Intrum AB (publ) (INTRUM) Earnings Call Transcript

Ladies and gentlemen, welcome to the Intrum Q2 Call 2020. Today, I'm pleased to present CEO, Mikael Ericson; and CFO, Anders Engdahl. [Operator Instructions] Speakers, please begin.

All right. Thank you, and good morning, everyone, and welcome to this presentation of the results for the second quarter 2020 for Intrum. And I do apologize for us being 10 minutes late due to some technical issues. But I hope that we are fine anyway. We got around 50 minutes, and I think Anders and I will try to be as brief as possible to leave for a Q&A session. Now 2020 has turned out to be very different to our expectations in the beginning of the year, and the pandemic has impacted both our private and professional lives. Having said that, we are very pleased with the results of the second quarter. I think the result proves the strength of our business model, our diverse geographical presence and our strong cash flow generation, despite the external disruption in the form of the pandemic. Before we look into the quarter in more detail, I would like to take this opportunity to thank all our 10,000 employees for the dedication and loyalty, providing services for our clients and customers in a very professional manner during this time. That has clearly made an impact in our second quarter results. So if we switch to the next page, the operational update. So let me start with some comments around our operational status. In general, our operations are clearly moving towards a more normalized status. All markets are opened and the courts in Southern Europe, Spain, Italy and Greece are open. There is a natural backlog, which we expect will last into the second half of 2020, of course, but courts will close for vacation in these countries, which, of course, is unfortunate given the backlog, but understandable in a year like this. Today, we have approximately 60% of our staff working remotely, down from 80% at the peak. We expect this number to drop significantly after the holiday period, but we are mindful of any setbacks. And our recovery routines remain in place, and we are fully prepared to revert to remote working again, if necessary. And I think if you look at the second quarter, we have proven that we can operate in an efficient manner also by having a large part of our staff working remotely. The pandemic is not over. And despite a very strong second quarter, we remain fully alerted and monitor the situation carefully. Our core values have guided us well through the spring, and I am very proud of how the organization has supported both clients and customers during this difficult period. All in all, the second quarter is again evidence of the resilience of our business model. We clearly have the benefits of our strong market position. And the fact that actually up to 85% of the collections in our own portfolios are generated from automatic and online payments. Now switching to the next slide, Q2 highlights. Looking at the highlights from the quarter, I would like to focus on 3 areas. First of all, a strong result. The results came in at close to SEK 1.350 billion. That is 23% better than the first quarter. The result is an effect of strong collection performance throughout the organization in combination with strict internal cost control. We see the full effect of the efficiency program from last year in combination with added cost focus during the spring. The support from local government is actually quite limited. We have benefited from government support only in a handful of countries and amounting to EUR 1.5 million in total direct support. We have not used any government support in Sweden. Secondly, we have continued to generate strong cash flow. Cash EBITDA came in at SEK 2.7 billion, actually higher than the first quarter and last year. Our liquidity position continues to remain very strong despite paying dividend and executing on a share buyback program in the second quarter. Available liquidity at the end of the second quarter was at SEK 11 billion. We managed to reduce our leverage level from 4.5 to 4.2 -- sorry, 4.4 in the second quarter, which, again, is a proof point of the strength of our business model. Our cash flow from operating activities is SEK 2.9 billion in the second quarter. That is over 50% higher than the equivalent quarter in 2019. Thirdly, we have seen a strong recovery in the strategic markets, Spain, Italy and Greece, in the second quarter. Overall, CMS was a bit slower with lower volumes, but performance in our own portfolios was relatively strong. Collections are clearly above active forecast at 111% compared to the forecast before COVID collections all at 92%. Looking into the future and our current outlook, switching to the next slide, stating outlook. We are expecting both the servicing and the investment volumes to pick up in the second half of 2020 and early '21. There has been a clear adjustment in expected return level on investments. Anders will cover it in a little bit more detail later on. And it would be interesting to see if the sellers are prepared to meet new price levels in the market and if the enhanced return levels we did attract new investors. We take comfort in the strong second quarter and the positive developments towards a more normalized markets, but we are mindful of potential setbacks. We also have to remember that we are now in the seasonally slow third quarter. Courts will close for vacation and general activity will be low. We do expect a more normal market at the end of the year in Q4. We anticipate a slow economic activity throughout Europe. The relief package agreed earlier this week will certainly help, and there is potential for a quicker return to normality with higher economic activity in the later part of the year and in 2021. We will continue to support our clients and will invest in new portfolios to keep our ERC stable over the year. We are committed to our leverage target and will balance our investments accordingly. We also expect our clients to continue to evaluate different strategies to protect balance sheet, including selling our portfolios and entering into carve-out structures. Now before I hand over to Anders, I would like to spend a minute looking at an important part of our client universe on the next slide. Focusing on the banks, we note increased provisioning of nonperforming loans by EUR 120 billion in the first quarter of this year. It is widespread affecting all markets. In the graph, you see the increase in provisioning from Q1 last year from major banks in Europe. This is an -- this, on average, more than double the amount in Q1 2019, and it is, of course, driven by regulatory pressure and accounting standards. Total nonperforming loans increased by 20% in Q1 compared to the end of 2019. It is clear that banks in Europe are very cautious for the coming quarters. This will lead to higher activity in our market, larger volumes to service and a high supplier portfolios. Intrum is very well positioned to meet this demand for our services. We have strong liquidity and high operational efficiency and stability. And now over to Anders for more details around the second quarter. Anders, please.

Thank you, Mikael, and good morning, everyone. So we're moving to Page 7, Group Financials in Summary. As Mikael was saying, overall, we are pleased with the financial performance in Q2, demonstrating the resilience, both in terms of reported results as well as on our cash-based metrics. On a reported basis, our revenues grew 17% versus the first quarter to SEK 3,885 million and up 3% versus Q2 '19. This clearly reflects the inclusion of Greece into the numbers, which was not there last year, which is effectively offsetting the impact of COVID in the quarter as well as reflecting the strong collection performance that we've seen on our own portfolios given the circumstances. EBIT adjusted came in at SEK 1,345 million, up 23% versus Q1 and minus 14% versus Q2 2019. Q2 is generally a seasonally stronger quarter, but also the inclusion of Greece clearly helped offset the weaker CMS performance. Earnings per share came in at SEK 5.39 versus SEK 6.26 in Q2 '19. On a cash basis, our revenues approached SEK 5 billion -- SEK 4,977 million, up 2% year-over-year. And on the expenses, as you can see, are down meaningfully from Q1 and in line with the Q2 '19 numbers, despite the inclusion of 1,000 employees in Greece, demonstrating the strong cost performance in the quarter across all our units. Cash EBITDA was very stable, up 1% versus Q2 '19 and up 3% versus Q1 2020 to SEK 2,709 million. Then looking at the segments. First, at Credit Management Services, which is in servicing business in mature and emerging markets. CMS had a challenging quarter with lower new case inflows due to clients taking a more cautious stance of sending new cases to collection in light of COVID-19. We do, however, expect this to normalize during the second half of this year and going into 2021. Revenues consequently were down 7% versus the first quarter and down 9% versus the second quarter 2019 to SEK 1,590 million. Looking at the margin, we see the good cost performance helped preserve the service line margin to 24% in the quarter versus 25% in Q1 and 26% in Q2 '19. That translates to service line earnings of SEK 383 million versus SEK 420 million in Q1 and SEK 460 million in Q2 '19. Then looking at strategic markets. So the servicing business in Spain, Italy and Greece. Strategic markets were significantly affected by the restrictive lockdowns early in the pandemic, which was evident already in our Q1 numbers. During the latter half of the quarter, conditions eased, and we saw a start of the return to normality in these markets with significant improvements in June. Revenues in specific markets came in at SEK 1,265 million compared to SEK 1,194 million in Q1, which corresponds to an increase of 6%, and SEK 973 million in Q2 '19, which corresponds to an increase of 30%, clearly reflecting the inclusion of Greece. Service line margin came in at 27%. That is to be compared with 9% in Q1 and 34% in Q2 '19. That translates to service line earnings of SEK 345 million, which is more than 3x more than we had in Q1 and in line with the Q2 '19 number of SEK 337 million. We did see a significant positive effect of the efficiency improvement program that we completed at the end of last year as well as the strict cost control measures taken during the quarter supporting the margin. But we should also bear in mind that Q2 is seasonally strong and Q3 includes the summer holiday period with the month of August, which tends to be the seasonally weaker month and quarter of the year. Moving to portfolio investments. Portfolio investment performance was very strong, very resilient and exceeded our own internal expectations based on the somewhat cautious view we had in Q1. Collection performance return towards pre-COVID active forecast in June with nearly 100% performance in the month of June, which translated to an average of 92% compared to our pre-COVID forecast for the quarter in total. Cost collections came in at a total of SEK 2,536 million, which is minus 9% versus Q1 and minus 5% versus Q2 '19. Amortization was lower because of the write-downs that we did in Q1 as well as lower absolute collection amount, but the ratio remained at nearly 40%. JV earnings was SEK 102 million for the quarter compared to SEK 81 million in Q1 and SEK 315 million in Q2 '19. That then translated to segment earnings of SEK 1,003 million for the Q2 quarter to be compared with SEK 1,037 million in Q1 and SEK 1,214 million in Q2 '19. Worth noting is that if you look at the underlying performance, excluding the contribution from the JVs, the segment earnings were virtually flat year-over-year. So if you look at the SEK 1,003 million minus the SEK 102 million, we had a SEK 901 million of segment earnings underlying for the quarter compared to SEK 899 million in Q2 '19. So virtually a flat performance year-over-year, which obviously demonstrates significant resilience in the business. That translates into return on investment of 11% for the quarter, which is the same as in Q1. And if we exclude the contribution from the JVs, the underlying [indiscernible] line was 12% to be compared with 13% in Q1 and Q2 '19. Diving a little bit deeper into the collection versus forecast. As you know, we did revise our currency in Q1 to reflect the risk of the COVID pandemic, which also corresponded to the write-down that we did in Q1. However, collections did, now in hindsight, demonstrate more resilience than we expected, especially in our unsecured books in the mature and emerging markets. That is a testament to our diversified book across a larger number of geographies and jurisdictions across Europe. Collection performance was 111% compared to the post-COVID revised forecast, which then, as mentioned, corresponds to 92% of the pre-COVID forecast. As I said, in June, we had nearly 100% performance compared to the pre-COVID forecast. We also wanted to show you a little bit more detail. What we've done is to look at the back book at the end of 2018 or beginning of 2019 and laid out what was the original forecast, that's the blue line in this graph on the right on Page 11, what was the original forecast when we report those portfolios and then compare that to the actual cash collections. And as you can see, in all the months leading up to the pandemic, we've continued to have outperformance versus the original forecast. Then in months of April and May, we had a short bit down below 100%. So the red line went below the blue line, which obviously corresponds to the underperformance. But then that reverted back to overperformance again back in June. So as you can see also, the bars in the chart there demonstrate the accumulated performance, which continues to have been above 100% through the entire period. Then looking at the cash flow. I'm on Page 12, the Cash Flow Evolution. We saw very strong operating cash flow in the quarter and continuing the trend of increasing cash flow and cash EBITDA sequentially on a rolling 12-month basis. Cash EBITDA rolling 12 months was SEK 11.2 billion, and free cash flow increased to SEK 9.3 billion. This is what supported our continued deleveraging in the quarter despite having paid both dividends and conducting the share buybacks in the quarter. Moving to Page 13, Funding Sources and Maturity Profile. We continue to have a strong balance sheet position and have SEK 11 billion available in liquidity and significant headroom under our covenants. This, combined with the level maturity profile that we now have following the redetermining of our balance sheet that we did during 2019 with limited near-term maturities, gives us an ideal position to monetize the upcoming business opportunities that we see emerging post-COVID. Moving to Page 14. On the left-hand side, you can see, as we have previously said and mentioned, our net debt-to-cash-EBITDA ratio declined to 4.4x in Q2, but we also continued to deleverage the SPV portfolio in Italy, which at the end of the second quarter came down to 2.0x leverage ratio. As we also discussed in the first quarter announcement, the inclusion of -- since we do not consolidate, the inclusion of the SPV actually increases the group's overall leverage ratio. If we exclude the impact from the SPV portfolio, the underlying leverage ratio is 4.1. On the right-hand side, we look a little bit at the new investments. And following the comments from Mikael, you saw the new investments in the quarter was SEK 1,267 million, which is in line with the stated ambition to stay at a maintenance level in 2020, which means keeping the book and the ERC stable. Looking at the new investments in the quarter, after a period of falling investment returns for the last number of years, we see that investments made since the outbreak of the pandemic have been made at significantly higher return levels than compared to pre-COVID levels. The increase in return, which is depicted in the chart with the 2 red little diamond squares, is more than offset the increase in the funding spreads of our debt, which is the lower blue arrow up and that outpaces that increase by more than 2.5x. So whilst the [indiscernible] becomes a little bit more expensive to borrow in these current market conditions, we see that the increase in return levels more than offset that and still represents a very attractive business opportunity going forward. So with that, I hand it back to you, Mikael, for the near-term priorities.

Right. Thank you, Anders. And let's move over to Slide number 16, short- and medium-term focus in 2020. We are, as we said, very satisfied with the second quarter and the resilience of our business model, but we remain vigilant, and we monitor the developments closely. We are prepared for setbacks and as such, are prepared to adapt, if necessary, and then move back to more remote working again. We are accelerating the transformation of Intrum to align more on standardized and global solutions, both in support and in front-office functions. The aim is to simplify our operational model, and this is a project that started already over a year ago and to utilize our scale and our geographical presence. This will drive our value proposition to our clients and secure our operational margin for the years to come. The transformation includes a uniform and, to a higher degree, automated reporting structure relying on more central solutions to central resources -- sorry; a simpler IT structure utilizing more common solutions and utilizing more shared solutions, both in support functions and front office, expanding our shared service centers and introducing multi language call center for high-volume cases. We are prepared to meet increased demand for our products from our clients in the aftermath of the pandemic. We expect higher volumes to come through late in 2020, as we said before, and in 2021 and as a result of increased provisioning in the banking sector and general increase in late payments in the markets. Finally, we are preparing for a Capital Markets Day in the fourth quarter, where we will give you more guidance on our long-term financial targets and the transformation of Intrum. That concludes the presentation, and Anders and myself, we open up for Q&A.

[Operator Instructions] The first question is from Patrick [indiscernible] from ABG.

Yes, my first question is regarding portfolio investment returns, where you showed a great slide here on Page 14. The H1 underwriting return seems to be very elevated. Can you elaborate a little bit how you think this will continue to develop through the rest of the year? And if it will stay elevated?

I guess that's a good question. And I think we will look forward to the second half of this year and into 2020 with -- it would be interesting to follow the market. If you look at it, and we take, you can say, the experience of the second quarter, we, as you say, clearly see higher expected return levels on the portfolios and lower price levels. But we also see a large number of portfolio that has been, you can say, postponed into later of this year. And it will be interesting to see if the sellers are prepared to meet, you can say, the new price level. We can also, I guess, expect that these type of return levels will attract maybe new investors into the market. But as it looks right now, it is, I think Anders clearly showed a very favorable market, but we hope that we will be able to take advantage of that, of course.

Okay. Great. And my second question is regarding your cost base. You're right that you have maintained a tight cost control during this quarter. Could you provide with some color how your cost base is currently divided between fixed versus variable cost at this moment?

Anders, so for you?

No, it's clearly the bigger important point here is we obviously entered the year on the back of having done the efficiency improvement program. And that's an important contribution to the tight cost control. On top of that, we obviously took additional measures to ensure that we adjusted accordingly as we at the early stage of the pandemic, so that this could have a meaningful impact on the revenue line and adjusted our cost accordingly, in addition to the efficiency improvement program that we did. So that's, I think, the cost sort of improvement that you see demonstrates the flexibility that we have in the cost save. And obviously, a business like ours have fixed costs, semi-fixed costs and variable costs. And that -- it's not an easy question to answer. But I think what you do see in the numbers is that we have significant ability to adjust very rapidly in a situation that the one that we've been through over the last 3 months.

We have [indiscernible]

So the first question would be on -- so in connection with Q1, you guided us for sort of flattish adjusted EBIT also for Q3. And I've understood that when you did that comment, you already sort of expected some opening up of societies from the start of Q3. Would you say that outlook has changed anything? Are we -- could progress more than you expected now when we enter Q3 relative to your expectations in Q1?

I think it's fair to say that -- I mean we have seen a more -- a quicker reopening of the markets in the second quarter than we anticipated at the time of our presentation of the first quarter results. Having said that, what we see now in Q3 is, as you know, a more seasonally slow quarter. We have our hopes in back in April that the courts in Southern Europe should remain open over the holiday season and take care of some of the -- of course, backlog that has been worked up during the pandemic. That would not be the case. And I guess everyone -- deserves a vacation a year like this and even the courts in Southern Europe, so they will be closed as a normal kind of. So we will see a seasonally slow Q3. But I mean, if things to continue to develop, as we've seen, we still hope that when we come to the end of the year that we have a more normalized market in general. So I think that's the kind of general comments we can do around it.

That's fair. Then on the investment pace. I mean, so far, if we look on the first 6 months, you're up around SEK 2.9 billion. And I think you've commented before that around EUR 500 million is what you need to just replace your ERC. What's sort of the bottleneck from growing much more aggressive already now when you see this positive return gap and your liquidity is holding up well because it sounds like you're still sort of just aiming for maintaining the book flat this year? Or have I understood something wrong?

No. I think it's 2 things in this, and Anders, you add to this. But first of all, I mean, we are, as you know, investing in portfolios is part of our value proposition to our clients. We react on the, you can say, demand from our clients on those type of services. So we work with our clients, and we see the need they have, and we see what that will lead into, so to say. But we are also strictly committed to our long-term deleveraging target. And as you know, unfortunately, we are not able to meet that in 2020 because of the pandemic. But we still have not clearly in focus. So it's a balance for us between the need for our clients and our deleveraging targets. But of course, I mean, we will try to work given those that balance, so to say, as proactive as we can in the market. And of course, it's comforting to see that the expected return levels is at the level where it is. I don't know, Anders, if you would like to add to that.

No, I can add a little bit. I mean, as also, Mikael was commenting upon, during Q2, we did see a number of transactions being postponed into the second half of the year. And also Q3 tends to be a seasonally slower quarter, also from the new investment point of view because of the summer holiday period. So transactions that have been postponed from Q2 tend to come out after the holidays in July and August, which means that they intend to be pushed into Q4. So, I think, Q3 tends to be seasonally slower. And then as I said, it remains to be seen. I mean, we expect more volume to come out during the second half of the sort of -- or during the second half of the year and especially from September onwards. But obviously, the pricing picture, combined with increased volumes, obviously, presents an interesting market opportunity, definitely. And obviously, we will want to try to participate in that. But exactly how that will play out, it's very difficult to predict at this point given the uncertainties in the market for overall.

Understood. And then just on working capital. Could you help us understand there what's been enabling you to see such improvements during both Q1 and Q2? And how should we think about it going forward?

Look, I think what is important to remember is the -- when we've done the partnerships, in particular, we saw it when we did transaction in Italy. We've seen it in Spain. We've seen it in Greece. In the ramp-up phase, we tend to have -- there's always a timing difference between a completion over months and the invoicing period, which means that in the beginning of those, we tend to find a bit of working capital. I think what we're seeing now in a period of stable or, for that matter, falling or lower collection levels means that we've been able to obviously to receive invoices that have been obviously build up as working capital over those sort of introductory months or quarters to actually been able to work that level down during the last 6 months. So there's that dynamic to bear in mind because, obviously, if you look at it even the first half of 2019, you actually did see a buildup of working capital that then went into more steady state. There's that dynamic to bear in mind.

And I mean, you can also say that this is also a result of an efficient finance department working in the second quarter. Anders didn't say that, but that's also true.

Found volume now. So then just -- I mean, coming back to previous questions here, but on the expenses, I think it's very impressive. And it would be interesting to understand a bit more how you've been able to reduce the cost base by 13%. At the same time, I can see your headcount has actually increased, for instance, quarter-on-quarter. So what is the underlying that you've been able to reduce so much, especially given you haven't really taken up any stated?

Well, if you remember the efficiency program that we talked about last year, we actually divided it into 3 different parts. One is, of course, you can say, very much related to Spain, where it's been an ongoing adjustment of the workforce over the last couple of years. And that was also a big part of the efficiency program. The second one of it is actually reprioritizations on the IT side. And I talked about the transformation of Intrum, and that is basically switch from, you can say, local initiatives to more global initiatives, utilizing common resources. That in itself gives us cost benefits, of course. And the third one was a general cost discipline in the organization in the autumn. And we took out a lot of -- you can call it, well, a little bit [indiscernible] unnecessary cost. But then, as Anders also said, during the spring, we've had a very strict cost focus in our operation to make sure that we are mitigating the loss of top line. And with a very tight follow-up on all markets and all areas that actually paid off. It's not more difficult than that, actually.

Next question is from Ramil Koria from SEB.

Starting off on a pretty high level note here. I mean, IFRS 9 obviously changes the provisioning regime for banks. And naturally, that all else equal should have sort of added to provisioning levels, which you've depicted on Slide 5 here. But based on your sort of discussions with the bank and tying into your seemingly decent collection performance, why should banks divest expected credit losses this early? Again, bear in mind that your collection levels obviously have held up quite decently, which to meet some extent illustrates that perhaps expected loan losses in Q1 reports, which were now potentially a bit overestimated, very high-level question, but let's start off there and see.

Now but I mean, it would be interesting to see the markets and to follow the market through. You're absolutely right. If you look at the provisioning, it's driven by accounting rules, of course. So you can say it's very much about what you can say, provision forecasting nonperforming loans, so to say, but still they are there. And we all know that the regulators has been very focused on making sure that the banks are dealing with the nonperforming assets of the balance sheet as early as possible. And we also know that late payments in general is a challenge, especially in the downturn scenarios that we are looking at right now for Europe. Even though we now have a huge package in Europe supporting the countries, which I think will be very beneficial in itself, it is still the case that both financial institutions and others needs to work with their late payments. We don't -- it will be interesting to see -- and we're not expecting a complete shift in the market, but clearly, larger volumes coming through in end of 2020 and 2021. And if someone believes that the NPL market is, you can say, disappearing in Europe, I think they're clearly evidence that that is not happening. We see the contrary. But the development and the sequences over the coming quarters, it will be interesting to follow. But in our dialogues with our clients, it's clear that this is also very much on top of the mind right now. They think a lot about this. Crystal clear.

And then perhaps more concrete here. Could you say anything about the deals in Q2? Was it a few big transactions with smaller transactions? Big, small tickets, big portfolios, assets, geographies, et cetera?

Anders?

Now look, it was a good spread of investment portfolios. Clearly, a bit more tilted towards the [indiscernible] and on average, I would say. I'd say more on -- from a proportion of perspective, [indiscernible] corporate portfolios were delayed into the second half of the year, but we saw better for remaining slow from a pipeline point of view on the [indiscernible] side. And it's a good spread that reflects our footprint. So I would say, well diversified and in line with the shape of our backlog.