019. And I have a lot of admiration for all the different teams that have contributed to this. All in all, at the end of 29 (sic) [ 2019 ], we reached an adjusted EPS of SEK 27.8. That is the number if we disregard all the adjustments on the P&L or nonrecurring items. I think we can say that Intrum is in good shape, and we are on our way to reach our financial targets for 2020. We have a business plan to reach an EPS of SEK 35. The plan is not without risk, but the end of 2019 gives us comfort entering into 2020. And as a consequence, the board proposes at the annual shareholder meeting to pay a dividend for 2019 of SEK 11 compared to SEK 9.50 for '18, an increase of approximately 15%. Before I hand over to Anders, a couple of points on the market trends. I now turn to Slide #4, market outlook. We're in a very active market throughout our geographies in Europe. IRR levels continued to be stable, and our pipeline continues to be very strong. Financial institutions continue to adopt to new regulations driving discussions on cooperation and, of course, volume on the investment side. Our partnerships with Intesa Sanpaolo, Banco Sabadell and Piraeus Bank are clear evidence and proof points in the last 18 months. We believe that the competitive landscape has become more rational. European macro remain on a stable level, and we see a healthy balance between risk and reward leading to stable prices of portfolios throughout Europe. We expect that to continue in 2020. We continue to have bilateral conversations with financial institutions around -- in Europe, and we clearly note that we today are perceived as the preferred speaking partners for many of them With that, Anders, I turn over to you for some more details of the fourth quarter.

Thank you, Mikael. So if we turn to Page 6, group financials in summary. We can note that the business delivered a strong quarter with revenues of SEK 4.66 billion, up 33% compared to the fourth quarter of 2018, leading to a full year 2019 revenue of close to SEK 16 billion, up 19% year-over-year. EBIT adjusted for the fourth quarter is SEK 1,821 million, up 47% compared to the fourth quarter in 2018, leading to the full year EBIT adjusted of SEK 6.2 billion, up 38% year-over-year. However, as you can see, the reported results were significantly impacted by a number of items affecting comparability of approximately SEK 4 billion, including a SEK 2.7 billion goodwill adjustment relating to the ILA region. That takes our reported earnings per share to minus SEK 18.84 for fourth quarter and minus SEK 2.76 in 2019. However, adjusting for the items affecting comparability, our adjusted EPS for 2019 is SEK 27.8. That is supported by a good development in the business on -- relating to CMS margins of 27% in the quarter, and the ROI, the return on investment on the portfolio investment business, is 14%. We note a significant increase on our cash EBITDA in the quarter, up 17% to SEK 11.4 billion, and the net debt at the end of the period was SEK 49.1 billion, reflecting the high investment pace and the closing of the transaction in Greece as well as the seasonally active portfolio investment business. However, despite that, we have a decrease in our net debt-to-cash EBITDA ratio down to 4.3 at the end of the fourth quarter, down from 4.4 in the -- during the third quarter. If we move to Page 7, to explain a little bit the adjustments of the -- differences between the reported EBIT and the EBIT adjusted. I'll take you through the graph on the right-hand side, upper right-hand side. As you can see, we have SEK 1.8 billion of EBIT adjusted. We have SEK 2.9 billion of the -- almost SEK 4 billion of total items affecting comparability relating to impairments on intangible assets in Spain. Out of the SEK 2.9 billion, SEK 2.7 billion is goodwill, and we have SEK 200 million of other intangible assets, including an adjustment of one of the client contracts as well as some IT intangibles that have been adjusted. In the table on the left-hand side, you would find those SEK 200 million at the -- item at the bottom of other items affecting comparability, if you want to compare the two. In addition, we have about SEK 100 million of other IT impairment, which is relating to the fact that we have, since the last 2 years, invested in central systems in a number of functions like HR and sales and so forth, which means that we have redundancies of other historic local systems that we have now written off. Furthermore, we have the third bar, which is the efficiency improvement program, which leads to nonrecurring items of SEK 621 million, which is in line with the communication that we had after the second quarter when we announced the program that we would have approximately one year's benefit as nonrecurring items. And most of that is coming now in Q4. And then the 2 remaining blocks, we have about SEK 136 million of transaction costs, which is relating to the transaction in Greece, primarily, and then we have SEK 200 million approximately of other items, where the biggest item is some -- there is remaining outstanding at the end of integration costs that came as NRIs, and which are now recorded in the fourth quarter. We do not now -- will have any further integration costs coming through in any future periods. That if you sum that up, that adds up to the total SEK 3.96 billion of items affecting comparability. Then if we turn to the business segments. If we turn to Page 8, Credit Management Services. We have -- we see a seasonally strong quarter for CMS, with revenues up 44% to SEK 3,458 million and the service line earnings also up 44% to SEK 948 million, leading to a stable margin of 27%. Clearly, we have a positive impact from the M&A transactions completed, including the Solvia transaction in Spain, the full year inclusion of the Intesa partnership in Italy as well as the early contribution from the partnership with Piraeus Bank in Greece. The quarter is, however, hampered by the change of seasonality coming in the northern region, with the change of tax refunds related to Finland as well as the postal strike that impacted the quarter. That had a negative impact in the quarter and offset some of the positive benefits coming from the other areas. However, in total, a very successful quarter and seasonally strong. And we do -- looking into 2020, we do expect that the positive impacts from the efficiency improvement program are expected to come through in the numbers during 2020. Looking at the portfolio investments side. We had a good quarter for portfolio investments with record level of collections and portfolio performance, or portfolio outperformance of 9% compared to our active forecast. That led to revenues up 12% to SEK 1,866 million and the service line earnings up 23% to SEK 1,208 million. That reflects a return on investment of 14% in the quarter, which is up 2 percentage points compared to the fourth quarter in 2018. We had a successful quarter in terms of new investments totaling almost SEK 3.8 billion, taking the full year investment pace to SEK 7.3 billion, reflecting a normalized investment pace for 2019, as we have communicated in earlier quarters. The portfolio book value at the end of the period is SEK 35.4 billion. Looking through the regions, and this is the last time that we will disclose the regions in this format. But looking at the northern region, as you can see, as I commented upon, the fourth quarter faced some headwinds from Finland and the tax refunds, change of seasonality. We had a strong quarter in the third quarter. That is now reflected in the fourth quarter with a slower pace. As well as the postal strike impact that led to revenues declining 5% compared to the fourth quarter of 2018, which is, in that sense, a more difficult comparison due to seasonality, and we landed at SEK 1,027 million. The EBIT margin went down 5 percentage points to 31% compared to 36% in the previous year. However, given the -- we have a positive contribution from the seasonality in the third quarter, the full year margin for Northern Europe is stable at 36%. We also note that we see strong demand from our CMS clients in the region, and we have a solid sales pipeline and several important client signings in the fourth quarter, which bodes well for 2020. Looking at Page 11, Central/Eastern Europe. Central/Eastern Europe performed very well in the quarter, up 61% in revenues, boosted by, of course, the inclusion of our Piraeus partnership in Greece. EBIT is up 104% and margin is up 10 percentage points to 49%, reflecting also very strong delivery in the other countries across the region. Our partnership with Piraeus Bank is off to a good start. However, benefited from seasonality as we have a stronger seasonality in the Greek business and somewhat lower than run rate cost base as we are in the process of starting building the infrastructure to develop the business further in the coming years. Going to Page 12, Western and Southern Europe. We saw a strong finish to the year in Western/Southern Europe, with revenues up 49% in the fourth quarter compared to 2018 coming in at SEK 1,087 million on the revenues, and the EBIT is up 143% and margin is up 22 percentage points to 55%, reflecting the inclusion of the Intesa partnership as well as the contribution from the portfolio in Italy. We also note, as we successfully grown the portfolio investments book by 22% in the quarter, where the -- particularly notice the U.K. market conditions have improved markedly through the year, particularly in the second half of the year, we have a strong pipeline and attractive risk reward in the portfolios in the U.K. Finally, in the regional overview. If we look at Iberia and Latin America, we had another challenging quarter, and whilst revenues are up 49%, reflecting the inclusion of Solvia, the margins are down to 13% in the quarter. We continue to see the impact of the decline of some of the older high-margin BPO contracts in the numbers. But we also see that the Solvia synergies and the effect of the efficiency improvement program is going to give effect in 2020, and we see a stabilizing outlook on the revenue line going into 2020. Moving to Page 14. We have, in the last few quarters, followed up and showed you the development of our partnership with Intesa in Italy. And at the beginning of 2019, we set out a target to deliver between EUR 140 million to EUR 160 million of EBIT contribution during 2019. And we are pleased to see the results where the business is now contributing SEK 1.48 billion to the EBIT line in 2019. That delivered as planned, even though we had a slower start, we have had a very strong finish. The platform has good margins at 30%, and the portfolio has delivered a return on investment of 22%. However, we're expecting that to normalize to the -- on average through the life of the portfolio between 14% and 16%, which means that in the coming quarters, we will have some quarters, but may be below that average. Moving to Page 15, in common costs. We see a strong common cost performance and also this includes the positive contribution from the efficiency improvement program is starting to take effect. Going into 2020, we do expect to be -- see somewhat higher common costs as we are, as I mentioned before, building up the infrastructure around our Greek platform. But overall, we are very pleased with the performance on the common cost side Moving to next page, financing activities. As Mikael mentioned, we have been very active on the refinancing during 2019 and, particularly, in the second half of the year. As you remember from the third quarter, we had -- we did 2 larger Eurobond transactions as well as an MTN transaction in the third quarter. We continued in the fourth quarter by, most importantly, extending the term of our revolving credit facility with up to 5 plus 1 years, with a maturity of 2025. And in addition to that, we did a SEK 1.1 billion MTN issue in the Swedish market as well as with private placements. Now that leads to the maturity profile for the company, which is now very well balanced, and we have extended the duration of our liability side up to 46 months. And importantly, for us, we see that all the upcoming maturities can now be financed through internally generated cash flow. Now over to you, Mikael.

All right, Anders. Thank you. And before we open up for questions, I would like to take you through just a slide on our near-term priorities. And I turn to Slide #18 in the deck. Looking into 2020, our priority #1 is to deliver on our targets: an EPS of SEK 35 and a leverage ratio of 2.5 to 3.5x. 2019, including all the hard work on the cost side in the end of the year, gives us a good starting point for the year. We have a business plan that will take us to our targets. It is a business plan that is a result of an intense process in the end of 2019, where Anders and myself personally visited the majority of the large countries to verify the plans in more -- in detail. The plans includes risks, of course. But now it's all up to execution. The ramp-up of our partnership with Piraeus Bank is, of course, important. We have learned earlier, and we are using all that knowledge to secure a strong start to a joint venture. End of 2019 was certainly positive. We will continue, as well, to standardize and centralize our processes. We have successfully, during 2019, established a digital end-to-end solution, I will say, collection service in a shared service center for SME. The service is based on best practice from our 8 largest countries, and all 8 countries have now at least one live client in the system. We will continue to build on this, adding new customers and widening the geographical scope to all countries in Europe in 2020. We will continue in our commitment to lead the way to a sound economy. We will continue to contribute to the understanding of the consequences of indebtedness and late payments. We will continue to develop our practice of fair and ethical collection. And we will continue to argue for European licensing for debt collection businesses. That is part of what I see is our commitment to the market. And finally, we will invite you all to our Capital Markets Day in Stockholm on the 19th of May. We will then discuss in more detail our plan for the coming years and also present financial targets for the years to come. I think we can conclude, Anders and myself, by saying that Intrum is in good shape, and we are ready to execute on the business plan, leading up to the fulfillment of our financial targets for 2020 And with that, we end our presentation and open up for Q&A.

[Operator Instructions] We have one question from Robin Rane, Kepler Cheuvreux.

I understand that you are not in a position and don't want to comment on ongoing negotiations and potential transactions, but there are rumors in Italian press, for example, that Cerved is looking to sell its credit management unit. And also yesterday, Piraeus Bank said they would securitize its NPL portfolio. Given the leverage ratio that you're at now and where we are in terms of the potential portfolio investments, how do you reason -- where do you -- about potential investments going forward, either in third-party or in full investments? And also, would you even consider a rights issue to finance growth?

Let me comment on that. There were several questions there, but let me start with the Italy and Cerved. We read the newspapers as well. And as you know, it is not possible for us to comment on rumors. But of course, given our size, we monitor the market closely and see what happens. Anything we will do in Italy will be based on -- be done together or form our joint venture with Intesa Sanpaolo, saying that. If you look at Greece, of course, we will work with our partnership bank down in Greece and do different things, but there is no commitment from our side to participate in any transaction around portfolios. The agreements we have with Piraeus today is around the servicing. And as you know, we service around EUR 28 billion of assets down in Greece, which is around 50% of the balance sheet that is -- already as it is today. But of course, we work closely with our partnership banks. Any transaction we will do will be within the framework of reaching our financial targets for 2020, hence reaching the net debt-to-EBITDA target of 2.5 to 3.5. We will not jeopardize that. And in terms of rights issue, that is not on the agenda at all. We don't see any need for that.

All right. That was very clear. And then on the goodwill impairment in Spain, is this pertaining to what was the old Lindorff business? Or is this more newly acquired businesses?

Yes. It's related to the merger with Lindorff. At the time, there was a goodwill allocation made and a significant portion was allocated to the ILA region as it were, or into Spain actually initially. And it's related to those -- that goodwill allocation. And that is the adjustment that has been made. It's not related to the recent acquisition.

I think it's important to state, not -- we don't have an issue in terms of goodwill in the group, as such. I mean, this is isolated to Spain, where you can see the allocation of goodwill has been a little bit too much in -- if you see how the development of the Spanish business has -- for how the Spanish business developed over the last couple of years. So this is an adjustment on the balance sheet.

All right. And then one last question. So my very quick calculations here following the release of the report, the collection costs in the portfolio investment business seems to have been coming down. What is -- what kind of assumptions should we use over time for the collection cost business -- oh sorry, the portfolio investment business and the collection costs in that service line?

Yes. Costs to collect on the portfolio investment business has been a little bit volatile in recent quarters, and that is due to the fact that we have to see both in revenues but also in service line costs. The -- effectively, the cost for -- or the acquisition cost of real estate owned assets has been sold. In terms of the -- so the -- call it, a bit more comparative level is probably one that -- before we had more of those in -- prior to 2019. We had more, sort of, representative level. I mean, we are seeing those levels gradually improve underlying quarter-over-quarter. And we see them to be in the range between 25% and 30% over time. But we are seeing an underlying improvement, but it's a little bit difficult to see it from quarter-to-quarter depending on how much real estate owned has been sold.

Well, we have another question from Ramil Koria, SEB.

A few questions from my side here. Just starting off on a high level. I mean activity in Q4 is extraordinary, of course, depending on how you want to categorize the Intesa SpA investment last year. But nonetheless, Q4 '19 was very strong. And you comment that 2020 has generally for your operations started off good. But is it possible to say anything on sort of investment levels, so how we should view them now going into 2020? And also, tying into that, to some extent, how the Greek market is developing on the portfolio investment side?

Yes. In terms of -- I mean if you look at the, call it, pipeline of the business going into 2020, we see high level of activity, as Mikael commented upon. So we see a very active market across our footprint. So we see very good opportunities to deploy capital during 2020. In terms of the development of, call it, investment levels, we do not have specific, call it, CapEx targets as we are always mindful to ensure that we have the adequate risk reward in all the transactions. That said, we have a longer-term ambition to continue to grow our investment business and the book value, which obviously means that in order to grow the book value with a gradual increase in the replacement cost, we will obviously continue to grow the investment pace year-over-year to deliver that.

And Ramil, just to add to that. I mean if you look at it, it is a little bit quarter-by-quarter. We stated a year ago that '19 will be what we called an investment level on a normalized level. I think we achieved that by the end of the year. Even though if you saw the first 9 months or 3 quarters, it was actually slow, and the last quarter was very active. So it's very difficult, exactly as Anders is saying, to predict quarter-by-quarter. But it's, of course, very comforting where we see that we have a very strong pipeline, and we see stable price picture in the market. That gives us a lot of comfort going into 2020.

And then -- I mean perhaps some very nitty gritty, but I mean, given that you, to some extent, have some infrastructure in Greece now, and then you said that you're going to ramp-up costs to improve that infrastructure. How should we -- sort of a guide, investments coming from that specific region moving on, also given sort of, I guess, improved or better pricing than elsewhere?

Yes. I think that what is important, we have been cautious investing in portfolios in Greece before we've had our own servicing infrastructure. I think we've commented upon that in the past, we have own some smaller portfolios, but we haven't made any large portfolio investments in that market, and they have been -- we've been using external services up until now. That is obviously important for us to have our internal servicing infrastructure and to be able to develop the integrated business model also in Greece going forward. That's a strategic priority. I think now that we have that in place, we are also obviously looking at how do we strengthen the portfolio investment side in Greece to be able to also capture the market opportunity in Greece going forward to make sure that, that is part of our investment footprint. And we do see an active market in Greece. So that will be sort of part of the opportunity set that we will consider as part of the footprint.

And then moving on to staying within portfolio investments and moving on to the ROI side. I mean you mentioned in the report that you're probably going to progress towards the 13% in 2020. Just perhaps a bit philosophical, but what kind of visibility do you have on that side? Because at the end of the day, it's dependent on mix as well.

Yes. It's obviously -- we have good visibility on the back book. It always depends a little bit on the mix on the front book, as you say, and both from an asset class and geographic mix point of view. But overall, I think we have reasonable visibility unless we see meaningful shifts in the market conditions during 2020. But at the moment, as we see it, we have a favorable market condition, strong supply and stable underwriting environment, which gives us comfort that this is in line with what we will be able to deliver.

Yes. And you have to remember, Ramil, I mean, we set up the target in 2017. At the time, then we saw actually increased prices for portfolios or a gradual reduction in the IRR levels. That was actually reversed, I would say, 12 to 18 months ago, and we've seen a much more stable price picture for portfolios. That gives us, of course, comfort that we will have a more stable development also in 2020, and we'll be able to achieve, you can say, our ambition to be above or at least 13% on ROI by the end of 2020. We don't see a challenge in that right now. And that will -- of course, that's not a target in itself but that contributes to us to -- in terms of reaching our financial targets for 2020.

And then on the common cost comments, you were saying that the run rate should come up from Q4 levels. You've previously said SEK 400 million assets per quarter plus M&A. Is that comment still valid?

Yes, it's still valid. As you can see, we are lower than that in the fourth quarter. And we're just wanting to remind people that the guidance still stays, and that is slightly higher than what we have in the fourth quarter. So that is correct.

And then just finally, looking at the minorities line item here, it's negative in the quarter. In terms of JVs, has progressed very, very well going into -- in Q4. You're saying periods have started off faster than expectations. Is it sort of driving the negative number here? Or am I missing something?

As we commented upon in the -- when we went through the adjustments from EBIT adjusted down to reported EBIT, a very significant portion of NRIs are related to Spain. And therefore, that also impacted minority and the minority line is not adjusted, that's on the reported basis. So it includes NRIs, and that's why you see a negative number.