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Edited Transcript of IJ.ST earnings conference call or presentation 18-Jul-19 7:00am GMT

Q2 2019 Intrum AB Earnings Call

Nacka Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Intrum AB earnings conference call or presentation Thursday, July 18, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Engdahl

Intrum AB (publ) - CFO

* Mikael Ericson

Intrum AB (publ) - CEO & President

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Conference Call Participants

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* Ermin Keric

Nordea Markets, Research Division - Analyst of Financials

* Gurjit Singh Kambo

JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research

* Luc Lebard;Brigade Capital;Analyst

* Maths Liljedahl

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Ramil Koria

SEB, Research Division - Analyst

* Thomas James Gibney

BofA Merrill Lynch, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Intrum Q2 2019 Call. Today, I am pleased to present CEO, Mikael Ericson; and CFO, Anders Engdahl. (Operator Instructions) Speakers, please begin.

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Mikael Ericson, Intrum AB (publ) - CEO & President [2]

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Well, good morning, and welcome then to the presentation of the second quarter results in 2019. I'm Mikael Ericson, the CEO of Intrum; and with me today is Anders Engdahl, our CFO. I will start by giving you some highlights of the quarter. Anders will take you through the details. And at the end of the presentation, we will have a quick view of our short-term priorities.

We expect the presentation to take 30 minutes and I believe 30 minutes for Q&A. But to warm up, let me give you some comments on the market and, of course, Intrum in that context.

So Slide #2, please. In general, we see continued strong market in the first half of 2019. In Europe, the bank's balance sheets consist of approximately 4% nonperforming compared to equivalent 1% in the U.S., and this drives a continued pressure on the banking sector from ECB, the European Union and other stakeholders to continue to divest NPL portfolios. For us, at Intrum, we continue to see the effect, which contributes to our pipeline with many opportunities in many of our geographies. We also note a continued improvement in prices and expected IRR for the portfolios. We believe this is due to high supply and our own ability to utilize our broad geographical presence and our internal price discipline. Our ability to broaden the asset classes to secure portfolios in several of the countries where we operate also contributes to the improved return profile even though the secured portfolios naturally comes with high volatility in the performance between quarters. Today, we regard ourselves being the preferred speaking partner for financial institutions in Europe. Our joint venture with Banco Sabadell in Spain, Intesa Sanpaolo in Italy and recently, our transaction with Piraeus Bank in Greece are clear evidence of our ability to form this type of long-term partnerships. Partnerships, where we combine our experience and knowledge from debt collection and the bank's local knowledge to establish value proposition that is relevant in the market and, of course, valuable for all parties. And now over to some highlights for the second quarter.

So Slide #3, please. All in all, I can conclude that the second quarter was a strong and solid quarter for Intrum. It’s another step towards our goals of 2020 and the fulfillment of our targets. EBIT grew by 31% year-on-year, reaching SEK 1,561,000,000. We are satisfied with the strong performance in the second quarter, providing good tailwind into the seasonable weaker third quarter.

We noticed a stable performance for portfolio investments with investments in the first half of 2019, in line with a normalized level that we have communicated earlier. In Italy, CMS performance is improving with a clear step up, and we also note a temporary increase in leverage, according to our plan in the second quarter due to the closing of the Solvia transaction in Spain and the dividend payments, but we reiterate our commitment to decrease leverage to 2.5 to 3.5 by the end of 2020 through a normalized investment level. In Greece, we are very satisfied to have been able to sign an agreement with Piraeus Bank. As you know, we have been pursuing a solution in Greece to establish our own collection platform now for several years. With the agreement with Piraeus, we have now found that long-term solution for Intrum, where we can operate with our balanced business model, which is so natural for us and a prerequisite for our long-term commitment.

We released our European payment report in June. Based on interviews with 12,000 corporates in Europe, we could conclude that late payments are still a big challenge in Europe despite all activities and initiatives in the European Union and on domestic level. This is an important part of our CSR agenda, and we continue to work for fair and sustainable payment conditions in all geographies where we operate. And now Anders, shall you take us through the quarter in more detail.

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Anders Engdahl, Intrum AB (publ) - CFO [3]

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Thank you, Mikael. So looking at the numbers and turning to Page 5, the group financial summary. As you can see, the Q2 results represent a solid quarter with a good delivery from both our CMS and portfolio investment service lines. The revenues are up 4% year-over-year, landing at SEK 3,784 million, and as you know, it includes the Intesa partnership in Italy as well as the consolidation of Solvia since May this year.

Also worth noting that the comparison with Q2 in 2018 included a onetime compensation for the loss of one of the BPO contract in Spain and if adjusting for that compensation, the revenue is up 11% year-over-year.

EBIT adjusted comes in at SEK 1,561 million, up 31% year-over-year versus Q2 2018 and also it includes the portfolio earnings from the Italian portfolio, which is reported as earnings from joint ventures. Earnings per share comes in at SEK 6.26 per share, which is up 17% year-over-year. Net debt to cash EBITDA comes at 4.3x, reflecting a temporary spike due to the closing of Solvia in the quarter as well as the distribution of the dividend. But as also as Mikael reiterated, we remain fully committed to our deleveraging target and to arrive inside the 2.5 to 3.5x leverage ratio by the end of 2020.

Looking at our service lines. Moving to Page 6 in the presentation, starting with the CMS Service line. We see a seasonally strong quarter, with revenue growth of 12%, coming in at -- revenues coming in at SEK 2,714 million and I said it includes both Intesa and Solvia in these numbers. And the service line earnings are up 16% year-over-year, coming in at SEK 798 million. That leads to a service line margin of 29% for the quarter, up 1 percentage point year-over-year and significantly up from the 22% level that we showed in Q1. CMS demonstrates solid progress on the underlying revenues, combined with a positive effect from the integration benefits and the big step up in margin we see since Q1 is largely due to the significant delivery of margin improvement we see in our Italian joint venture.

Furthermore, Solvia is included from May onwards, but similar to Intesa in Italy in Q1, there is a ramp-up phase and the bottom line contribution from Solvia is limited in the first quarters, but we do expect that to improve over the coming quarters. Furthermore, we see opportunities to continue to drive efficiencies and margins in the CMS service line over the coming quarters.

Moving to the portfolio investment side. Overall, it's a solid quarter for portfolio investments. Service line earnings of SEK 1,214 million, is up 37% year-over-year and reflecting return on investment of 15% in the quarter. Investments in Q2 came to SEK 1,436 million, which reflects a normalized investment pace and also in line with our guidance of -- of a normalized level, following very significant levels that we had in 2018.

The book value at the end of Q2 for investment portfolios comes at SEK 32.4 billion, up 24% year-over-year and as said, it's a consequence of the very high investment pace that we had in 2018, which has now been normalized.

Moving on to look at our regions on Page 8 in the presentation. Starting off with the Northern European region, we see that Northern Europe performed well, growing revenues 5% year-over-year, coming in at SEK 1,071 million and delivering an EBIT of SEK 433 million, which is up 8% year-over-year. This is driven in part by growth in the portfolio investment book value of 16% year-over-year as well as some notable contract wins on our CMS side. We continue to focus on driving efficiency and profitability in the region, and we continue to see continued potential for that in the coming quarters.

Moving to Central and Eastern Europe. On Page 9, we see continued strong momentum and good collection performance. Revenues are up 10% year-over-year to SEK 992 million and EBIT is up 14% to SEK 411 million, and that is despite a slowdown in the book value growth that we see across the region.

In the region, we are also preparing for the closing of the Piraeus partnership deal that we've done in Greece, which we expected to close during Q4 this year.

Moving to Page 10, looking at the Iberia and Latin America. In Iberia, Latin America, we have an underlying decline in the revenues after the loss of BPO contracts and some volume losses because of client portfolio disposals that we saw during 2018. That is on the revenue line, offset by the inclusion of Solvia since May 2019. So the revenue line is down only 1 percentage point, coming in SEK 818 million. However, we continue to see challenges on the profitability, which is down 30% year-over-year, coming in at SEK 207 million as the loss of the high-margin contract is not fully compensated by the cost reductions that we have continued to work through in the last year. Solvia, which is, as I said, included since May in Q2 is expected to gradually increase its profitability, and we see significant benefits by integrating Solvia into our Spanish platform.

Moving to Western and Southern Europe, on Page 11. As you can see, the inclusion of the Intesa partnership leads to high revenue growth of 37% year-over-year, landing at SEK 899 million for Q2, and the profitability is significantly improving to SEK 511 million for Q2 as Italy is ramping up and also it benefits from the seasonality that is more prevalent in the Southern European markets. Also, glad to note that we're now adding some new contracts for servicing with other financial institutions in Italy. We have included, as we also did in the last quarter, on Page 12, a separate disclosure on Italy, to follow-up. As you can see, we're now producing stable revenues in the platform in Italy, but with a more normalized profitability level with the CMS service line margin at 32%. On the portfolio in Italy, we see stable performance and an ROI of 24%, which is in line with our plans. However, this level of profitability will normalize over the life of the portfolio and as I think we have guided for in the past, will come into the mid-teens.

And with that, I will also hand it back over to you, Mikael.

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Mikael Ericson, Intrum AB (publ) - CEO & President [4]

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Thank you, Anders. And on Page -- on Slide 14, common cost. The common cost for the quarter is inflated as a consequence of the transactions in Spain and Italy and that is, of course, the Solvia and Intesa and Sanpaolo transaction. And the underlying cost is approximately SEK 25 million below the first quarter. So in that sense, you can say, we are comfortable with the level. But nevertheless, we clearly see potential to reduce the common cost further. So I will, in a minute, take you through the additional efficiency activities that we are planning for, that will also affect the common cost. But before I do that, it is important to state that the integration between Lindorff and Intrum Justitia and the establishment of Intrum is more or less completed today. More than 90% of the synergies promised 2 years ago at the time of the transaction is now realized, and the remaining parts of this will be realized during the autumn.

But you can say, despite the integration, Intrum has also grown, as you know, over the last 2 years through the partnerships and the transactions, and that leads us to the possibility for an additional efficiency improvement program described on Slide #15. And as you know, during the last 2 years, as just Anders said, we have grown in size, and that is giving us these additional opportunities. During the autumn, we will execute on an efficiency program, targeting EUR 60 million in EBIT improvements. We are targeting improvements of bottom line, and we are here not talking about revenue enhancement activities, but it will include discontinuing of unprofitable contracts and subsequent cost reductions. 1/3 of the program is allocated to Spain to further mitigate the decaying top line. And I think it's also prudent to say that Spain has over the last 1.5 years already done a lot of activities and reduced the number of FTEs to try to mitigate, but we see further opportunities to work on the cost side and the efficiency side, especially in the light of the integration with Solvia. 1/3 of the efficiency program, it will come from common costs. Reprioritization of existing and new products -- sorry, projects in combination with more efficient operations within IT will take the majority of those reductions.

The final 1/3, meaning the EUR 20 million of efficiency improvements, will be carried out by the remaining countries and business lines. And you can say, this is more kind of housekeeping activities in the rest of the countries to make sure that we are well prepared, not just for delivering on our 2020 targets, but also to be able to prepare the organization for the next phases beyond 2020. The efficiency program will be executed during the autumn, and I expect full effect from January 2020. The program would carry a cost of approximately EUR 60 million, that is 1 year savings that will be treated as NRIs in the third and fourth quarter of 2019. From 2020 and onwards, there will only be NRIs generated from transactions to be accounted for. The program is an obvious next step to take the benefits of our growth and to deliver on our 2020 targets, but also to prepare the organization, as I said before, for the next steps to secure continued growth between -- beyond 2020.

Now to finish up with some just short comments on our short- and medium-term focus 2019 and then for the second half of this year, so on page -- Slide 17. Continued focus on our large joint ventures will be important in the autumn. We will focus on taking out the synergies after the Solvia transaction, continue to increase the performance in Italy and, of course, close the transaction with Piraeus Bank and secure a smooth start of that partnership. The efficiency program will be important, and I will focus a lot of my own attention to secure delivery and execution of the program. We have already communicated a normalized investment level. We will continue to focus on value-enhancing transactions through a disciplined sourcing, and again we reiterate our focus and commitment to delever down to 2.5 to 3.5 by the end of 2020.

With that, we actually conclude the presentation of the results and well in -- within the time frame allocated to the presentation, but will allow us actually for more Q&A. So with that, I hand over to the presentation -- presenter for managing the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Ramil Koria from SEB.

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Ramil Koria, SEB, Research Division - Analyst [2]

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So since we have -- since we're right on schedule or before schedule, I'll take the chance to ask a lot of questions as well. And starting off with the common cost run rate of SEK 400 million a quarter that you state now, do you include Piraeus in that since -- well, obviously that transaction will entail a lot of -- or at least some common costs? That's the first.

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Anders Engdahl, Intrum AB (publ) - CFO [3]

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No we -- that statement is on the base -- on the current run rate base, meaning, not including the Piraeus transaction. So the Piraeus transaction will add common cost on top, but obviously significant net benefits for the group.

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Ramil Koria, SEB, Research Division - Analyst [4]

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All right. And is it possible to quantify the common cost effect from Piraeus or is it still early days?

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Anders Engdahl, Intrum AB (publ) - CFO [5]

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No, we haven't given any separate disclosure on that, and we expect to do that after the transaction has been closed. You will see that in the numbers.

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Ramil Koria, SEB, Research Division - Analyst [6]

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And then just one clarification here. If looking on the noncontrolling interest and then just calculating backwards. I mean, we get an indication of how the Intesa JV in combination with the Solvia transaction are performing. Is it fair to assume that the vast majority of the EBIT generation in this quarter from those 2 transactions is predominantly from Intesa and not Solvia?

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Anders Engdahl, Intrum AB (publ) - CFO [7]

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Yes, that's a fair assumption.

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Ramil Koria, SEB, Research Division - Analyst [8]

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And then perhaps looking beyond this quarter, leverage, how should we reason on leverage going into H2 '19? And then perhaps, bear in mind that -- well, some of the credit rating agencies have made some clear indications of what they assume.

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Anders Engdahl, Intrum AB (publ) - CFO [9]

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Yes. I mean, on the leverage ratio, as I said, we have a temporary spike now in Q2 due to the dividend and the closing of the Solvia transaction. We will continue to maintain a normalized investment pace. And if you roll that forward, you will see a gradual improvement in the ratio and slightly improvement through the end of the year and then a meaningful improvement during 2020. And we expect to end up inside of the range as I said.

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Ramil Koria, SEB, Research Division - Analyst [10]

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And if I'm not completely mistaken here, but one of the credit rating agencies, one of the larger ones stated that you have to be below 4x cash EBITDA by end '19. Is that something that you internally benchmark against? Or is that something you, in any way, consider when you do your business plans? Or is it more your own leverage target for 2020, that's a base case here?

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Mikael Ericson, Intrum AB (publ) - CEO & President [11]

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But it's -- we have now for a couple of quarters, communicated a normalized investment level. And if you go back in time to when we actually made the plans for reaching our targets for 2020. We looked at it from a couple of different angles. One of was on the investment side, of course, reaching a portfolio about SEK 30 billion. We are actually at that level right now. So we can -- we [comfort] say that we have a normalized investment level. And if you look on the investments in portfolios in the first and second quarter, I think, we are actually delivering on that. So the benefit of being a little bit ahead of the curve on the investment side, this will get the EBIT effect earlier. So that will contribute, of course. But as Anders rightly said, the main effect on this will come in, let's say, in 2020, when the EBIT comes in, and we will delever down to within the range that's been communicated. And that's been the target of the operation and something that we are fully committed to.

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Anders Engdahl, Intrum AB (publ) - CFO [12]

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With that said, we're obviously mindful of the rating agencies' views, and we'll take that into consideration as well, of course.

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Ramil Koria, SEB, Research Division - Analyst [13]

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Noted. And then looking on the ROI within purchase the portfolio investments that you know, they call it. If excluding Intesa it seems like it's down more than 1 percentage point year-over-year, but also sequentially. And I mean, we acknowledge obviously that could have some mix effects of the -- given the improving pricing environment, how should we view that development moving forward? Is 13% the bottom line here, or how should we reason around that?

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Anders Engdahl, Intrum AB (publ) - CFO [14]

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I think that what you see is, on the underlying, given the mix of portfolios that we have in our portfolio, we see as somewhat increasing volatility in -- it was also as you have probably seen and noted our portfolio outperformance numbers is slightly more volatile this quarter. We don't see a structural underlying decline of any sort. On the contrary, we see an improving pricing environment. So from that perspective, I would view that more as sort of slightly more increasing volatility from quarter-to-quarter because of the business mix.

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Mikael Ericson, Intrum AB (publ) - CEO & President [15]

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And I think it's important -- if I may add to that. I think it's important to note here that we clearly have seen a shift in the market for portfolios throughout Europe since 1 year back. Prices are improving and the expected IRRs are stable to improving in many of the geographies. And that is, of course, something that we look very positive to.

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Ramil Koria, SEB, Research Division - Analyst [16]

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And then final question on the CMS side. I mean, in Q1, the margin was a clear disappointment. And then in Q2, obviously a lot better than expected, at least by us. How should we look at that going into H2 given the seasonality, et cetera, et cetera?

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Anders Engdahl, Intrum AB (publ) - CFO [17]

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Yes, I think that -- I mean, we have 2 effects or 3 effects actually. I mean, one is the effect of the Intesa partnership in Italy, which was in the ramp-up phase in Q1, which as you saw in the disclosure at that time, diluted the group overall CMS margin. That is now being normalized and producing and contributing in line with the group's overall margin levels. Second is, there is an element of seasonality and Q2 is a seasonally strong quarter. And as Mikael also mentioned, Q3 tends to be slightly worse because of the holiday season and particularly in the Southern European markets, where August, in particular, is a very slow month. So you have that seasonality benefiting in Q2 to some extent. That said, also, we have an underlying improvement based on the actions and integration benefits that we see coming through, which is also contributing to an underlying efficiency improvement on the ratio.

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Mikael Ericson, Intrum AB (publ) - CEO & President [18]

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I think if you go back to the first quarter, if I don't -- if I remember correctly, we actually at that time communicated that besides Spain and Italy, the improvement in the rest of the geographies were around 1 percentage point in the service and margin. So you can see it's a marginal improvement and to some extent, that is extended in the second quarter. Having said that, I think, it's also important to note that are we 100% comfortable with this? No, we think it's a little bit shy of what we actually can do. We will continue to work in the second half of this year. With a focus on margin improvement on the CMS side and hence, you have the efficiency program that will support that over the next 6 months. So yes, I think that's also part of the comment.

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Operator [19]

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And our next question comes from the line of Maths Liljedahl from Handelsbanken.

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Maths Liljedahl, Handelsbanken Capital Markets AB, Research Division - Research Analyst [20]

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I can just follow-up on -- continue on the margins. I mean, obviously it was a strong beat in the CMS operations. Has there been any kind of reallocation. I mean, common costs are higher than we expected and the CMS margin is much better. So is there any movement in terms of costs between business areas? What I'm deriving here is if we can get to the underlying organic CMS operations if we exclude the Intesa impact et cetera, is that possible to quantify? I will stop there.

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Mikael Ericson, Intrum AB (publ) - CEO & President [21]

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Yes, you also comment on my side. I think, as you know, Maths, we do quarter for quarter. We try hard to have the right price between the different service lines, so also this quarter. So I think in that sense, it's fair. I think what we're trying to explain is, between the quarters, it's been a little bit difficult to compare as you also alluding to, because of the transformation that we see in Spain and the ramp up of Intesa as such. The underlying improvement of the CMS margin is marginally positive both in first quarter and second quarter, and we note that and we think that is good. And we will continue to focus on that to drive that margin improvement also in the second half of this year. But it's a slow process, and I can be fine and open to say, we have -- had a little bit of headwind on this over the last 2 years, that's clear with -- compensated with a tailwind on the investment side. That's how it is. But that's a clear focus from our side. Anders?

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Anders Engdahl, Intrum AB (publ) - CFO [22]

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Yes, I think that when you look at the common cost development and the increase of common costs in the quarter, that is driven by the fact that we're now fully consolidating Solvia. So that's fully M&A driven. In fact, the underlying common cost development is actually positive in the sense that we're reducing common costs slightly quarter-on-quarter. So we continue to drive efficiency, underlying on common costs. But it's obviously -- the M&A is contributing to increasing the number in total.

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Maths Liljedahl, Handelsbanken Capital Markets AB, Research Division - Research Analyst [23]

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So we should expect that to come down to a more, yes, say, normalized level already next quarter or...

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Anders Engdahl, Intrum AB (publ) - CFO [24]

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Well, what you will say is, as we said, I think with the M&A that we have done, you will see -- obviously you have a higher starting point with the current quarter level. But that said, also the efficiency improvement program will contribute to taking down the common cost level. And as also Mikael commented upon, we see a normalized level at or below the SEK 400 million per quarter.

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Maths Liljedahl, Handelsbanken Capital Markets AB, Research Division - Research Analyst [25]

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Okay. Okay. And then on the lower guidance for Q3. I mean, we do know that there's a seasonality effect, but is that also an element of the new efficiency schedule that you will take some extra costs in relation to realize this in Q3 and Q4. So is that also a reason for you guiding for a weaker Q3?

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Mikael Ericson, Intrum AB (publ) - CEO & President [26]

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No, not really. I mean, the cost will be allocated between Q3 and Q4 this year because that is the accounting rules. And I just want -- we just wanted to -- for people to know that. Now I think it's important to remember that if you look at our business over the last, say, 2 to 3 to 4 years, I mean, there has been a shift in the balance towards southern part of Europe. So you can say both Spain, Italy and from next year, you can say also Greece will be a very important part of our operations. And if you are in the northern part of Europe, there has been a more, you can say, spread out holiday season between June, July and August. You come to Southern Europe, is more concentrated to the August, early September period. And we just know for a fact that for us, that means less cash flow in those months, and we just want you all to be aware of that. It's nothing else really than the seasonal impact and a slower quarter as such.

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Anders Engdahl, Intrum AB (publ) - CFO [27]

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And also the cost of the efficiency program will be allocated to nonrecurring items. So you will be seeing that disclosure coming through during Q3 and Q4 separate.

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Operator [28]

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And our next question comes from the line of Gurjit Kambo from JPMorgan.

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Gurjit Singh Kambo, JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research [29]

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Just a couple of questions. Firstly, on the EUR 60 million of additional cost savings. I know you indicate about 1/3 will come from Spain. But can you just -- is there any sort of way just to think about how that will be split between sort of CMS, Central and the other business, just so you can see what sort of potential margin, uplift we can get from those cost savings? That's the first question. And then the second one is in terms of the organic revenue growth, the -- then sort of minus 14% in Q2. I'm presuming a lot of that was driven by Spain. But if you can give us perhaps some color around -- about the different geographies, how organic growth has sort of progressed during Q2?

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Anders Engdahl, Intrum AB (publ) - CFO [30]

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Yes. Maybe to start with perhaps the organic growth point, you also should be mindful to my comment when I had my summary overview, that the 14% organic growth is actually affected by the fact that we had a one-off compensation in Q2 in 20 -- in 2018, so that the comparison is, if you exclude that, the -- as I said, the overall growth in revenues, excluding that one-off compensation effect in Q2 is actually plus 11%, not plus 4%. That's also affecting organic growth number in that table as you can see in the report.

Second point on Spain, we don't make any separate disclosure on what will come as common costs versus what will come as service line costs in Spain, particularly. But that said, it will -- the cost efficiency measures will help to improve common costs for the group in total, as previously guided upon to a level of around SEK 400 million for the group in total, and also then significantly sort of 1/3 of -- approximately 1/3 of the total effect in the EUR 60 million in Spain which -- so if you actually look at that and allocate that, you'll probably make some reasonable estimates on how much comes from common cost and what comes to service line earnings.

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Operator [31]

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And our next question comes from the line of Ermic Keric from Nordea.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [32]

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Ermic Keric from Nordea. So just on Solvia, you said that had quite a limited contribution now in Q2. Could you just help us to give some flavor on sort of what contribution we should expect from it going forward in terms of margins, should we think somewhere in the mid-30s or what would be reasonable? And then also -- so what's the outlook for Spain when we think about the top line? So the new cost savings program will obviously aim to maybe downsize the operation somewhat, if I understand correctly. So do you see less of a scope for adding new contracts there? And also, there's been some speculation about Solvia potentially losing some volumes from Sareb. Could you comment anything on that? That would be very helpful.

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Mikael Ericson, Intrum AB (publ) - CEO & President [33]

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Well, I can start with the Sareb question and then Anders can take over. I mean, that's correct that Sareb is looking at reallocating their portfolios. As usual, we have a contract, where we have a termination fee around that. So from a financial perspective, that's okay. But it's also an opportunity for us actually to gain more volume. So we have an active dialogue with Sareb, and we'll see where that will take us. But all in all, I think, it's important for us always in all geographies to be able to, over time, mitigate the resources that we have and you can say balance that to the potential top line. And it is, as we have had a clear headwind in Spain and we are, you can say, I wouldn't say that we are behind because it takes some time to adjust the cost side. And the team down in Spain has done actually a great job in reducing the underlying staff, so to say, by 20% in '18 and early, up until first quarter of '19. But we need to continue to trim the organization. The Solvia transaction gives a lot of opportunities and optionality in this. The combined resources take out synergies and operate in a more efficient way. So that is what you can expect during the autumn.

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Anders Engdahl, Intrum AB (publ) - CFO [34]

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Yes, I think as for the kind of profitability level of margin contribution from Solvia, we don't give any specific number guidance. But it's fair to say that we expect that once it's fully up to run rate in the coming quarters that will contribute to -- in line with the group overall. So I think that's as much we can say on that. I think in terms of the revenue development I think that following the more meaningful declines from the loss of the BPO contracts and portfolio sales that were in 2018, we're more into a sort of a stable environment from that perspective. That said, there may be some smaller negative effects based on the efficiency improvement program in Spain on the revenue line as well as we're also meticulously going through the profitability on each contract. There may be some revenue losses in relation to the efficiency program. But there will not be as meaningful going to the scale of anything that we've seen over the last 12 months.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [35]

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Okay. But when you say roughly 1/3 of the cost efficiency program will be in Spain, should we also think about it that then basically, EBIT would basically increase by EUR 20 million from that program in Spain?

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Mikael Ericson, Intrum AB (publ) - CEO & President [36]

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Yes, a little bit shy of EUR 20 million, but for simplicity we talk about the efficiency program in 1/3, 1/3, 1/3 and 1/3 being allocated to Spain. But in reality, it's a little bit shy of the EUR 20 million. But it is an EBIT improvement program. So in that sense, not a cost program in itself. It is focusing on delivering bottom line.

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Ermin Keric, Nordea Markets, Research Division - Analyst of Financials [37]

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Understood. And then, sorry, just one clarification because my line broke up a little bit when you talked about the organic CMS. Could you just clarify how we should think about the organic CMS in Q2 because you said something that we should exclude the compensation from -- yes, I think, was this your main concern last year?

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Anders Engdahl, Intrum AB (publ) - CFO [38]

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What I said in my introduction is that the revenue growth for the group in Q2 year-over-year compared to Q2 2018 is stated as 4%. But you should bear in mind that in Q2 2018, we had the contribution from compensation payment for one of the Spanish contracts. So excluding that effect, the revenue increase is 11% year-over-year. Probably -- but you can work -- based on that you can work out what the difference is.

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Operator [39]

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And our next question comes from the line of Tom Gibney from Bank of America.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [40]

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Actually, my question relates pretty much to what you just said, but with respect to that, was all of that compensation payment related to the organic growth number. So is that why the organic growth is down 14%?

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Anders Engdahl, Intrum AB (publ) - CFO [41]

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That's a meaningful contributor to that decline. Yes. And actually, I mean, if you look at the business, excluding Spain and Italy, which obviously distorts the pictures, we have an underlying positive organic growth for the rest of the business in the first half of this year.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [42]

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Okay. But excluding that compensation payment, what would have the organic growth have been?

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Anders Engdahl, Intrum AB (publ) - CFO [43]

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Well, I would -- as I said, I think you can work it out based on the 11% organic -- our total revenue increase compared to the 4, I think, disclosure is. You'll be able to work that out -- that difference.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [44]

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Sure. Okay. And then it was slightly -- and you're saying it is slightly negative even excluding the compensation payment and that was due to Spain and Italy?

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Anders Engdahl, Intrum AB (publ) - CFO [45]

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Yes, indeed.

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Operator [46]

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And our next question comes from the line of Luc Lebard from Brigade Capital.

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Luc Lebard;Brigade Capital;Analyst, [47]

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Just -- yet another one, just on this organic growth point. So just to be clear, just given the comments you just made, it sounds like the organic growth, excluding that one-off payment would have been still kind of negative 6% to 7%, just doing some rough math. So firstly, just if you can confirm that, that's the right number? And then secondly, how should we think about negative organic revenue growth in the context of you having obviously spent substantial amount of money on portfolio investments over the last 18 months?

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Anders Engdahl, Intrum AB (publ) - CFO [48]

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So I think the ballpark that you're mentioning, gross total is correct. And as I said, that's relating to Spain and Italy. If you make that exclusion, it's an underlying slight positive for the first half of the year. I think that in terms of the total revenue growth going forward I think what we -- as I also said, I think we're now through the effects of the most meaningful portfolio disposal and from portfolio -- contract loss declines as we've seen, particularly in Spain, and that will come into more kind of stable environment. Now with including of Solvia, we also see some positive potential for organic growth, also based on that acquisition in Spain, driven by the ability to attract third-party volumes also in Spain with a Solvia platform.

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Mikael Ericson, Intrum AB (publ) - CEO & President [49]

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I think actually it's interesting to note -- it's interesting to note, actually, if you look at the Nordic countries, and we talked about this earlier. We actually see meaningful increase under our existing contracts in the Nordics and clearly generated, in that sense, you can say organic growth. And it's been a number of years, where it's been actually quite stable in that sense. So that is positive, we would say.

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Luc Lebard;Brigade Capital;Analyst, [50]

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And just to be clear on how you classify organic growth versus the other categories that you have in the bridge. Everything, all the income generated from portfolio investments is included within that organic growth number, right? You don't kind of subdivide the portfolio investments between component, which is organic and some component which you defined as being inorganic and above the normal run rate?

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Anders Engdahl, Intrum AB (publ) - CFO [51]

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No. Portfolio investments is viewed as (inaudible).

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Luc Lebard;Brigade Capital;Analyst, [52]

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Okay. So I guess, just I mean -- so just I mean, you've obviously -- you've been spending, as you described, you're now in a kind of more normal environment in terms of portfolio investment spend. So given that you've been in an environment, where you've been spending substantially more than what you would consider to be a run rate. Just how should we think about the organic growth number being negative in an environment where you've been spending more than the run rate?

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Anders Engdahl, Intrum AB (publ) - CFO [53]

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I think if you look on the CMS side, I think that you will see a more stabilizing picture as we're focused less on M&A and more on the efficiency side and leveraging the benefits of having built out the full European platform. On the investment side, you will see a more -- overall, a slower growth rate of the book value over the coming quarters. As for the revenue contribution from portfolio investments into total result, that is slightly volatile from quarter-to-quarter on the basis of the comments I made before. But on average, over the coming years, you'll see a slower growth, if you will, from the portfolio investment side based on this -- on the lower normalized investment pace.

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Operator [54]

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(Operator Instructions) And it looks like there are no more questions registered at this time. So I'll hand the call back to you, speakers, for your closing comments.

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Mikael Ericson, Intrum AB (publ) - CEO & President [55]

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All right. Then in that case, I think, it's -- let me just say thank you to all who take your time to listen to us and thank you for your questions. We are looking back at what we think is stable and solid quarter and also looking forward to a busy second half of this year. But before that, I guess, it's time for us all to have a little bit of vacation. So for the ones of you who has your vacation left, I wish you a good vacation and summer holidays. And I guess I'll see you later in the autumn. So thank you all and have a good day.

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Anders Engdahl, Intrum AB (publ) - CFO [56]

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Thank you very much.

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Operator [57]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.