Intrum AB (publ)
Q4 2023 Earnings Call Transcript

Published: 25 Jan 2024

[Andres Rubio:]

Good morning, everyone, and welcome to the presentation regarding the results for the fourth quarter of December -- fourth quarter ended December 2023. I'm here in Stockholm with Anders Blomqvist, our Interim CFO, who came-in in December; and also Emil Folkesson, who is the Head of the CFO office and Investor Relations Director. Before I get into the details of the presentation, I just wanted to give a little bit of an overview from my perspective as to the quarter. I think that the fourth quarter and also the conclusion of '23 was a very strong end to what was a challenging and transitory year. Despite a very difficult comparison with a very strong '22 and particularly fourth quarter '22 and also the overall economic backdrop and difficult in collectability, which I'll get into more detail later in the fourth quarter. We had a very positive result. And it shows the strength and resilience of our business and also the drivers of our business. At the top line, we've had growth driven by acquisitions, but also organic growth in the middle and north of Europe. And our profitability figures of adjusted EBIT and EBITDA are essentially flat, only slightly down, despite the significant headwinds. Just as importantly, we entered '24 with significant momentum in combating our 2 main headwinds. Inflation continues to impact our costs. During the quarter, we hit SEK 800 million of run rate on our cost reduction program. We will expand upon that. And also on deleveraging. Despite the fact that we paid the final installment of the dividend and we completed an acquisition, we were still able to reduce our net leverage and continue on the path of deleveraging. So if we can go to Page 3, please, the just highlights. So on the top left, you can see that we continue to perform on all our key strategic initiatives. In '23, we shifted a significant focus and coordinated focus on the commercial development of servicing. That resulted in an all time high in the annual contract value of new business. We hit the SEK 800 million on a run rate basis, I've already mentioned on the cost base. And we've also rolled out client profitability tool to 3 new markets during the quarter, all of which are important initiatives to continue to add to our profitability and to our top line. The quarter on the top right, as I said, top line growth. And right now, I think it's a wonderful environment for our top line. There's going to be increased demand for our services going forward. And the quarter certainly demonstrated that. It was driven by M&A, but it's also driven by organic growth in the Middle and North of Europe. The cash EBITDA and EBIT in line with what was already a strong Q4 '22. So very good comp despite the more difficult environment. On the investing side, we are -- our strategies to extract cash. We extracted SEK 5.4 billion from investing, and also our leverage ratio remained stable. Specifically on the businesses in the bottom left, you get into a little bit more of a detailed picture as to the trends as well as the challenges. On servicing our assets management -- our assets under management, excuse me, are growing substantially, not surprisingly. Our ACV signings are already high or -- hit a record for the year, but also we're significantly up quarter-on-quarter. Our external income, which is our client service business, is up significantly, driven by M&A primarily. And our servicing adjusted EBIT is down. And that's where we have the prime, one of our prime challenges, which is inflation continues to increase our costs. That manifests itself in our servicing business, which is the operational element of our business. And we need to continue to combat that. In the quarter, we had a very strong 23% margin, but last year was 27%. For the year we had 16%, but last year was 21%. This is part -- this is one of our headwinds, which we are combating head on. On investing, collections performance, not surprisingly, was down at 103% versus last year in 111%. That's just a reflection of the environment. It is more difficult to collect on these claims today than it was a year ago. But despite that collections headwind and despite the fact that we scaled back investments to extract cash and de-lever as of the middle of the year, cash income and cash EBITDA are incredibly resilient and perform very, very well. And our investments, albeit at a lower level of SEK 0.5 billion for the quarter, consistent with our SEK 2 billion annual run rate, was at an all time high IRR of 19%. And then in the bottom right, we continue to deliver on everything we're telling the market we're going to do. Over the near-term, we want to reduce leverage and de-risk. We have lowered our investments down to the SEK 2 billion level, as I mentioned. We have exited 5 markets and are evaluating the additional exit of 3 other markets. We announced earlier this week, and I'm sure there's going to be questions later on, on the sale of a very large portion of our back hook to raise liquidity, to meet our maturities and to cement our relationship with an already important client in the form of servers. And we are hitting on our cost reduction, but we're not fully there yet. We will continue to add to that SEK 800 million, fully realize it as well as add to it during '24. Next page, please. The environment continues to be favorable for our business in that our clients are going to continue to need us. Not surprising from top down, all of the support programs that came in during the pandemic are starting to effectively come due. There is a general view in the media and amongst people in the financial system that a very large portion of that SEK 1 trillion is going to default over the near-term. That's going to put pressure on not only collecting against those assets, but collecting on other assets from the same individuals who are defaulting. The U.K. continues to be a jurisdiction, which is almost, as I say, often leading into the next crisis, whereas every market operates at their own speed, but the U.K., in particular, consistent with our published European Consumer Payment Report in November, consumers are having a very difficult time with a recent report that 56% of U.K. consumers ran out of money as of the 20th in this month, a very significant pressure on the consumer, which has to manifest itself in additional credit, additional wage rises, which adds to the inflation, which will eventually turn into and many in the financial system in the U.K., I believe that we're going to see an increase in consumer credit defaults in the coming years on par with the great financial crisis. And then you overlay on all of this, the fact that our industry is becoming more regulated, which, as I've said in other public forums is a positive for us. We are an established large player. We've been in this business for over 100 years in most of our traditional markets. We have a very large investment in compliance and legal. What that means is that in a more heightened regulatory environment, companies are going to turn to us more than others, in my opinion. Next page. Let's talk about servicing. Here, you see the ACV year-over-year 50% up on a gross basis. When you look at churn is obviously what we primarily focus on, you see it well above 200%. So a great year on the commercial side. And this is a function of many things. It's a function of putting George Georgakopoulos as the Head of Servicing as of April, which never existed before. It's a function of focusing on underwriting and higher margins, which I'll talk about later on. It's a focus on every single member of our platform going out there and find new business. And we had a record year and a record quarter, and we're going to continue that into '24. Commensurate with that on the bottom, and also the general environment where our clients need us more than ever. Our assets under management are almost at SEK 2.1 trillion. And you can see the actual sign quarter-by-quarter actual signed business is significantly growing. We've had some key commercial wins, 2 large wins within the financial sector in the U.K., adding to that business, which now has a much larger base as a result of the Arrow acquisition and also a key commercial win with Lyse AS and TF Bank in Norway. So we continue to win both in individual situations also overall. Next page. Continuing servicing. Here, you see the commensurate with what I just described. The revenue picture is quite robust, and I believe that, that demand for our services and the revenue impact of that will continue going forward. Here, you see clearly the '21 versus '16, which I mentioned earlier, that is the challenge. We have a headwind in terms of cost. We are trying to address it. That impact is already being seen in the fourth quarter and will be seen even further in '24. On the bottom, you see an important point about our servicing business broken up into our 3 main regions, North, Middle and Europe. Organic growth was positive and very meaningful in the middle of Europe and positive in the north of Europe. That's a reversal of prior trends. And it was negative in Southern Europe, but that is a function of both environment as well as our Southern European businesses, our very large businesses that manage very large stock, which doesn't renew as much, which inevitably is going to have some revenue headwind as we go through the cycle. But what you can see here to margin, you can see on the gray, you can see the SLE margins for '23. And you can see in the more turquoise or blue, the activity margins of the new business signed in '23 in North and Middle Europe, more than double. And in Southern Europe, maintaining the very high margin, which is the reason that we believe that not only our tactical cost reduction measures, plus this fundamental just underwriting and costing up our new business in servicing better and the focus on that business and the commercial results will all translate into a reversal of that margin trend starting in '24 and ultimately hitting our objective to hit 25% by 2026. Next page. Shifting over to investing. This business is incredibly resilient. You can see that we extracted SEK 5.4 billion in the last 12 months and -- versus an average of 2.7% over the last 3 years. We can see a lower rate of investments here. And what this tells you is that it tells you that we are very good at collecting. It tells you that we have a very high-quality book and that our industry -- the combination of our industrial capability to collect and to extract cash from our book is combined with our ownership of these assets yields this kind of cash extraction. But next -- on the next page, you see it even more evident, which is the top line -- or sorry, the gross cash collections continue to increase against what is a decreasing book. And so again, it's resilient. It's a high-quality book and our industrial capability to apply resources to extract collections from a very large underlying nominal asset base continues to bear fruit. You can see down below the headwinds we have on collectability. It is the lowest at 103% versus any one of the last 3 fourth quarters, so 112%, 113%, and 111%, down to 103%. Our underlying forecasts are also showing signs of not increasing by as much and actually moderating in some markets. So overall, it is a more difficult time to collect. And -- but what I gain comfort on is the fact that, that is 103% despite it's probably the most difficult quarter to collect we've had in many, many quarters. When you look at our 20-year history or a 19-year history, we've only dropped below 100%. So I think this is very resilient and also is reflective of our capabilities as an industrial collector, and it manifests itself in the performance index as well as the aggregate collections. Next page. This is one of my favorite pages. You've often heard me say, you have to have a purpose. You have to have a why, why we get up in the morning, why we work hard collectively. And that first point there is one of the key drivers of our motivation, which is we helped in the last 12 months, over 5 million individuals become debt-free with us and reintegrating society. That shows how important we are to the financial system. That shows how much of an impact in how we are to society as a whole. Consistent with a difficult environment, consistent with a large-scale activity, we continue to get very positive scores from our customers as well as our clients, and we continue to grow our activity where we collected SEK 105 billion during the last 12 months, with SEK 14 billion of that being from our own portfolios. Transitioning to Page 7 -- so Page 10, excuse me. We did announce a very important milestone a couple of days ago. We announced a very significant back book sale to servers. This is a large transaction. It is a financial transaction, which raises liquidity and forgo future profit on these assets to raise that liquidity to make sure that we can address all of our maturities in 2024 and 2025, combined with this liquidity and our organic cash flow, we can meet all of them without relying on market access. That's a very important step in derisking our near-term financial profile. The portfolio -- the transaction specifically is a broad-based transaction large, SEK 11.5 billion across 13 jurisdictions, 10,000 portfolios, nominal value of SEK 382 million. The transaction price is 98%, again, a very important validation of our curves and our book values. We retain the servicing very big statement of confidence on the part of servers, who already has a very large book of business with us to add to that significantly and allow us to retain the servicing for at least 5 years. And bottom right, we're using overall proceeds to reduce leverage. Pro forma for that, we're going to get down to -- this is a Q3 pro forma. But if you pro forma our Q4 number, we're down to SEK 49.1 billion. You have to go back to 2020, the last time we had that lower level of debt at year-end. The leverage ratio, and I'll talk about this a little bit later on when I talk about targets, but the leverage ratio is slightly negatively impacted because we are foregoing profit as well as gaining liquidity. The target of 3.5% has slipped from year-end '25 in to '26. There have been some reports that it switched to the end of '26. That's not correct. It slipped into '26. We are taking other active measures as obviously, we're a management team, and this is a dynamic equation. And we have 2 years until that time frame at the end of '25. We are taking other measures to regain profitability and to bring that to 3.5 targets back into hopefully year-end 2025. The benefits of the transaction are unfold on Page 11. It raises liquidity, accelerates deleveraging reduces risk. It validates our curves as well as our book values on a very significant and representative portion of our investment portfolio. It cements our relationship with service, who was already a top 5 client has now cemented their position as one of our top clients. And very importantly, they are a different type of client than others. They are a financial client, not a bank client or a financial fund, and they are going to grow. They're one of the top NPL investors. So not only do we have a large book of business today, but as their activities grow, we can grow with them. This is an acceleration of our strategy, taking SEK 11.5 billion of assets that sit in one pocket, which is our investment portfolio where we 100% own it and 100% funded over to the right pocket, which is our third-party servicing pocket, gaining liquidity, but also gaining a very important growth to our external servicing perimeter. And it also provides the foundation for the next step. And I'm sure there'll be questions on this going forward, where we want to not only take this back book and move it into third-party servicing and actually keep a minority interest. But we want to do that going forward in a larger volume of new investments. We've reduced our proprietary investments to SEK 2 billion. And today, if -- we fund SEK 2 billion a year. But what we want to do is increase that overall investment activity from SEK 2 billion up to our prior levels of SEK 7 billion, SEK 8 billion, SEK 9 billion. Keep our SEK 2 billion from a funding perspective and own that percentage, but the remainder funded by third party capital. This tactical back book sale provides a foundation as a logical step towards that. All of that is an important step, as the last point on this page, towards the ultimate goal of becoming a very high profitable servicer, but also more importantly, a capital light asset manager in the consumer NPL space. When you look at Page 12, I'll wrap it up and then I'll hand it over to Emil, who is going to handle the financial pages this morning. '23 was, as I said, a very challenging year. Externally, there was a lot going on. Internally, there were tremendous amount of challenges, changes in management, changes in strategy, but it was also a year of tremendous accomplishments. We acquired 2 technological platforms that long term are going to assist us in becoming more technologically intensive and driven, and where we can specifically lower our cost to collect and increase our ability to collect against the same level of nominal claims. We've dramatically improved our servicing franchise. You've already seen the numbers over the last few quarters. I think this will continue to accelerate into '24. Our cost saving target was achieved at SEK 600 million originally, expanded to SEK 800 million. We've now hit the SEK 800 million on a runway basis. We're going to continue to expand upon that and add to it to have a mentality and a culture of continuous improvement, specifically addressing one of our major headwinds, which is inflation. We did 2 other acquisitions, which are consistent with our strategy of market leadership in the U.K. and Spain. Being #1 is important. Being the largest is important in our service, in our industry. It accrues significant benefits over the long term. These 2 acquisitions made us #1 in the U.K. and Spain. We did, obviously, as I just mentioned, the material asset sale to accelerate our strategy and to raise important liquidity. So it was a year of significant activity, significant accomplishment, and I think we've laid the foundation and the base to enter into '24 in the best possible fashion we could. Given the environment and given our company -- our development as a company. With that, I'll hand it over for the financial overview to Emil, and then I'll give some wrap-up comments at the end, and we'll turn to questions. Emil?

[Emil Folkesson:]

Thank you, Anders, and good morning. Andres, sorry. My name is Emil Folkesson, and I've been at the Intrum for the past 8 years and are now primarily looking after our investor relations functions. Turning to Page 14. The trend of growing adjusted income continues for the fourth consecutive quarter, up 8% to SEK 5.5 billion compared to last year. The full year adjusted income is up 5% to SEK 20 billion flat. The growth is primarily driven by M&A activities in our servicing segment. The increased costs that we have discussed throughout the year are affecting our profitability with our adjusted EBITDA 1% for the quarter and 13% for the full year. Adjusted net financial and tax came in 3% lower in the quarter. And for the full year, net financial tax increased by 23% to SEK 4.3 billion, which reflects the higher interest rates as well as increasing in the gross debt of circa SEK 6 billion on average throughout the full year. The leverage ratio remained at 4.4x during the quarter, despite us paying the dividend and we're closing on the e-Collect platform. In the quarter, we also had a positive impact on leverage from the FX movements. Now looking at Page 15, and the progress of our cost program. To date, we have achieved the majority of the run rate cost savings target. The majority of these savings are relating to the redundancies. Adding other efforts such as IT contract renewals and termination, plus reduction of general spending, it stacks up to run rate savings of SEK 800 million by end of 2023. Of these, SEK 300 million is visible in the full year's results. In the graph, we're trying to visualize the effect. So we're starting at the baseline rolling 12-month cash cost by the first quarter of 2023. The first bar represents the actual savings by year end of SEK 300 million. The second bar shows that with organic decreasing volumes, we managed to further reduce our cost base with SEK 400 million. As you can see in the third bar, these savings are reversed due to our M&A activities, which increased our costs by circa SEK 800 million. The fourth and the fifth bar represent inflation and currency effects, which are both out of our control, and they are adding SEK 1.1 billion in increasing costs. All-in-all, the total cost increase of SEK 1.1 billion compared to the baseline, baseline cost based on the first quarter of 2023 for the full year 2023. The cost to achieve to date is SEK 230 million, and we expect the full cost to achieve will come in below 1x the total savings. I'm now looking at Page 16 in our servicing segment. In the fourth quarter, we saw significant increase in external income amounting to SEK 3.4 billion, a 17% increase in the quarter versus 10% increase in the full year 2022. This is driven by acquisition as well as organic growth in Northern and Middle Europe. As you saw on Page 6, we are seeing organic growth in these 2 regions, also at significantly higher margin. As Andres mentioned, the Southern European region is a different environment, where you essentially work out the stock, and that stock is by nature changing, leading to a natural organic decay. In addition, last year we lost this Cerberus contract, and towards the end of the year, we accelerated the cash income related to a specific contract in Italy. If we're adjusting for this effect, the total organic growth for the segment would be close to 0, both on a quarterly and yearly basis. As you can see, the elevated cost in segment -- affects the segment's profitability with adjusted EBITDA on 8% in the quarter and 7% for the year. Regarding our investment business, now looking at Page 17, as a function of the slower investment pace, we will have a natural reduction in our adjusted income and adjusted EBITD, which creates 4% and 5% respectively during the quarter. However, we do continue to have a resilient cash collection versus our forecast. The collections came in at 103% and 102% versus active forecast for the quarter and the year respectively. The segment delivered a stable ROI of 14% for the quarter and for the year. During the quarter, we made new investments of SEK 532 million at an underwriting IRR of 19%. In the full year 2023, we deployed SEK 5.5 billion versus -- all in new portfolios, and these are expected to deliver 16% unleveraged IRR. In line with our target to extract cash from our investing segments, we had a net cash extraction of SEK 2.2 billion in the quarter and SEK 5.4 billion for the full year. We expect the cumulative net cash extraction to increase in 2024 as we have reduced our unbalanced investment pace and our collections remain extremely resilient. Looking at my last page, Slide #18, you have the net debt development in the top left corner. As illustrated, the SEK 2 billion of net cash flow in the fourth quarter has by and large funded the dividend as well as our investment activities in M&A's. In addition to this, we also have a positive currency effect on the reported net debt of SEK 1.7 billion. In the bottom left corner, you can see the return gap between our underwriting IRR, average underwriting IRR on balance, and our average cost of funding, which remains at a healthy level above 10% despite the fact that our average cost of funds is increasing with higher market rates. If you look at the maturity profile, so the graph to the top right, it's in principle un-shade compared to the third quarter. But with the announcement made on Tuesday night, we expect to repay a portion of the drawn RCF, and we will be able to address the maturities in 2024 and 2025 with liquidity and organically generated cash flow as they become due. With that, I'll hand back to you, Andres, for some final remarks.

[Andres Rubio:]

Perfect. Thank you, Emil. I am now on Page 20, where we look at our starting point, how we've done in the quarter, and then our targets. So the top is the starting point, the middle is the quarter, the bottom of those targets. Left to right, on servicing income or revenue growth, you can see we had a very good quarter. I'm not worried. Given the dynamics in the marketplace, I am not worried about top line. We started off the 18% margin. We have a target of 25%. The quarter is at 16%. These are the headwinds and the specific factors I mentioned earlier. We're addressing that in many different ways with the tactical cost cutting measures, plus the increase focused on higher underwriting margins in that business that will reverse in the coming periods. The investment portfolio is at SEK 41 billion. We have a target of going down to SEK 30 billion. It is at SEK 37 billion officially, but pro forma for the transaction we announced a couple of days ago, we're already below SEK 30 billion. So that target, at the very least, based on the completion of that transaction is achieved. And then the leverage ratio, as I explained earlier, we started at 4.6%. We're now at 4.4%. The 3.5%, as a result of that transaction that we announced earlier, does get pushed into '26. We are taking other measures to bring that back sooner, and hopefully as soon as restoring it to the end of 2025. On Page 21, just to recap over the near term, tactical measures, we said we were going to lower investments. We did it. We said we were going to exit certain markets. We exited 5. We're evaluating an additional 3. We said we were going to exit a part of our back book. We did so in, I think, as positive a fashion as possible with the announcement earlier this week. And we're already well on our way to achieving our cost reduction targets. But I think cost reduction needs to be something that needs to be continual. So reducing leverage and de-risking the platform, we are delivering everything we said we were going to as of the middle of last year, and in particular in September at our CMD. Long term, our goals are the same. We want to grow profit. We want to be the leading servicer, and we want to be a capital light asset management platform in the consumer NPL space. Part of the acquisitions we made of the tech platforms in 2023, part of what we did, we planted the seeds as part of our tactical back book sale for third party capital going forward. All of that is moving in that direction, and I think it's going to help us achieve the targets I outlined on the prior page on or sooner than promised. And with that, I'll just conclude. Again, good quarter, very strong end to what was a challenging year. We've created, I think, the foundation to enter '24 on a very strong basis. And now we're happy to take your questions.

[Operator:]

[Operator Instructions] The next question comes from Jacob Hesslevik from SEB.

[Andres Rubio:]

By the way, I'm going to worry next time you're not the first person in the queue because you're consistently the first person in the queue. And I thank you for that.

[Jacob Hesslevik:]

We need to keep some type of order, I guess. But let's start on the cost program. Andres, you mentioned you expect to exceed the SEK 800 million and do additional cost savings. Could you quantify these in a bit more detail, please?

[Andres Rubio:]

Well, again, our cost program was originally SEK 600 million, as you know. Then we revised it to more than SEK 800 million. To be very clear, our nomenclature that we use or the wording we use is more than SEK 800 million. We hit the SEK 800 million. It's going to have a full effect. Plus, we're going to expand. My personal view is that, we'll get well above SEK 1 billion. But that is just on the original perimeter of the original cost cutting program. We are then obviously on a continual basis looking at everything we do and figuring out how we can be more efficient. But also, at the same time, how do we become more effective on efficiency? Is it additional areas where we could potentially reduce costs without impacting revenues? Those always present themselves and we always try to pursue those. We're going to do that in 2024. But then more effective means lowering my cost to collect while increasing my collections rate and delivering a better result for our client. That's more about long-term impact of Ophelos, e-Collect, and also just in general, improving our technological platform as it relates to our collections systems architecture. So that's my overview of the cost initiatives, Jacob.

[Jacob Hesslevik:]

All right. Very clear. But given your early comment that to execute the cost savings program, you will have to take upfront costs relating to less than 1x the savings, then we should expect additional IAC in H1. But do you have any comment on how front-loaded you expect these costs to be?

[Andres Rubio:]

It's a good question. Unfortunately, a big part of the cost cutting measures are reducing platforms, people. That has to be done market by market. Some of them have shifted into 2024. We will have additional 1x costs related to that. We've taken a big part of it already, but we will have additional costs to that. I don't have the exact figure at hand right now.

[Jacob Hesslevik:]

All right. But if we look into 2024, then how do you expect your M&A agenda to look, which also brings quite a bit of cost for you?

[Andres Rubio:]

Well, I want to be clear about that M&A cost. That M&A cost comes with a much bigger revenue perimeter and client perimeter. So let's be clear. It does add cost, but that's just 1 dimension. It obviously adds revenue and clients and other things. But your question is a good one. Our agenda right now is that, we are assuming we're not doing any M&A for the foreseeable future unless it is highly attractive and highly tactical, which I don't see on the horizon. You can imagine we need to digest what we have. We need to ultimately extract the benefits that we're expecting to extract from our current perimeter of businesses. But at the same time, the environment is evolving. The sector is consolidating. We are the first call as the leader in the sector. We're the first call in all processes. But what that means is that we can be incredibly, incredibly, incredibly selective and disciplined. But I don't foresee M&A anytime soon.

[Jacob Hesslevik:]

Okay. That makes sense. And if we move over on a slightly different topic, we do see NPLs increasing in the niche banks in Northern Europe. And I would guess the same is happening in the Middle and South of Europe. And waiting for the financial claims has been a lot like waiting for Godot. But are they finally within reach for you in the interim?

[Andres Rubio:]

Listen, you're absolutely right. And I've been through these cycles 2 or 3 times in my life, both in Europe and in Asia. And it never comes exactly as you expect it, but it does come eventually. It's inevitable. It is coming. There is no doubt about it. Up until now, you've seen Stage 2 loans basically explode. You've seen anecdotally with banks talking about the fact that they're coming. You now see things like out of the U.K., which is, again, as I always say, seems to be the market that is always leading the cycle, the progression through the cycles. You see banks that are very worried about their consumer credit portfolios. It is coming. It is coming over the next 1, 2, 3 years. I think what's good, and I've said this before in this forum, is that the industry is established now, not like the great financial crisis. So there's no stigma about sellers. Sellers are sophisticated. There is a whole apparatus, including us and advisors, et cetera, to facilitate sales. What you will see is these assets will come first into our servicing business, and then as the holders of these assets, principally the banks, but also others, get a handle on what volumes they're getting, and then also get a sense of what price the market is willing to give them. You'll see that price discovery take place, and then ultimately it will manifest itself in investment volumes that with a lag, but servicing first, then investing. But the volumes are coming. I'm certain of that.

[Jacob Hesslevik:]

All right. So I guess that would be supportive for your EBIT margin then to develop positively in servicing in the fairly near future.

[Andres Rubio:]

Absolutely. Absolutely. And if we do any investment partnerships, for example, and we scale up our investment activity, that will allow us to make more investments, but fund fewer. But more importantly, is purely additive to our servicing projections. And that's none of the numbers we've shared with anyone yet, Jacob.

[Jacob Hesslevik:]

Okay. But do you expect on servicing EBIT, do you think it's going to be driven by higher margin on collection, or will it be that indirect cost will develop favorably going forward?

[Andres Rubio:]

I think it's both, actually. I think it's both. I think we're going to have a primary margin benefit of the new business coming in and focusing more on our collections activity, being more intelligent around our collections activity. I mean, we took almost somewhere, almost 160 million activities last year. I think we can significantly reduce those and still collect more. But I also think we have indirect costs. We need to be more efficient, particularly in selected markets. I think it's both, Jacob.

[Jacob Hesslevik:]

Okay. Very clear. Just 1 final question for me. So we move over to investing side. You have now resized your back book, and then I guess we should begin to focus on the front book, which you also mentioned before. But let's say interim invest SEK 2 billion in 2024, and then capital partners invest SEK 8 billion, i.e. a total of SEK 10 billion. Then assuming we have no leverage, your income in investing division should be similar as if you only invested SEK 2 billion, right? But on servicing, you will now do internal collections of SEK 10 billion instead of just 2, i.e. 5x as much. Or am I misunderstanding the potential setup here?

[Andres Rubio:]

No. You are exactly understanding the correct phenomenon. The investing business will continue at its run rate of SEK 2 billion, so it will continue net taking out cash because it's below replacement. But the SEK 8 billion, which is the incremental perimeter, all goes to servicing.

[Jacob Hesslevik:]

Okay. Very good. No wonder you’re not worried about top line then.

[Operator:]

The next question comes from Patrik Brattelius from ABG Sundal Collier.

[Patrik Brattelius:]

First, a question on tax here in Q4. It was much higher than what I had expected. What happened there?

[Andres Rubio:]

When I hear tax, I ask Emil to respond.

[Emil Folkesson:]

Yes. The reason for the effective tax rate is because we have earnings in countries where we don't have corresponding tax assets to counterbalance that. So that will fluctuate, but over time it will, call it, normalize and be in line with the guidance of about 25% over a full cycle.

[Andres Rubio:]

Yes. Earnings, obviously, in different jurisdictions vary from period to period. This quarter it happened to be where we had more earnings, book earnings, in places where we didn't have offsetting tax assets, and therefore it increased our effective tax rate. That, through the cycle, as Emil said, should normalize and should offset, and we should be at roughly a 25% tax rate through the cycle.

[Patrik Brattelius:]

And for future reference, which regions are these?

[Andres Rubio:]

It's market by market. It's literally market by -- it's not about regions. It's about market by market, and it's way too -- I don't think it's worth getting into what markets are not, because there's no regional focus. It's literally market by market, and it's quarter-to-quarter, so it can shift.

[Patrik Brattelius:]

Okay. Fair. If we go into the collectability, you highlight -- and we also saw that in the slide, that it has trended down. Do you see that this is negatively accelerating, or how do you perceive this will progress to coming quarters?

[Andres Rubio:]

See, I think -- I mean, obviously, our active forecast gets adjusted for expected collections. That's an important thing that everyone should realize. So, in theory, we should be close to around 100, but there's always somewhat of a lag. There's always more over performance in individual quarters. But we have never, in 18 years, gone below 100% except once. It went down at the pandemic, the 99%, and it popped right back up. But what's interesting is it not only went from 111% to 103%, so we outperformed by less, but also our underlying active forecasts are not being increased by as much, both of which indicate that there's a more difficult collections environment. We will continue. What's beautiful -- or beautiful may not be the right word, but what's good about us is that we have the largest and the most capable industrial collections capability in the industry. So, we can deploy resources where we see underperformance in order to address it, and we consistently outperform. So, that industrial capability, that experience in history allows us to manage this figure. But it is inevitably and obviously becoming more difficult to collect. That shouldn't be a surprise to anyone.

[Emil Folkesson:]

If you look at collection performance versus the original underwriting forecast, we came in at 111% for the fourth quarter and 108% for the full year last year.

[Andres Rubio:]

Exactly. Exactly. Showing that we have adjusted those original forecasts, obviously, over time.

[Patrik Brattelius:]

But the delta here with -- do you foresee that -- you highlighted some negative aspects in U.K., but do you believe that the falling rates will help the disposable income and will help the collectability in the second half of 2024, or how do you view that from the macro perspective?

[Andres Rubio:]

Obviously, falling interest rates will help. But I don't think we've felt the full impact of the increase in interest rates that we've envisioned, particularly in the residential mortgage sector, which will have a knock-on effect into our assets. So, I think that equation may turn, but the manifestation of higher interest rates on the credit quality of banks, and in turn, the creation of NPLs, has a significant lag. The environment could be getting better as of next year at a rate -- in the rate environment could be getting better next year, but NPLs still could grow for 2 or 3 or 4 years. As evidenced, the great financial crisis happened in 2008, but NPLs continue to grow in Europe through into 2015.

[Patrik Brattelius:]

That's fair. And my next question is a little bit on the topic that Jacob touched upon, and I know you answered, but I will try to format it in a different way. But you had like SEK 250 million in adjustments affecting comparability in this quarter. You've had different adjustments for a number of years now. How should we think about these adjustments looking into 2024, which will be the driving forces? Do you think it will accelerate? And any color on this will be very helpful, please.

[Emil Folkesson:]

I mean, we estimate it to come down in 2024. Presently, we're expecting a -- which includes the cost-saving programs and other larger projects, but the estimate is that we will have roughly SEK 1 billion in IACs during next year, and they are expected to be a bit front-loaded. I mean, back to the comment Andres made, that a lot of these are coming from redundancies in the cost-saving programs, which then naturally comes earlier in the year.

[Patrik Brattelius:]

Very helpful. And my last question is a little bit more regarding strategic thinking. If Cerberus were to come back and ask for you to divest an additional SEK 11.5 billion at the same terms, are you then a seller, or how do you think about that? Or are you satisfied with the back book you have?

[Andres Rubio:]

No, no. The short answer is no. We did this tactically and in this size to satisfy servers, satisfy ourselves with liquidity. We have reduced to under SEK 30 billion. My point is not to go to 0 on proprietary investments, to be very clear. It is to bring it down to a level, and then to grow our investing business, not with my balance sheet, but with third-party capital. This was an important step towards that. I would like to maintain the circa SEK 30 billion investment portfolio, but grow our overall investment activity to well beyond that with third-party capital. That’s part of having an asset management model vision. But the answer to your question is if they came back and said they want to do a equivalent deal, I would say no.

[Operator:]

The next question comes from Ermin Keric from Carnegie.

[Ermin Keric:]

I liked the bridge you gave us on cost. Could you just help us there? How should we think about the salary inflation for 2024? How are you thinking there?

[Andres Rubio:]

That's a very good question. The salary inflation in 2023 was very elevated by selected markets and overall higher than anything on the history. We do think that that is moderating. There's no doubt about it. But also, inflation doesn't just impact salaries. It impacts lots of third-party servicing, contracts, et cetera, for services we receive. As I said in my opening comments, as I said in various media interviews, inflation is a headwind we need to attack head-on. We're doing so in a variety of ways. The cost-cutting measure is most directly. And we need to continue to add to and expand our cost-cutting perimeter such that we continue to force efficiencies and offset, if not exceed, the impact of inflation. But it is going to be less than '23, but it's still going to be meaningful. We need to continue to be mindful of it.

[Ermin Keric:]

Then on Southern Europe, you mentioned how you have stocks on servicing, which just have a natural decay over time. I mean, more conceptually, how should we actually think about servicing in Southern Europe? Is that really as capital light as it is in the rest of Europe, since you kind of need to reinvest in these contracts or buy the units from time to time?

[Andres Rubio:]

Okay, well, let me explain. There's two elements to your question. First off, in Southern Europe, the Southern European businesses are very large. They were created in Spain originally, then in Italy, and then more recently in Greece, with a large one-time transfer of assets from bank balance sheets to servicing balance sheets, to external servicing, and in some cases, purchased by us. Which means there's a very large stock that collects, call it circa 5% a year, and it's going to continue to be collecting for a very, very long time. New inflows, because such a large stock was transferred, new inflows are still not accelerating. They are somewhat, but they're not accelerating sufficiently to offset the decay, which is why on a net basis, that business's perimeter is declining. But that will turn, okay, to be very clear. And that's why you see the phenomenon, and it's also our highest margin business. So even flat in our highest margin contracts is actually a very important contributor to our bottom line. The second point is what you said about paying for contracts. Historically, that is what happened. It started in Spain, where banks needed the capital, and then it was done in Italy, and most recently, it was done in Greece. What's interesting is going back to Spain is a perfect example of it's the most advanced market in this regard, where you go from financial and industrial transactions to purely industrial transactions. That market doesn't do the whole selling contracts anymore, at least we won't do it also, but our major clients, we have every major client in Spain. We've already renegotiated some of our older clients, older contracts that had financial elements down to slightly lower margins, longer term contracts without any upfront payment. So you would think of it as still very high by our standards above the 25%, but also an industrial margin as opposed to an industrial plus financial margin. Spain is by far the most advanced, and a more recent example is the contract we got from Building Center last year, which there was no, it was tender, it was a competition, but we wanted on our capability, not on our ability or our willingness to write a check. That is going to flow into Italy and is flowing also into Greece, and the new inflows aren't sufficient to reduce the decay on the net or to offset the decay, but I wanted to make sure to distinguish these 2 things. That's the dynamic on the top line. Also, these markets are evolving and becoming much more industrial, which is to our favor, by the way, and will eliminate this phenomenon of having to pay for contracts.

[Ermin Keric:]

Understood. That was a very helpful color on that. Then maybe just lastly on capital partnerships. I 100% agree that that sounds like a very lucrative setup over time when it grows, but just to not get ahead of ourselves or if I'm thinking about it the wrong way, maybe. When you talk about adding maybe SEK 8 billion of capital partnership, you deploy SEK 10 billion in total, you are doing SEK 2 billion, and then SEK 8 billion from a partner. I mean, if I look at your total AUM on servicing, that's like SEK 2,100 billion, so that would add less than half a percentage point. Am I thinking about it the right way, or is it a much higher margin on this, or how should I think about it?

[Andres Rubio:]

You're not thinking about it wrong, but let me give you a little bit more detail and a little bit more precision. If you think about your example, that doesn't start day 1. It didn't start January 1. It most likely is going to start, I would assume, sometime in the second quarter, so you have a partial year. Then your first year, you're correct in that this is not a big percentage, but it actually will be purely additive, but we're talking about tens of millions of EBIT impact in the first year. What's very important is that it starts compounding. If you have SEK 8 billion now, and then another SEK 8 billion next year, or a partial year of SEK 8 billion now, and another new SEK 8 billion next year, and thereafter, it really starts compounding. Then you have a significant increase in financial impact. The other point I will make for you is SEK 8 billion is purchase price, whereas SEK 2 trillion is nominal value. Those are apples and oranges. SEK 8 billion of purchase price could mean 30x that in nominal value, so you need to make sure to put that in context. The SEK 8 billion of purchase price is small relative to our AUM, but 1 is purchase price, the other 1 is AUM. The SEK 8 billion will represent potentially 20x to 30x that in actual AUM.

[Ermin Keric:]

Got it. That’s very fair.

[Operator:]

The next question comes from Wolfgang Felix from Sarria Limited.

[Wolfgang Felix:]

Congratulations on the back book sale. I just have a few questions remaining. With respect to that back book sale, could you tell us a little bit more about what kind of assets are in there, maybe by region, or are they more forward flow, or are they new assets, or how should we think about those? And will that sale, I guess, count towards reaching the [3.5%] leverage target? And then the other question, cash EBITDA leverage target, I guess. And I was wondering about the relatively -- once more it's relatively sudden deterioration in the collectability. Obviously, it's been going tough through last year already, but do you feel we're at the nadir here? Is there going to be another quarter like this before there's going to be an improvement? Or do you -- and I realize you've sort of said this a few times already in various ways, but it would be good to hear one more time how long you think this valley will last? And then the lower servicing earnings. Can you remind me again why the margin on the servicing earnings has been falling?

[Andres Rubio:]

You've thrown out 3 things. Let me address them, and if I forget them, remind me, please. So the sale.

[Wolfgang Felix:]

Okay.

[Andres Rubio:]

And thank you for your congratulatory words. It is a very widespread portfolio. As I said earlier in my comments in the presentations, 10,000 underlying portfolios in 13 out of our 20 countries. These are seasoned assets. They're not fresh assets. They're seasoned assets, thus the low purchase price relative to nominal value. And they are very representative of our older portion of our book. So that gives you a little bit more color on the type of assets. And they're all basically, with very few exceptions, consumer unsecured assets, to be clear. Sorry, go ahead, please.

[Wolfgang Felix:]

No, no, no, please. I was just wondering, should I think of these assets as mostly worked out at this point or mostly still sort of untouched and outstanding?

[Andres Rubio:]

Well, I mean, to be clear, there's SEK 382 billion or SEK 392 billion of nominal value. As long as a claim has a nominal value, it's not been worked out, to be clear. When something's worked out, it gets put out. So it still has EUR 30 billion, more than EUR 30 billion of claims, which means we haven't. And we're only assuming we collect on this, you know, sub 10%. That's the beauty of this business. I mean, that's the beauty also of holding long tails as well, because you can collect for a very, very long time. These assets are not worked out.

[Wolfgang Felix:]

Yes.

[Andres Rubio:]

Then the second question you asked is about collectability. And are we at the nadir or the valley? And how long does, I mean, again, over 18 years, we consistently exceed our underwriting. We consistently exceed our active forecast. We adjust our underwriting into our active forecast for current changes in the collections expectations. That will continue. As you correctly said, I mean, you said sudden, but then you recognize that it's been that way for the last year. The last 3 or 4 quarters have been hovering just above 100%. So we haven't been outperforming by as much, which is reflection of the environment. But we don't expect to hit below 100%, to be very clear. We expect to actually hit our active forecast. And also the process lends us towards getting towards 100%, because we continually adjust our active forecast. What I will say also is that while we've historically adjusted our active forecast very meaningfully up, we are adjusting that less up recently, as you can imagine, because the curves reflect the environment. You can't get away from that. Are we in the valley? You have to recognize that this collectability is going to then feed into assets that come into the system, which then later on accumulate, which we're collecting against and potentially own, which then when the environment improves, which is the leading indicator, the economic environment, and these assets have already been accumulated, the collectability improves. That's the beauty of the cycle. Collectability comes down. Assets accumulate with our clients. Our number of cases increase, but our collectability comes down. We buy assets. Then the environment improves, collectability improves, and we collect more for our clients and more for our own investments. That's the way the cycle works. So are we in a valley? Will this continue? I suspect that the challenging collections environment will continue. I can't tell you for how many quarters, but it will continue. I think eventually we're going to see higher investment volumes and then ultimately higher collectability to really provide the return on those investment volumes.

[Wolfgang Felix:]

Okay. I understand.

[Andres Rubio:]

Then the last question I think you asked was about the servicing margin. The servicing margin is a challenge because we have been growing, as you saw, in our lower margin areas. We've been growing in middle and northern Europe, and that's our lower margin areas. And we've been stable to slightly down in our highest margin area, which is southern. That's math. That's the weighted average obviously comes down. Also, we haven't had the focus that we had in 2023 previously on margins, direct margins on this business. You saw that all our new business is at significantly higher margins. And also on indirect costs, our cost-cutting measures are largely targeted after that. None of this includes our primary cost-to-collect minus conversion rate. So ultimately, long-term, we're going to fundamentally improve our primary margin. But for now, we have a weighting average, which is bringing down the margin, which we're going to reverse. This new business is going to flow in, and our tactical cost measures are going to take effect to reverse this impact. I'm confident we're going to hit the 25 within the committed timeframe.

[Wolfgang Felix:]

I just have maybe 1 tiny last question, and that is whether or not the back book sale will be counting towards the target of 3.5x cash EBITDA leverage?

[Andres Rubio:]

I don't really understand the question of that, but what I think I'll say is yes. It obviously factors in. It impacts cash EBITDA. And the leverage, all of the liquidity we're getting from it will lower our leverage. But ultimately, as I said earlier, because we're foregoing future earnings in lieu of current liquidity, and we haven't factored in the returns we're getting into from the retained 35% stake in '24-'25, ultimately, that 3.5x target has been pushed out into '26. We are taking other measures, as I've said a few times on this call, to improve profitability, to regain profitability, to regain cash EBITDA that will bring it back sooner. With the goal bringing it back to the end of '25.

[Wolfgang Felix:]

Okay. Understood.

[Emil Folkesson:]

This is very technically as well. We have performed out the effect of this parameter.

[Andres Rubio:]

Correct.

[Emil Folkesson:]

So, Andres mentioned that with this transaction, we increased the performer leverage to 4.6x.

[Andres Rubio:]

Yes. We talked about that on Tuesday’s presentation.

[Operator:]

The next question comes from Haris Papadopoulos from Bank of America.

[Haris Papadopoulos:]

Yes. Three questions on my side, please. The first 1, you have mentioned a few times that following the server still, you can cover your debt obligation between '24 and '25 with liquidity. This is in case the market doesn't reopen for you. But I was wondering if you did not end up with enough liquidity to cover them and the market remained closed for you. What other liquidity levers do you have to pull in terms of like subordination capacity, for example? Or you've mentioned NPL spending is guided for like SEK 2 billion. This is foreclosed. These are contractual agreements. But could you go below, perhaps? Or any other liquidity levers you could discuss, please?

[Andres Rubio:]

Well, obviously, there's a whole host of potential levers. Thankfully, we did get the back-book deal done. So we have it, just based on that, plus organic cash flow, we have met these maturities. Although, I want to be clear here. It doesn't mean we're not going to be in the market. It doesn't means -- what it means is we don't have to be in the market. We are likely to remain in the market to some degree to get even more flexibility going beyond '24 and '25. But we have other levers. We could go from 2 down to 0. We could put in additional cost-cutting measures. We could, in an extreme case, raise equity, for example. There's a whole host of other levers we could pull if for whatever reason that back book sale liquidity wasn't available to us, which, thankfully, it was. And it is. And it has been and on very good terms, actually. So that's how we look at it.

[Haris Papadopoulos:]

Sorry, the subordination capacity now. How much further do you have?

[Emil Folkesson:]

This transaction actually doesn't consume any subordination or security capacity. So we still have -- no, no. We still have -- sorry, the RCF.

[Haris Papadopoulos:]

The RCF goes down in capacity. But I was wondering, within the dock, how much more availability could you raise?

[Andres Rubio:]

But that's not subordination, to be clear. The RCF has to come down because it's a function of ERC. Emil can explain that. But that's not subordination capacity. Those are 2 different things, to be clear.

[Haris Papadopoulos:]

Yes, but the RCF dock has a limit.

[Emil Folkesson:]

Yes. EUR 100 million in additional secured funding capacity. So it's 35% of 84 months ERC is the RCF capacity.

[Haris Papadopoulos:]

And then for the 3 countries that are under review, what sort of evaluation would you look at there?

[Andres Rubio:]

I don't discuss evaluations on individual countries. Those 3 countries we continue to evaluate the potential exits. What's great, as I mentioned on Tuesday, about the fact that we now have the liquidity covered, not only in what we're getting from Cerberus, also we have SEK 4 billion of cash on hand and we have the organic generation potential over the coming months. But not only do we have that, thanks to all of that liquidity, we can now look at these exits with a more disciplined eye, not focusing on the need to raise liquidity, but to focus on making sure that we get the right value relative to their cash generation potential, which is a factor of the risk environment. And we will come back to the market as we develop our thoughts and have some conclusions there.

[Haris Papadopoulos:]

Makes sense. And the last one is on your cash flow statement. I see cash interest actually significantly lower than fourth quarter of last year. Could you explain why you were surprised by that?

[Emil Folkesson:]

So the cash was lower this year. I think that's purely a seasonality effect. I mean you have, when the cash and coupons are actually paid. But happy to walk you through the cash flow statement offline, I mean to go each individual line.

[Haris Papadopoulos:]

And then perhaps the very last 1, in terms of like this co-investment partnership, you mentioned you're going to announce something this year, is that correct? Like perhaps any more color on the partnership or the timing, please?

[Andres Rubio:]

No, I mean, I think I’ve already said the timing, which is, as soon as we can in ‘24, I’m not going to give a more precise calculation than that, but we’re working on it, rest assured. It’s going to be a partnership where we increase our investment activity without increasing our own funding. But we’re going to keep our funding SEK 2 billion plus or minus, but we’re going to increase our overall volumes to something in, for example, in Ermin’s example, SEK 8 billion to SEK 10 billion, with the difference coming from a third-party capital partner or partners. We’re working on it, soon to come.

[Operator:]

The next question comes from Angeliki Bairaktari from JPMorgan.

[Angeliki Bairaktari:]

First of all, you mentioned a few times in the call today that you're finding much harder to collect today. So I was just wondering, does that mean that there could be any risk of future write-downs also in your investing portfolio, in your investing back book? Or is that not the case? Second question, with regards to the cost savings, can you give us an indication of sort of the absolute cost trajectory we should have in mind for 2024? The chart that you showed in your slides today, all of the cost savings have actually been offset by inflation and other sort of M&A costs, et cetera. Should we expect a reduction in absolute terms in the costs in 2024, or would that be too optimistic? And third point, with regards to the debt maturities in 2024 and 2025, I estimate something around SEK 21.5 billion of debt maturing those 2 years. We know that you have SEK 8.2 billion in net proceeds from the sale you announced 2 days ago. Can you remind me, please, in terms of the organic cash generation, is that expected to cover the entire sort of difference between the SEK 21.5 billion and the SEK 8.2 billion? And if yes, how much of that is coming from servicing and how much is coming from investing in your plan?

[Andres Rubio:]

Let me go back to the first one, which is it is more difficult to collect, but we have consistently hit at or above 100%. What's very important about write-downs is, remember, we're well above our underwriting forecast. So the active forecast and the underwriting forecast, we only adjust relative to our forecasts. I don't anticipate any write-downs in our investment book, to be very clear. And I think that what we did with service is a validation of that fact and that we made a very large transaction of season things at close to our book value, to be clear. And that is not a function of curves. It's a function of the risk environment. So there's a slight delta in the risk environment that led to that 2% discount on that deal, not the curves, to be very clear. Second, cost savings. You saw on page 15, 11.8% goes to 12.9%. That doesn't fully reflect the full cost program and the progression of the business next year. But I believe you should see a reduction in that 12.9% during the full year '24. As we start delivering on the quarters, we can give you more visibility on that trajectory. Third, on your liquidity point, you're correct. It's a little bit over SEK 20 billion for 2 years. I'm not sure if it's exactly SEK 21.5 billion, but it's roughly SEK 20 billion in my head. We have SEK 8.2 billion that we're getting from service. You need to remember from the deal with service, you need to remember that we have SEK 4 billion of cash on hand. That's actually an important figure. So that gets us up to about SEK 12 billion. And then over the next 2 years, gross cash flow minus cash taxes, cash interest, and our SEK 2 billion a year of investments should make up the difference. But I want to emphasize that we will still be in the market and to the degree we still issue in the market, even if we downsize and push out and refinance and push out some maturities and some of these, that will give us even additional liquidity and additional flexibility, which we can then apply subsequent to the '24-'25 period.

[Emil Folkesson:]

Just an additional comment to the cost. If you're looking at operations today on the like-for-like basis, and stripping out M&A, so everything that's within our control, less M&A, we actually have a lower cost.

[Andres Rubio:]

Yes, exactly. Does that answer your questions, Angeliki?

[Angeliki Bairaktari:]

Yes, yes.

[Operator:]

The next question comes from Lancelot Berlemont from H.I.G. Capital.

[Lancelot Berlemont:]

So the first one, I just want to ask you is, you had this helpful cash flow bridge to 2025 in the CMD presentation. Given that you now have more visibility on the back book proceeds, do you think you could provide perhaps an updated version of this or walk us through it? And the reason why I'm asking is based on what we initially felt. We are trying to reconcile the impact on the cumulative cash EBITDA and all the other related impacts?

[Emil Folkesson:]

I think that the question is very similar to Angeliki's, where Andres actually walked through the components on the cash flow bridge we showed on the…

[Andres Rubio:]

Again, the components are SEK 8.2 billion plus SEK 4 billion in cash plus organic cash flow on a gross basis minus net financial interest and net taxes minus the SEK 2 billion a year in investment gets you to in excess of SEK 20 billion. So the math is not that different, by the way. Relative to the CMD, I can see perhaps slightly higher interest in there and perhaps slightly lower organic cash flow because remember, this is a dynamic equation. The more we do on the back book, the slightly less we'll have on organic gross cash flow, and it flows, so but where the end state is that we're getting there and we are there now. Because the big question in September is are you going to get the SEK 6 billion done? Well, we got SEK 8 billion done. That does impact earnings a little bit but we got SEK 2 billion more and we do have SEK 2 billion more of cash starting point now, which we had SEK 2 billion back then. So these are things that are offsetting but largely speaking, we are now there and we're there with certainty, which is important.

[Lancelot Berlemont:]

Okay. That's understood. And then the second one is, and I know, its been slightly asked before. But I just wanted to ask on the cost-saving program just to clarify that we really understand everything to the fullest. So you've incurred SEK 230 billion to-date and then you say that you expect the program to be 1x the savings. So that means in the financials, we can probably expect to have SEK 230 billion that have flowed through but on a run rate basis, it already represents SEK 800 billion and you expect this to grow next year onwards. Is that sort of -- we're just trying to reconcile really like what have been incurred today, what would we incurred.

[Andres Rubio:]

Yes. I think your understanding Lancelot is roughly correct. We've done SEK 230 billion against realized 0.3. We do think it's going to be below a 1, but we have yet to realize the remaining SEK 500 billion on a full year basis and that's going to incur costs. And so that's why the number that Emil put out of roughly SEK 1 billion expected during '24 more fun loaded is mostly coming from that and the SEK 800 billion is going to be exceeded. So that will come with some one-time cost as well to create a recurring benefit. So I think you're understanding it correctly.

[Lancelot Berlemont:]

Okay. Okay. That's helpful. And then the last one is again a point that we touched upon already but it's given the back book disposal will impact your ERC figures. You're kind of effectively from what we understand reducing your RCF capacity. Now, what are the -- and that kind of doesn't really help your liquidity. What are the other levers that you think you can use there to kind of alleviate that?

[Emil Folkesson:]

Again, I mean, we have a strong underlying organic cash flow. We have to your point that the RCF capacity will be impacted by selling ERC. So we have Andres Rubio went through the levers. I mean, we can look at our investments in volumes made for the year. We can look at additional cost measures, but with the plan including the SEK 2 billion of investments per year. We will meet the upcoming maturities in 2024 and 2025.

[Andres Rubio:]

I mean, we hadn't. As I answered earlier, if we had not done the back book deal or for whatever reason it didn't it was smaller or not happened. We have other ability to reduce to increase liquidity which is lower our investment volume, cut more costs and increase our cash flow from organic cash flow from servicing in the extreme circumstance raise equity, et cetera. So there are other levers. Thankfully, we don't have to look at those levers. We can continue investing a meaningful amount which is SEK 2 billion. We have the back book. We have more cash and we have slightly less organic cash flow than we projected in the CMD, because our back book deal is bigger. But we are now meeting our SEK 20 billion over the 2 years, with certainty, to be clear. And we will be in the market. I'm not sure we will be refinancing these upcoming maturities in full. We'll probably be reducing them and pushing them out in maturity, which will give us additional flexibility and additional liquidity.

[Lancelot Berlemont:]

Okay. And there's no, in terms of other levers relating to specifically the capital structure and not whatever you can do with the business, is there any other secured capacity that you think you can use?

[Andres Rubio:]

Well, I mean, we have, as Emil said earlier, we do have under our covenants additional secure capacity of a SEK 100 million, but that could be used if we needed to. Like, for example, last quarter, we did 1 with a bilateral basis with a bank in Southern Europe and we could pull that lever as well. But I mean, largely speaking, the levers are the ones I described.

[Lancelot Berlemont:]

Okay. Okay. That’s what I understood.

[Operator:]

The next question comes from Lars Christian Dueser from Deutsche Bank.

[Lars Duese:]

Yes. A few questions from my side this morning. So first of all, on the Cerberus JV again, can you confirm there that on the one hand you will receive SEK 8.2 billion net proceeds? That's what you have disclosed. But then at the same time on the last call, you said that the RCF availability pro forma for it will reduce, I call it SEK 7 billion to SEK 13 billion.

[Emil Folkesson:]

Yes, that's again, the technical implications of our super senior leverage in our bond covenants.

[Lars Dueser:]

Okay. So net-net basically existing liquidity improves by SEK 1 billion, right? So, okay.

[A - Andres Rubio:]

A bit more than SEK 1 billion actually, to be clear, a bit more. There's required reduction in the RCF, but there's still, I think it's almost SEK 2 billion, if I remember correctly, the incremental liquidity.

[Lars Dueser:]

Got it. Got it. And then the second one, if I look at your cap structure now as of Q4, I get actually to SEK 22 billion of maturities in '24 and '25. It depends a bit if you include the CPs. You clearly should include this new term loan you raised in Q4 last year. So against the SEK 22 billion of METs, we have SEK 8 billion roughly of net proceeds from the sale. And then to be fully covered by organic cumulative free cash flow, at least, my take is you really have to deliver on obviously the service and growth, right? The 10% CAGR you have communicated at the CMD. Now, given that it's so important, otherwise the operating, the leveraging we see on the investing side is quite high and painful. Can you not give a bit more, color maybe on that external servicing growth for this year? How much of the 10% CAGR will be already achieved this year? Can you maybe even like you did on cash EBITDA, give a range, a guidance range in terms of year-over-year growth rates for that?

[Andres Rubio:]

Sure. Sure, Lars. I just want to, before I get into some description around my confidence on servicings, I want to just make sure that we have the numbers right. And I've said it a couple of times on the call. There's SEK 8.2 billion of proceeds that are coming from the deal. There's SEK 4 billion of cash on hand. Then you look at gross cash flow, which will be slightly less than the CMD plan because of the larger perimeter in the back book deal. Gross minus cash taxes, cash interest, and minus the SEK 2 billion a year of investing gets us to the roughly SEK 20 billion plus or minus. Okay. That is the analysis. You are correct that to achieve our organic cash flow targets, we are assuming servicing growth. Part of that servicing growth comes from full year impact of the M&A we did. Part of it comes from organic growth, which we're witnessing, as I said earlier, between middle Europe and Northern Europe. And part of it comes from expansion of our margin, which I've already talked about and addressed several times here. We are confident in the top line. Everything we presented earlier should give, I think, you confidence that the top line is not the issue. We are confident we are addressing the bottom line. And I think we would not have put what we did in front of you at the CMD, if we weren't confident in it. If anything, I'm more confident in it today than I was back then.

[Lars Dueser:]

Okay. Fair enough. I mean, with the only caveat under stress that, you know, maybe the SEK 4 billion cash on hand is not excess cash, right, in the truest sense, because you also have clearly minimum cash needs, at around SEK 2 billion to SEK 2.5 billion or so.

[Emil Folkesson:]

No, that's fair. That's fair. That's fair.

[Andres Rubio:]

But the SEK 2 billion, you could say the same thing about the SEK 2 billion we did at the CMD. And you can argue that this is really a theoretical exercise because we are going to be in the market. But it is a risk metric that we were very keen on achieving, to be clear.

[Lars Dueser:]

Okay. But I understand that you want to be in the market. But given the servicing growth is, so vital for regaining market access, why can't you not at least tell us, will this 10% CAGR be achieved in '24 already? Will it be front end or back end loaded? I would just love to get a bit more, color on it. That's what I would have hoped for.

[Andres Rubio:]

Let me give you some color. You can look at the servicing, the projection we showed in the CMD. And you can assume that servicing will be slightly better. PI will be slightly worse in 2024 by virtue of the larger back book deal. That's a simple way to look at it. And the underlying organic growth x this switch from 1 pocket to the other, we're extremely confident in and we're going to achieve. What this deal does is that it makes PI investing slightly smaller and it makes third party servicing slightly bigger because we've shifted from 1 pocket to the other. That should be, I think between these comments and you looking at that page in our CMD, you should get more than enough color.

[Lars Dueser:]

Okay. Okay. I will follow-up with you guys. I mean, it's, obviously, yes, an important one in the puzzle overall, but I appreciate your answer on that. And so, and then maybe, the other 1, RCF and the bank discussions, that's a maturity, I think, Jan '26. It's now drawn pro forma probably for the back book sale around SEK 5 billion to SEK 6 billion. So clearly it has come down, but then given the availability comes down on a percentage basis, probably drawn around 40% pro forma. So what I would like to understand a bit, how do you think about that RCF? You now become also increasingly a very asset line business. So, how can we think about the negotiations you have with the banks? What did you try to achieve on that one?

[Emil Folkesson:]

Lars, I mean, a, I'm not going to discuss any negotiation tactics or how they progress here and now. I mean, we have an active dialogue with the full set of banks in our RCF and they are supporting our business. I mean, in the transition from a more capital intense to capital light structure. So that is progressing well, I would say. I think it would be realistic to assume a similar amount of the capacity. So call it the EUR 1.1 billion in the upcoming refinancing of the RCF.

[Andres Rubio:]

Yes, I mean, I think if anything, this measure we've taken on the back book makes it, gives us greater confidence that we're going to be able to extend and negotiate and extend an RCF on a reduced size, which is commensurate with the way we want to manage the business.

[Lars Dueser:]

Got it. Got it. And then last but not least, appreciate you take all these questions. On the Eastern European exit, you are still working on in Q2 last year. And that was, back in the day Michael Ladurner, he basically disclosed that it's roughly 80% of groups book value. So back in the day, it was like around SEK 3 billion. Can you can you give an update on that number as of Q4? And then maybe can you also share a bit color on the NPLs in these Eastern European markets in terms of maybe age, average balance and so on, compared to what we have seen in the new Cerberus JV?

[Andres Rubio:]

So sorry, the 30 -- I don't follow your question, Lars. Do you mind repeating the first half of it?

[Lars Dueser:]

Yes, sure. So, when this Eastern European exit was initially brought up, I think it was in Q2 last year, Michael, on the call back then shared that these are NPLs accounting for roughly 8% of your book value back then. And that was….

[Andres Rubio:]

And I remember now, sorry, Lars, I remember now. And roughly at the CMD, roughly the CMD, the SEK 6 billion that was espoused was roughly half market exits, half back book sales, to be clear.

[Lars Dueser:]

That's right.

[Andres Rubio:]

That book value, that book value in those markets is still roughly accurate. Yes.

[Lars Dueser:]

Got it. And when we compare it to the Cerberus JV, right, where you achieved like, a value realization in the 90s relative to book. And these were very seasoned assets and obviously a diversified pool of assets with high average balance, right? I think EUR 9,000 or so. How does it compare to what we have in Eastern Europe? Like, is this a very similar kind of book in terms of this? Yes.

[Andres Rubio:]

It's a very good question, Lars. I don't mean to cut you off there. I apologize. It's a very, very good question. It's part of the reason that we now, by virtue of having done this deal, can look at those with a sharper eye and a more disciplined view on are we getting the right value in that process, which are ongoing. Those assets are, I would argue, probably around the same midges to slightly fresher. They're obviously specific to those geographies and those geographies are higher risk, higher return. So the book value would imply a higher return, if we just sold one of those countries, for example. And that's why I'm happy that we can look at it with a little bit more of a disciplined eye to cash generation as opposed to necessity of liquidity.

[Lars Dueser:]

Got it. Got it. So you won't be a seller in any event. And if this is a deal which would be too releveraging for whatever reason, you wouldn't just trade again liquidity for leverage. Let's put it that way.

[Andres Rubio:]

I think that's a fair description.

[Lars Dueser:]

Got it. I think that’s it. I’m not sure.

[Operator:]

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

[Andres Rubio:]

Thank you all for listening to us and also for your very, very good questions. As we've mentioned a few times with some of you, we're always available off-line to bilaterally discuss with you any elements of this. I know some of you listening were meeting later today and in the coming days. So we look forward to seeing you. Thank you for listening, and have a great day.