Intrum AB (publ) (INTRUM) Earnings Call Transcript & Summary

Good morning and welcome to the Intrum Q2 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Anders Engdahl, President and CEO. Please go ahead.

Good morning, everyone. My name is Anders Engdahl, and I'm the CEO of Intrum. And with me this morning, I have Michael Ladurner, our CFO. I'm very pleased to present to you the results of the second quarter 2022. So if we turn to Page 3 of the presentations labeled, highlights of Q2 2022. The second quarter was a seasonally strong quarter and the business continued to deliver double digit growth across all key cash metrics. The business showed strong resilience and continued strong growth with no visible adverse impact from current uncertain macroenvironment. Cash revenues was up 12%, cash EBITDA up 15%, cash EBIT up 13% compared to the second quarter last year. Over the same period, the rolling 12 months cash EPS has increased 19%. Our leverage ratio was temporarily elevated at the end of the quarter. And we usually do have a small uptick in the second quarter due to the regular dividend payments, but this quarter they increased a bit more due to a strong investment quarter and an adverse effects impact at the end of the quarter inflating net debts. We expect this to reverse during the second half and we will expect to continue to deliver on our financial targets of around 3.5x by the end of the year. Looking at our servicing businesses, we continue to see strong growth in revenues up 11% versus last year, supported by the strong new sales performance where we saw record value of new contracts up 60% versus the same period last year, and adding net of losses, 555 the medium and large new clients to Intrum. The new sales performance is broad based and includes winning important new mandates across all our key servicing markets where we, for now, for instance, service all the 4 major large banks in Spain. In addition, we won a large contract for Vattenfall, the large energy utility in Sweden and many more. Financially, Strategic Markets continued to perform strongly for all 3 countries, Spain, Italy and Greece contributes very well and we added this approximately SEK 40 billion of new major AUM. In CMS, we continued to see a pattern of lower like-for-like new inflows offsetting the improvement -- improving operating performance and new client wins. However, in the current uncertain macroenvironment, I am optimistic about the outlook for revenue growth and margins in CMS. Portfolio Investments delivered at a record quarter with gross collections at 115% of active forecast, driving revenues up 13% year-over-year. The performance in PI is very robust despite the adverse macro, supported by our diversified book of granular payment plans. ROI was stable at 14% and ROIC above 10%. It was also a very strong quarter for new investments with attractive risk adjusted returns. We continue to execute on our transformation program according to our plans and the value realization remains fully on track. We continue to migrate cases to our common platform that now covers 7 countries and approximately 25% of all our cases. Our global front offices now covers 17 markets and delivered about 18% of our calls and customer contacts at most recently. The cost to connect ratio continues to reduce and stood at 5.9% for the rolling 12 months and it's right in line with our expectations. Turning to Page 4. The economic environment in Europe is challenging with strong inflationary pressure and increasing interest rates eroding affordability and consumer confidence indicators are falling sharply. Households are concerned about their financial situation, and we see Stage 2 loans continuing to increase across the banking system. Our European Payment Report points towards that businesses expect to see increasing late payments during the coming months. And speaking to our bank clients across number of our key markets, they are asking us to make sure that we have capacity ready for greater volumes later in 2022 and into next year. This environment presents an opportunity for our servicing businesses over the coming 12 months, especially in CMS. As we have noted since the start of the pandemic, we saw a sharp drop in new inflows due to the strong fiscal and monetary response as the last moratoria introduced across many markets. Since the beginning of 2021, we have seen an increase in inflows for trade clients sending us more lower balance, lower margin invoice claims, but consumer unsecured lending and defaults remained low. Since the beginning of this year and as the macroenvironment has worsened, we see -- I've seen a sharp decrease in consumer unsecured lending across a number of the key markets. And as affordability reduces and the interest rates increase, defaults are now increasing. We expect to see this translate into greater inflows of large balance, high margin financial claims over the coming 12 months. Furthermore, building on our strong momentum over servicing sales coming into production, this will help further boost revenue growth for CMS and with a positive operating leverage and transformation reporting and improving margin development. Turning to Page 5. This chart shows what I was just talking about. Since the inflection point in Q1 2021, overall collection has increased, but due to the mix shift towards inflows from lower balance, lower margin trade invoices, we have not seen a corresponding increase in revenues. Overall costs, which are driven by collections, have been contained and the cost-to-collect ratio has continued to be reduced as well as our cost-to-income ratio. Looking forward, with the increasing inflows from higher balance, higher margin financial claims, we expect the revenue conversion from increasing collections to improve and thereby supporting revenue growth. Furthermore, you can see in the blue circles on the top, the strong commercial results of adding new clients is visible in the AUM development, which is now very positive over the recent quarters which gives us a bigger asset base to work with going forward. Turning to Page 6. Despite the uncertain macroenvironment and increasing financing costs, competition and pricing for Portfolio Investments remained stable. We're continuing to see a solid supply of portfolios in the market and the pipeline has continued to grow across our footprint. In a worsening macroenvironment like this, we generally tend to see that fresher claims and non-payer portfolios are more sensitive in terms of worsening performance, whereas payer portfolios with high cash flow generation tend to be more robust. Also, we expect to see that positive inflow of an outlook for CMS will over time turn into greater supply of opportunities for sale in due course and with a lag, but it will respect that -- materialize over the coming years. In terms of what this means for interim, as we've pointed to in recent quarters, we do not expect the current level of 15% outperformance to continue indefinitely, but to normalize in coming quarters towards the longer term trends of between 5% and 10%. Also in terms of new investments, in the first half of 2022, we focused on safer, lower risk payer portfolios with high cash conversion and lower headline IRR money multiples. Given the strong investment pace in the first half and the current pricing environment, we expect to moderate our investment pace for the second half of the year. We expect that the market will gradually reprice as compared to this refinance and reset finance commissioning -- reset financing conditions are reflected in terms of pricing. In the meantime, as we often do in dislocated market conditions, we start to see the emergence of individual, highly attractive, off market proprietary investment opportunities with outsized return. And we expect to focus more of our investments in these types of opportunities in the near term as the market adjusts to prevailing conditions. On Intrum priority also remains to maintain our backbook performance and in particular our paying book performance. Turning to Page 8. We continue to progress well with our transformation program, and we remain on track all our key KPIs. We are now migrated to date approximately 25% of all our cases to the common technology platforms, we now have 7 countries live. Recently we successfully migrated our UK PI portfolio as well as our first servicing clients in Spain. Progress then to date remains slightly below budget, but more or less in line with our forecast. Turning to Page 9. Our FTE cost-to-collect ratio is on track at 5.9% and are significantly improved compared to Q2 2021, as well as Q1 2022. In terms of value realization, we are on track and now we're slightly ahead of forecasts, and we expect to reach approximately SEK 300 million run rate savings by year-end '22 and full SEK 1 billion by the year-end 2023. Beyond that, we'll see that our continued investments into technology, automation, digitization and advanced analytics, we'll continue to support the value realization on the common platform into 2024 and above and beyond the SEK 1 billion that were set out as part of the program. Turning to Page 10. We continue to make progress on our ESG agenda. At the Capital Markets Day in 2020 we set out 5 sustainability targets to be achieved by 2023. Already halfway through now, we have made very good progress and achieved 4 out of those 5 targets. Furthermore, our strong sustainability rating, advanced analytics has been reconfirmed, and we have been awarded the ESG Industry Top Rated mark. And with that, I hand it over to you Michael for the financial performance.

Thank you, Anders and good morning. I'm now turning to Page 11 of the presentation and looking at our group key financials. We delivered a seasonally strong second quarter with substantial organic growth. All our key cash metrics are showing double digit growth with cash revenues up 12%, cash EBITDA up 15%, cash EBIT up 13% and cash EPS up 61% compared to Q2 2021. Similarly, all key cash metrics are also up on a rolling 12 month versus full year basis with cash earnings per share of SEK 31.34, above SEK 30 in first time. Our cost to income ratio, cost expenses in relation to cash revenues continues to improve to 45.6% down 1.3 percentage points from the same quarter last year. Cash ROIC is also improving to now 9% on a rolling 12 month basis and 8.4% in the quarter. This strong quarterly result is a testament to all our segments contributing with cash revenues growth. On the leverage side, we see a temporary increase to 4x. This is due to the dividend of SEK 1.6 billion paid during the quarter, a front loaded investment pace, as well as an adverse effects development, which in and by itself adds circa SEK 1.5 billion to the net debt in the quarter. At the same time, cash EBITDA has increased substantially from SEK 3 billion in Q2 2021 to SEK 3.4 billion, up 15% and SEK 12.3 billion at year-end 2021 to SEK 13.1 billion for the rolling 12 months. When looking at the remainder of the year, we expect the increase in debts to revert to a level roughly in line with the average of preceding quarters, also due to the more moderate investment pace Anders mentioned earlier, while cash EBITDA will continue to grow. To sum up the results, in the second quarter we produced cash revenues of SEK 6.3 billion, cash EBITDA SEK 3.4 billion, cash EBIT of SEK 1.6 million, cash earnings per share of SEK 9.12 and the cash return on invested capital 8.4%. I'm now turning to the next page in the presentation, Page 12, and looking at group cash earnings generation. On a rolling 12 month basis, we really see the year-over-year progress come through as well as the specific elements that drive this development. Year-over-year growth in cash revenues of 7% drives the growth in cash EBITDA of 9% due to the cash expenses only increasing by 3%. This clearly shows the operating leverage in our business, even before having realized the full benefits of transformation, both in terms of recurring benefits as well as increased scalability. Replenishment CapEx is up due to the lower money-on-money multiple as we have acquired more defensive payer portfolios with higher short term cash conversion during this quarter. At the same time, we continue to reduce our other CapEx. This results in a cash EBIT increase of 10%. Lower cash tax compensates somewhat higher cash financials in the context of the rising rate environment, resulting in recurring cash earnings growing by 19% year-over-year. From a returns perspective, we generated a recurring cash earnings yield on shareholders' equity of 16% and also return on equity or 16% based on adjusted net income. I'm now turning to the segments and starting with Page 13, Credit Management Services. Here, I would like to refer to the dynamics that Anders has explained earlier. While we have made significant progress in signing new clients and thereby increasing volumes, this an aggregate, has been offset by like-for-like reduction in inflows from existing clients and the reduction in revenue conversion. The reduction in revenue conversion is due to the inflow mix being skewed towards lower value, lower margin invoices such as, for example, utility bills, rather than higher value, higher margin Financial Services claims. So while we have seen good progress in growing our franchise and increasing gross collections with the associated costs, it has not yet translated into meaningful revenues growth. In Q2 2022, we generated cash revenues of just over SEK 1 billion, cash EBITDA of SEK 348 million and cash EBIT of SEK 342 million. And with that a cash return on invested capital of 7% for the quarter as well as an adjusted margin of 19%. I'm now looking at Strategic Markets on Page 14. Here we see a continued strong performance, again across all 3 markets, with cash revenues increasing by 18%, cash EBITDA by 44% and cash EBIT by 46% compared to Q2 2021. This highlights the significant progress and continued improvements both compared to same quarter last year, as well as on a rolling 12 month basis. In my opinion this result is even stronger than the headline numbers suggest as we continue to replace and exceed transactional revenues from 2021 with organic performance and growth. As I mentioned before, this result is broad based with all markets contributing. Italy and Spain added a gross total of roundabout SEK 40 billion of assets under management during the first half, and Greece continues to perform strongly as well. In Spain, the offboarding of SAREB volumes is expected to be completed by the end of the third quarter. From an impact perspective, this corresponds to a reduction in revenues of circa 7% for 2022 versus original expectations, however with an immaterial impact on expected profits in Spain. Overall, cash revenues for the quarter were SEK 1.6 billion, cash EBITDA SEK 851 million, cash EBIT SEK 834 million and cash return on invested capital 22.5%. In Q2, the adjusted segment earnings margin came in at 35%. Now on to Portfolio Investments on Page 15. Portfolio Investments again delivered a very strong quarter. Collections outperformance versus active forecast was 115%. Gross cash collections increased 11% compared to the same quarter last year. SEK 3.5 billion of gross cash collection also marks an all-time high for a single quarter. Supported by the strong collections performance, all other key metrics have also improved during this quarter, with cash revenues up 13%, SEK 3.7 billion and cash EBITDA up 17% to SEK 2.8 billion compared to Q2 2021. The increase in cash EBIT to 15% to SEK 1.1 billion is relatively lower due to the higher growth in replenishment CapEx. In replenishment CapEx increase in the second quarter, not only due to the strong collections performance, but also given the reduction in money-on-money multiple coming in at 1.79x for the quarter and 1.98x on average over the last 4 quarters. The second quarter, we had a strong frontloaded investment pace drawing SEK 3.1 billion. During the quarter, we invest mainly in defensive payer portfolios with good risk adjusted returns in the current more uncertain environments. Such portfolios, however, come with lower headline returns on money-on-money multiples. We expect this to revert in the coming quarters. Looking at page 16, due to the dynamics I've just outlined, the difference between our cost of funds and the last 12 months averaged unlevered underwriting IRR slightly down 3.6x. Our liquidity position remains strong with SEK 17.3 billion at the end of the second quarter. As of the end of the quarter, 72% of our net debt is fixed rate with longer dated maturities between 2024 and 2027. I'm now let's turning to Page 17. We continue to make progress and remain on track towards our medium-term financial targets outlined during our Capital Markets Day back in November 2020. Taking Q3 2020 as a starting point, we have increased our cash return on invested capital from 7.4% to 9%, up 1.6%. During the same period, we have also grown cash earnings per share from SEK 22.3 to SEK 31.3, circa 40%. When it comes to leverage ratio, this is also down compared to Q3 2020. And while temporarily elevated in the second quarter, we expect in line with our financial targets. And now back to you, Anders, for some concluding remarks.

Thank you, Michael, and then we can turn to Page 19, the final remarks. So to summarize the outlook for the business for the coming quarters linked to 2023, starting with servicing. In CMS, we continue to focus on delivering on our new client acquisition strategy and to drive organic growth. The strong results so far is expected to contribute positively in the coming quarters. We also have a strong focus on limiting churn so that we can get the full benefit of the value of new contracts into our revenues. Among our existing client base, we expect continued growth in new inflows for cases with continued higher inflow from trade clients with categories like energy being particularly important, but also increasing inflows from our consumer unsecured financial claims from currently very low levels, thereby improving the inflow mix. This means that I am optimistic that we will see the revenue growth in CMS over the coming 12 months with improving margins. On top of that, the benefits from the transformation program will accrue disproportionately due to CMS further supporting a positive margin development. In Strategic Markets, we expect to see continued strong performance during the second half of 2022 with the usual seasonality pattern of a slow summer quarter and a strong finish to the year. I would expect, though, that into next year the strong growth rate that we've seen over the past 2 years will moderate as the current macroenvironment will likely have a dampening impact on our real estate business in Spain and that the liquidity in court auctions will likely extend resolution timings for our secured claims under servicing. We expect to continue to see positive AUM development as we continue to leverage our franchises to add more new clients and servicing volumes. In Portfolio Investment business, we expect to see a moderate investment pace during the second half of 2022, and we will continue to focus on maintaining our backbook performance that we expect to moderate towards the long term trend around 5% to 10% outperformance. This is supported by the solid performance on our diversified book of granular payment plans as a large single payment settlement is becoming somewhat more challenging to achieve. Our transformation program continues according to plan, and we will continue to migrate volumes to our common technology platform during the second half of the year. We also expect to ramp up rapidly the utilization of our global front offices during the second half. In terms of benefit realization, we expect to deliver run rate savings of approximately SEK 300 million by year-end '22 and the full SEK 1 billion by the year-end 2023. And as I said before, in addition, we do see significant potential to continue to extract benefits from the common technology platform by leveraging state-of-the-art technology and analytics, extending benefit realization well above the SEK 1 billion into 2024. Overall, Intrum is highly resilient to adverse macro conditions such as the one we're currently experiencing through its essentially macro hedge business model, thereby delivering stability through the cycle. Short term, we expect to see a seasonally slow summer quarter, especially in Strategic Markets, with a strong finish to the year similar to the pattern that we saw in 2021. We remain confident that we will continue to deliver double-digit growth in cash EPS and that we will reduce our leverage ratio to around the 3.5x ratio by year-end 2022, in line with our financial targets. And with that, we open up for questions.

[Operator Instructions] Your first question comes from Rickard Strand from Nordea.

First question. You touched upon this briefly Anders in the presentation, but just curious to hear more about your acquisition of new debt portfolios, given sort of rising funding costs. Can you describe how you take that into consideration where you bid for a portfolio? Is it sort of your current funding cost? Or do you also take fully sort of the expected rise in funding cost over the maturity of the portfolio into consideration? That's the first question.

We do, obviously, at all times we monitor the developments of funding costs and cost of capital for us as a business. And when we make investments, we adjust that as we go along. So we have a continuous revision of our view of that as the market develops. So all the investments that we any point in time affects that we update our expectations for investment returns and our risk/reward view on a continuous basis.

I would add to that, we've actually invested quite a bit into developing also our house view and developing scenarios. And obviously, these are taken into account as we make decisions. I think that's important to mention here as well.

And also a follow-up question on that. You mentioned also in the presentation that you expect the market to start also considering higher funding costs in there when they are bidding for portfolios. But is that something you have seen yet? Or is that something you expect sort of your competitors to start doing ahead?

I think that going forward, I don't think anyone can continue to invest in portfolios without considering the cost of capital. But I think there is -- the time to sort of implementation for that and how quickly others are implementing it into their own models, it's hard for me to comment upon. But I do expect the market at large to adjust accordingly. And that's what would be aligned with the pattern that we've seen historically, and we would expect that also to be the case for the future.

And then, Anders, you commented in the report that you have high growth of new recurring contracts in CMS and that the current macro development is expected to have a negative impact on collectability and costs, while you expect that to be outweighed by increased case inflow. Can you share some more color here on what is the timing effects of this? Is this something where you start seeing during the second half of the year? Or is it later and will be sort of positives and negatives occur at the same time? Or is there a lag there before we see the positives?

I mean it's a good question. I don't think everything would play in exactly simultaneously. But if we -- looking at experience over a long time and many a cycles, we do see that as we go into more adverse macroenvironment and particularly in the current environment with significant reduction of real incomes, affordability challenges and reduced consumer confidence. We tend to see, as we're write, it becomes a bit more -- take a bit more effort to collect the same euro. Or to say it differently, right, in terms as collectability goes down a little bit and it tends to cost a little bit more to collect the same euro. At the same time, what we tend to see in the same environment is an increase of inflow in new cases as you see more default and more late payments in the economy. But for what we are -- so -- and that tends to be a positive volume effect that -- and combined with the efforts we're doing in terms of our cost efforts and everything we're doing on top of that also the transformation, and the significant operating leverage that we have, we see that to be a net positive from a volume and revenue margin perspective. On top of that, we do see that the very conservative effort that we've done in terms of new sales and adding new clients, and as you can see from the numbers that we're disclosing, we've made very, very strong progress on that over the last -- first half of this year. We'll also start to then add to the total amount of assets under management and the number of clients that we can work with, with obviously increases that -- our market position effectively. That also is a positive contributor to the total volume inflow. So hopefully, that gives you a bit of color on how we see the dynamics playing out. So we would expect that the revenue side would ultimately outweigh the sort of the cost side of that equation.

Then a final one from my side. Is it still fair -- I think you previously sort of hinted that we should expect external revenues from CMS to start showing positive year-over-year growth during the second half of this year, excluding FX. Is that still something you see as achievable? Or is it delayed to the effects -- that sort of the mix effects that you talked about before?

As I also stated, I am very optimistic about the outlook for CMS. I'm probably more optimistic now than I've been in a while. And just been speaking a lot to our clients. As I mentioned, I mean, we -- they are asking us to be ready for more volumes. And about exact timing, I don't expect it to happen during the summer months. But towards the end of the year, we should start to see the positive trends emerging, and then into 2023 with good tailwind. But exactly -- the step of that, it's hard to predict exactly.

The next question comes from Jacob Hesslevik from SEB.

So my first question is considering ECB is discussing raising the rate today. I'm just wondering, I mean, the interest expense in the quarter, is it a reasonable run rate assuming borrowing remains relatively steady given that you're skewed to fixed and hedged, but you do have some floating rate component in your stock as well. So I guess there will be some impact on the rising rate cycle, but how much is this affected by Riksbank versus ECB?

Jacob, I think in terms of detail, obviously, we provide a very detailed breakdown of our funding stack. And that can be a good basis from modeling out the impacts based on your scenarios. But when I just look at the development versus the same quarter last year, obviously, in that financial items, we've had an uptick. But that, other things equal, is essentially driven by 2 factors. One is the expansion in net debt. And one is the increase in rates, right? And as you rightly mentioned, on a net debt basis, we're about 70% to 72% fixed rate. So when I disaggregate this back of the envelope, about half of the increase is due to the volume increase so that the higher volume of net debt and the other half is due to the change in rates environment. And we've also indicated in the presentation that if you take the stack of that as it is today and you increase rates by 1%, the annualized effect of that based on the stack as it presents itself at the end of the second quarter would be roundabout SEK 200 million.

Yes. But it's not possible to do any split of that SEK 200 million. Is it 50-50 from ECB and Riksbank or is it more heavily skewed towards ECB those SEK 200 million?

For that, we provide the exact breakdown of the debt. So obviously, in terms of floating rate, from my perspective, it's more skewed towards Riksbank and given that the floating rate is principally domestic MTNs, private placements and then obviously also our RCF, which has a slightly different dynamic. But again, the details after that and what rates are applicable are provided in the appendix of the presentation.

But then on the question for recession, so obviously, you mentioned that you're kind of monitoring the situation to seeing early signs. I mean what is your view so far? What are you seeing? Are you changing your budget for the year? Are you increasing the probability of recession within your internal budgeting. I mean you have a lot of experience navigating this tough period historically, so what can you tell us at this stage?

No, I think the current adverse macro both presents opportunities and challenges for us as a business. And I think if you look at our business overall, it's quite well balanced between the pieces that would benefit from a more challenging environment and the pieces that will be slightly more slowed down by the current environment. So I think overall, if you look at CMS, it's overall beneficiary of a more slow environment, because of the increasing payments amounts and the new inflows certain to flow into business. And as I explained before, we see the revenue dynamic, and in particular in the context of the market share improvements and new client acquisitions we've achieved, to be a positive contributor to the group overall. Whereas, the impact on the -- sort the negative impact of this environment is more on the Portfolio Investments side where we would expect to see a more challenging settlements environment. Where the ability to do settlements which, as you know, I mean, the vast majority of our monthly payments are on the payment plans and they are -- it is primarily robust. We're seeing 0 [ tolls ]. So far no impact whatsoever. And we also in previous cycles, have seen none or minimal impact on our payment plans as they are very individually small payments, a very large number of them. So it's really at the settlement side of Portfolio Investments that you have an clear impact. So they -- we would expect that to offset each other in terms of overall performance. On the strategic market side, as I mentioned, I'd say, expect that the more challenging economic outlook would have an impact on the real estate business that has done extremely well over the last 2 years. And also the resolution timings in court in Southern Europe for secured claims should most likely be extended if you have an impact on interest rates in terms of liquidity to pick up in quarters across. But overall, I think we're in a good position to be able to balance out the effects for the group overall.

But I mean, obviously, things have changed a lot since inflation started to pick up and continue stretch high in all of Europe. I mean are you not more concerned at this stage versus what you were early in terms of collection rates might evolve? I mean not necessarily for this year, but potentially for next and the year after?

As I said, I think in terms of portfolio performance, if we look at performance over previous cycles, the piece that gets the impacted is large payments. And it's a small portion of the overall every month, but that would lead us to believe, and that's why we're guiding towards a moderation of the outperformance level which has been very high for the last 2 years, towards a more normalized level, so down to the 5% to 10% outperformance over from the current 15%. Whereas on the servicing side, we'd expect the inflows to contribute positively to revenues, albeit with a slightly more effort to put into collect, which will then drive cost like-for-like. But on the other hand, we are doing all the measures from a cost perspective that we expect to contain and continue to deliver good cost to collect development.

The next question comes from Ermin Keric from Carnegie.

My first question would be around Slide #5 on the servicing development that you showed us. Could you just try to help me understand that one a little bit better. First of all, in 2020, when we see collections coming down, but we still have revenues essentially flat, just how that dynamic as such. And then also kind of how would this picture look if we only did it for CMS just to get a better understanding as Strategic Markets and CMS have had so different development?

I mean, if you can actually disaggregate this a bit, what you can see in the earlier part of this chart is also the impact of the lockdown. As you saw, actually if we had a picture further back in time with to dropdown a little bit in Q2 because of the lockdowns [indiscernible], we have a positive contribution in Q3, right? But then you do see some transmission into -- to the revenue -- negative revenue development, right, for the quarters following that. And that has also been what we have been challenged with the negative revenue development in CMS from Q3 2020 until sometime into Q3 2021. But -- and there is a little bit of lag effect in here, but -- from quarter-to-quarter. But overall, the trajectory -- collections drive revenues and they drive costs. But they have -- because of the inflow mix, as we've talked about, and the fact that the inflow mix seems -- the bottom of this, whereas it actually seems to be advent over the start of the pandemic has been more skewed towards our balanced gains. Our average balance inflows has dropped quite sharply. That has led to lower revenue conversion. That's why we haven't yet seen a positive comeback on revenues to the extent we would have expected. Now with the current outlook, with expectation both from ourselves, but also from our clients of the current affordability environment and the expansion of equity accounts into lending in the first half of this year in number of the key markets we operate, lead to more volume of inflows. All consumer unsecured claims which has higher margins, and therefore, that mix to be reverted to more, call it, the normal balance between trade and finance gains. In terms of the picture for CMS itself, I don't know, Mike, if you want to comment on that.

No, happy to. So obviously, when we look at these trends in developments, its easiest to disaggregate them to -- from a businesses overall perspective. But if we were to take some of the key points Anders had mentioned, right. I mean the key ingredient in here is Financial Services claims and Financial Services inflow given the margin dynamics around that topology. And if we recall Strategic Markets is essentially Financial Services, there is a very, very limited demand of invoice type claims that come into the picture there. So from my perspective, if we were to reproduce this for the segment separately, essentially, these messages are exacerbated for CMS, because in CMS we've really taken the hit of the mix change. And obviously, as we have to recall, invoices, good collections, collections drive costs, but the transmission into revenues is lower for those target things. But I think what's also important to note in that development is the seed for the improvement that as Anders mentioned -- that Anders has mentioned going forward. Because it is important to remember that the commercial progress that we've made is being offset by that like-for-like reduction in inflows and the lower conversion. So as we see that picture reverting with more inflows across the board and inflows more weighted relatively towards Financial Services, we get the positive turnaround in both of these factors. So we have more volume or a bigger pipes, so to say, to work with given that we've won more contracts, but we'll also see the reversion of the trends in terms of the, call it, like-for-like picture where we see that more inflows, more weighting towards Financial Services and therefore, also higher conversion ratio. And I think that is really what underpins that ramp that we are guiding towards starting from late in the -- into the second half.

And just on the cost side, in that same chart, would that CAGR change anything if we stripped out the ONE Intrum implementation cost or have those essentially been the same throughout the period?

So as you know, from a total cost perspective, ONE Intrum, the SEK 1 billion that we've talked about in terms of investing into that to generate SEK 1 billion of recurring benefits. That SEK 1 billion is going through our cash P&L. So obviously, that is distributed across the entire company, but you're absolutely right. In terms of our running costs, we're also carrying the cost of that program. So obviously, that would marginally change. But then again, ONE Intrum, as I've mentioned, is really going to generate disproportionate benefits for CMS and is also significantly increasing our scalability. And that, again, is particularly beneficial in a low volume business such as CMS.

Then last question more on the investment side. You mentioned that you expect more moderate investment pace during H2. Is that more driven by you being committed to a leverage target? Or is it more of this kind of timing issue? I don't know if you should call that the timing or you say that you expect maybe your peers to better reflect the higher cost of funding going forward?

And as you can see, in terms of the total quantum of investment for the first half, it is a bit more frontloaded in this year than what we usually see. So I mean, with the -- with a view to continue the pace for the full year, as we've guided towards previously that means that the reinvestment pace for the second half will be somewhat lower. As we've said, we remain committed to the leverage target, and we have a good visibility on how we will deliver on that in the second half. And the -- but also I think the -- what we have done, and as Michael pointed to as well, is we have focused on type of portfolios also that have the characteristics of less -- in a lower risk and being less affected in the current environment of the high cash conversion payer portfolios. So it's a combination of those factors. When it comes to the outlook, as we said, we do expect the market to gradually reprice as the current funding conditions are reflected and funding costs across the market as a whole recovers for peers.

Just one follow-up on that. If I got you right, Michael, I think you said that you expect money multiples and underwriting returns in coming quarters to kind of recover? And as I understand its depressed now in Q2 from the fact that you've gone for more low-risk portfolios. But how should we read into that? Is that, that you're going to increase the risk aspect a bit again during H2? Or is that fully just by the market reflecting higher cost of funding?

I think, I mean, what I would start with is that, we try to do the best deals that we can. So we don't focus on volumes, we focus on the best deals we can find. But it's also then referring back to what Anders mentioned earlier, which is that we do see somewhat dislocated environment. We do see that our peers have fully taken that into account, potentially. But in that dislocated environment, given our origination franchise, given our footprint, given our relationships, we also see, and this is consistent with what we've seen in past cycles, we see proprietary, bilateral, you name it, transactions that offer outsized returns and from it good money-on-money multiples. So for the second half, having built up in a way on those payer portfolios that are really adapted to the current macro, we want to focus on those type of opportunities, given that we see them emerging. But maybe, Anders, do you want to add.

You're right. And it is interesting and having lived through a number of these cycles over the years, some of the best investments you can do are the ones where you can take advantage of the dislocated environment. And as we're now starting to see some of them emerge, and given the picture that we painted overall, I think from our perspective, that's where we see our focus to be the most near-term future and to be able to take advantage of those and prioritize those from an investment quantum point of view.

The next question comes from Robin Rane from Kepler.

So I guess back to CMS and what we all would like to know is, of course, what kind of margin are you aiming at in CMS when you see this normalization effects on the revenues and also the ONE Intrum transformation benefits that you say will disproportionately benefit in this new CMS?

I think if we look back -- widely talked back through pandemic and the margin picture has been and should be for CMS, it has been probably the mid to high 20s and that's the margin picture that we see is achievable at the inflow mix and the growth of the inflow and the inflow mix reverts back towards more heavily weighted on the financial claims. Then as we said, the total SEK 1 billion of benefits from the transformation program accrues disproportionately to CMS, and in particular, gives some of the smaller units benefit of the economies of scale that we can build through the ONE Intrum transformation. So that's -- and as you know, I mean, our strategic market units are very large and very scaled already. And that's why proportionately the benefit is much more to the collection of smaller units we have in across our CNS markets where we can take a much bigger leap from a cost-to-collect perspective by leveraging the economies of scale there. So also the 2 effects that we would expect to materialize for CMS over the next sort of 12 months to 18 months.

And then my second question, the common costs, if I look at the adjusted earnings in group items has been elevated now for 2 or 3 quarters. How -- why is that? And how should we expect this to develop also factoring in the ONE Intrum benefits?

Sure. I mean common costs naturally is a home for the transformation cost, so we see a good part of that go through that. And in addition to that, it also needs to be mentioned that we have substantially upgraded our commercial capabilities where we see the payoff in terms of adding new clients. I mean just repeating the statistic we put out there. In the second quarter alone, we added 558 new medium and large sized clients when we lost 3. And I think it's really a testament to that investment that we've made into this commercial organization. I think the second leg there is also our focus on data and analytics and also then ultimately leverages what we do on the ONE Intrum side in terms of building a common process and systems framework. So that's really what the drivers there are. And there is actually investments that underpin the growth trajectory of Intrum for a long time to come.

If we look at an absolute level of this line, I mean should this -- should this be around, sorry, 500 or 600 or maybe you don't want to go there?

What I would say is, obviously, over time, we'll see the ONE Intrum cost coming out of this. But relative to the past, we are a somewhat larger company, and we have made those investments in commercial and data and analytics, and we'll see some of that remaining in that line. But again, underpinning the revenue growth and also the efficiency trajectory of the company as a whole.

The next question is from Wolfgang Felix from Sarria.

I'm more focused with my remaining questions, I suppose, on your purchasing -- portfolio purchasing business. There, you are obviously migrating, as you said, towards performing portfolios, paying portfolios. And I was wondering about how the ERC curve is ultimately going to shift in that context. And I'm trying to understand what the individual curve or portfolio curve is going to -- it looks like for these types of portfolios. And obviously, I'm partly generalizing. But I think in the past your average portfolio would have reached peak payment performance in about year 3 or so with about 1/4 of the portfolio being paid in year 3 and then tailing off of logarithmically perhaps a bigger tail afterwards. As you have paying portfolios, I imagine that payments will be much more frontloaded, and I was wondering what the curve looks like on average for these types of portfolios? And what you say, portion of that of such an average portfolio will be paid in year 1, year 2, year 3 or something that, if can give feeling for that?

No, I'll start with that. You're absolutely right. So when we think about our portfolios, obviously, in the current environment, they're much more what the payment resilience is much more isolated from the macro, given that the underlying customers have moved past the initial impact and are essentially in a personal recession where we helped them to get out of it and come back to financial power. So when we translate that into payment pattern, it's essentially a starting point. It doesn't require outsized additional activations. We obviously always continue to activate nonpayers on an underlying basis to replenish payers that have either paid off or where other challenges have emerged. But when I think about that from a pattern perspective, you start at a certain level and then you have a decay that over time decelerates and then a longtail, that's how we think about them.

So should I think of a paying portfolio, effectively paying more in year 1 than in year 2 and more year 2 than in year 3, is it sort of dropping off pretty much from the get-go where I see -- yes?

Maybe sort of another interesting element of that is, if you think about, say, a payer portfolio with very small claim size, the initial decay is obviously higher, and then you have a very tail of time. Whereas, if these are somewhat larger claims, say credit cards or overdrafts, et cetera, then that initial decay is obviously still there. And it's more pronounced than in the tail, but it doesn't drop off as much as, call it, a very small claim portfolio.

And then in aggregate, say, for this year, I suppose there's a lot of judgment in the answer to such a question. But how much would you think your ERC curve would, therefore, presumably shift near term if this year you were to continue to buy those higher-quality portfolios?

I would look at it slightly differently. Obviously, ERC has been built up over a very long period of time. It's more than SEK 80 billion. So what we do in any quarter doesn't really majorly move the needle. And as we said, Q2, we really had the focus on those portfolios, because we saw them in the market and we felt that based on our data, based on our, call it, also advantages, knowledge, relationships, et cetera, those provided this with the right risk-adjusted return. But as we've also said, in the second half, we'll focus more on a different type of portfolio given what we know now and given that we see that dislocated environment leading to the type of portfolios that we've seen in such environments in the past where we then see higher returns, higher money-on-money multiples as they come out of specific situations that we can access.

Yes. And then actually, in that context, if I can ask you an overall question, last question. But obviously, this environment is somewhat different to what we've heard in the past. We've got pretty much full employment and yet a squeeze on the consumer wallet from inflation. How should we think about that overall? If you can just sort of maybe summarize that one more time for your back book going forward?

I think If you look at macro factors, including employment levels on the impact of the back book, the correlation is not there. It is minimal. And because if we look at the composition of our -- and the reason for it is the mature portfolios, very large number of individuals, very large number of individuals, small payment building up the payment plan. And then the majority of payments in every given month or quarter comes from those payment plans. So the impact unemployment or the macro factors on the payment plans is not measurable. And believe me, we've tried. Where we see the impact is on settlements. And every month, we have a -- and still contributing to the strong outperformance levels recently over the last 8 quarters, we have a portion of settlements with full payoff arrangement. Those are more impacted by the economic environment and particularly the main driver for that is consumer confidence. And if the consumer confidence is high, we tend to be able to agree an arrangement for a settlement with a customer. If the consumer confidence is low, certainly the time for the individual that tends to be more challenging to complete. Therefore, we do expect in this current environment that piece of the market payments to contribute to moderation of the outperformance level that being added towards -- more towards the 5% to 10% level from the current 15%. So that gives you the quantification of impact on the moderation settlements that we see in the monthly payment. In a sense, the vast, vast majority of payments we'll get every given month is on those payment plans, and they're extraordinarily robust regardless of the events in macro. I mean, even in Q2 2020, when the world shut down, we saw no impact.

This concludes our question-and-answer session. I would like to turn the conference back over to Anders for any closing remarks.

Well, I just wanted to say thank you so much for joining, and I wish you all a great summer and look forward to coming back and speaking to you again after the third quarter, after the summer. So thank you.

Thank you.