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

Ladies and gentlemen, welcome to the Intrum Q1 Call 2020. [Operator Instructions] Today, I am pleased to present CEO, Mikael Ericson; and CFO, Anders Engdahl. Please begin your meeting.

Well, good morning, all of you, and welcome to this presentation of the first quarter results of 2020 for Intrum. I'm Mikael Ericson, and we will now walk you through the quarter results and pay special attention to some analysis of the potential consequences for Intrum with a focus, of course, on our cash flow and projections for the rest of 2020. I expect this presentation actually to take a little bit more than 30 minutes. So since we have allocated 1 hour to this call, it unfortunately would be a little bit less of time for Q&A, but we'll try to manage the time as good as we can. First of all, I must say I'm actually satisfied with the results for the first quarter given the circumstances, and I would like to characterize our performance as stable in an uncertain environment. If you look at our cash EBITDA, it actually increased by 14% compared to the first quarter of last year. And if you look at the stability of the company, at the end of the first quarter, end of March, we actually had SEK 13.5 billion in available liquidity in the group. Well, since the outbreak of COVID-19, we have conducted an early management call every morning to share the development in our different markets. And we have also involved all our country managers on a regular basis and, of course, listened to their experience from the respective countries to make sure that we are on top of what's going on. So it's been, you can say, a daily monitoring of the events in the group. With that, I turn over to the first page of the presentation, labeled Q1 Highlights. This quarter has been very unusual and challenging in many ways. It has affected not just our group, but also, of course, our clients and customers. Our reported adjusted result for the quarter is close to SEK 1.1 billion, that is 19% lower than Q1 2019. But our cash EBITDA is a little bit over SEK 2.6 billion, and as I said before, 14% higher than the first quarter of 2019. And as I said in the beginning, we have ample available liquidity in the end of March of SEK 13.5 billion. In these circumstances, I think it's important to note, and we have disclosed it earlier, that we estimate that over 80% or close to 85% of our collections are actually generated through automated and online payments. And that's 73%, a little bit over 70%, of our total collection amounts generated without the involvement of legal proceedings, which tells you a little bit of the underlying strength of our cash flows. The result is affected by revaluation of a little bit over SEK 600 million and lower revenue from joint ventures. If you look at the revaluation, it reflects our expectation of delayed cash flows in the quarters to come. If you actually look at our collection in the first quarter, it is above our active forecast, and it doesn't really give an indication of a revaluation. But we take, you can say, cautious measures if we look at the quarters to come. And if you look at the collections in April, it actually indicates that our provisions is on a margin conservative. FX impacted our leverage level. And despite a strong cash EBITDA contribution, the net debt to EBITDA is 4.5 in the end of the quarter, up 0.2 percentage points. And that is due to a weaker Swedish krona. For those of you who have followed us for a while, I would like to remind you that we have changed our segment reporting starting from this quarter. The COVID-19 has a clear impact on our new segment strategic markets due to the lockdown in Spain, Italy and Greece. In the other 22 markets, we noted a more stable performance with expanding margin, France and Portugal being the exceptions. On the investment side, we note lower performance than expected, but collections are still above our active forecast in Q1. This is a good proof that we have been able to operate in all markets during this pandemic. Our diverse business model is resilient, and we note a strong cash flow generation overall. We have made an analysis of the consequences of the downturn in 2008-2009, using our current portfolio and business mix. And Anders will later take you through the conclusions of this analysis and, of course, also go through the quarter in more detail. Turning to the next slide, labeled Outlook. Now what do we see ahead of us? Europe will gradually open up in the second quarter. Already today, we have more than 50% of our staff in Italy back in the office and all 30 offices in 22 locations in Italy are open. We are following local guidelines, of course, but we actually will gradually increase the presence in the office and expect to be -- within a couple of weeks to have 80% of our staff in Italy back in the offices. Courts are also gradually opening up in the Southern Europe, and even though it will be a step-by-step approach. And if you look at Italy, for example, we expect the courts to start to reopen from next week, but the larger courts in Milan and in Rome will not open until June or July. But of course, there will be a backlog to deal with, and that challenge will be evident in all of these markets in Southern Europe. But there is a clear pleasure from the business community of not closing the courts fully for the traditional summer vacation to manage this backlog. We see limited or no impact on our pipeline for servicing contracts within traditional collections, CMS. On the contrary, we actually expect increased activity from our clients later in the year with higher volumes. Clients are expecting growing volume in nonperforming exposures in the months to come, and I think that is obvious for everyone. We are committed to our leverage target of 2.5 to 3.5 in net debt to cash EBITDA, even though we will not be able to reach it by the end of 2020. We are reducing our investment level to a level in line with keeping the portfolio stable, and we do not see any material M&A activity during the year. Many larger portfolio transactions having natural causes being delayed in the first quarter, but there are small evidence in the market of, you can say, significant price adjustment, reflecting higher refinancing rates and added uncertainty in the small number of smaller transactions that we have seen being executed in the last 2 months. To conclude, we expect continued challenges in the next 2 quarters with flat or similar result in Q2 and [ Q2 to the Q1 ], basically resulting Q2 and Q3 in line with Q1. And we forecast to be back in more normal or normalized operations in the fourth quarter. I now turn to Slide #4, Leading the Way During COVID-19. Our core values have always guided our actions. From very early on in this pandemic, our employees demonstrated a high degree of empathy towards both clients and customers. We introduced freezing of interest calculation and prolonged payment plans in some markets. We suspended our field collection activities in many markets, and we revised our written and verbal communication to be even more sensitive. All in all, our value-based approach to collections has really served us well in the last 2 months. Turning to slide -- to the next slide, Our Daily Business Operations. Since the outbreak of COVID-19, we have conducted a daily early management call to share experience, numbers and, of course, action planning. Already in January, we began instructing our staff to carefully follow the health guidelines of the World Health Organization. And in a matter of weeks, we took a further step to organize efforts in all our 25 countries to work from home. Today, we have 75% of our staff working remotely and more than 2/3 are working in our production systems all through secured connections. We have enhanced our internal communication to secure best practices shared between markets and also to keep up motivation and engagement. And you can say that our markets -- or our operations has been open in all markets during -- from day 1 in this pandemic. As I earlier said, we have been and are able to operate also in Spain, Italy, Greece, and France and Portugal who have been clearly impacted. Other markets, besides those 5, has been affected to a lesser extent. And now we see the markets are gradually opening up. And we -- of course, we are coordinating all our efforts in group level to secure that local guidelines are followed and our stock is protected. Turning to Slide 6, preparing for post-COVID-19. Before I hand over to Anders, I would like to cover some other important points. We have revisited all local and group initiatives due to new circumstances and reprioritized projects aiming at cost saving and, of course, to protect the margin in our business. At this point, we have also assessed the government support programs provided in certain markets. But as you know, this type of support offering comes with some obligations, and we are following local advice. We have applied and been approved in a couple of the markets. And of course, we see some short benefits in the second quarter to the support from local governments. I would like to point out that we are also accelerating the transformation of Intrum. We will hold on to our ambition to find solution to leverage our scale and offer cost-efficient products to our clients. The transformation aims to utilize to a much larger extent standardized and centralized solutions, both in support functions and frontline facing clients and customers. This journey has already started, and today, we operate on 1 outsourced IT infrastructure. It's actually an infrastructure who has served us very well during this pandemic, but we have also implemented, since last -- during last year, a common IT solution for HR and for sales, and we have also invested in a common telephone system in the group. This work will continue and is now -- we are now accelerating the transformation towards one Intrum. There are a lot of evidence of discussions in the markets, of course, of the consequences of COVID-19. Our clients expect growing volumes of late payments and nonperforming exposures. Intrum has a stable platform, strong liquidity and resilient cash flow generation, and we're prepared to stand even stronger from an operational perspective when the markets normalize. I think it's fair to say that the Intrum has proven to be able to handle this unprecedented time through a solid IT infrastructure, dedicated managers and loyal staff. And I would actually like to take this opportunity to thank all our employees for their fantastic contribution during these last months. And now Anders, over to you for the second -- for the first quarter in more detail.

Thank you, Mikael, and good morning, everyone. So we turn to Page 8, Group Financials in Summary in the presentation. And as you can see, in total, we do see an effect of COVID-19 into our financial results for the Q1 2020, and it's especially pronounced in the strategic markets as well as the contribution from the SPV in Italy. On a reported basis, our revenues declined 11% to SEK 3,333 million, which does include the negative effect of the revaluations of the book. On an adjusted revenue basis, our revenues grew 11% year-over-year to SEK 3,969 million. Our reported EBIT is SEK 459 million, which includes the negative revaluation effect of SEK 636 million. EBIT adjusted was SEK 1,095 million, down 19% year-over-year, which is -- or corresponds to SEK 255 million lower than last year, which is fully explained by the lower contribution from the SPV in Italy. Adjusting for that, the underlying profit contribution is up 2% year-over-year. Our reported earnings per share is a negative SEK 0.25 per share in the quarter. However, on a cash basis, our cash revenues grew 16% to SEK 5,250 million, and our cash EBITDA up 14% year-over-year to SEK 2,633 million. Our leverage ratio increased 0.2x to 4.5 in the quarter, which is fully explained by the change of the currency between particularly the SEK-euro exchange rate at the end of the quarter, which fully explains the increase in the leverage ratio. Our net debt at the end of the quarter is SEK 51.3 billion, which is an increase of SEK 2.2 billion, which is, as I said, driven by the translation from -- particularly from euro to SEK. On an FX adjusted basis, we actually did reduce the net debt in the quarter by about SEK 200 million. Looking at the segments. So moving to Page 9 in the presentation, which is now, according to our new segment disclosure, our Credit Management Services segment, which is the servicing in the 21 markets not included in strategic markets, we saw a limited impact of COVID-19 in the quarter with stable performance and expanding margins. Revenues declined 1 percentage point to SEK 1,705 million. On an FX organic underlying basis, that's a negative 4%, which does reflect the challenges, specifically in France and Portugal from COVID-19. Service line earnings, on the other hand, was up 2 percentage points year-over-year to SEK 420 million, which corresponds to service line margin increase of 1 percentage point to 25%. Cash EBITDA contribution from the segment was SEK 499 million, minus 1% year-over-year. For Credit Management Services, as also Mikael commented upon, we are cautiously optimistic regarding the outlook for CMS in many markets, where we do expect to see increased CMS volume flow in the coming quarters. Moving to Page 10, strategic markets, which is the servicing business in Spain, Italy and Greece, we do see a significant impact of COVID-19 in March. Revenues are up 81% to SEK 1,194 million, which is driven by the acquisitions in Spain and our platform in Greece. Our service line earnings, though, is SEK 102 million, down 1 percentage point year-over-year, which corresponds to service line margin of 9%, down 7% year-over-year, down from an already challenging quarter 1 2019. However, the cash EBITDA contribution from strategic markets was SEK 328 million, up 24% year-over-year. Clearly, COVID-19-driven lockdown in these countries in the South Europe had a pronounced negative effect on the business in Q1. In quarter seasonality, if you will, the March is normally the strongest quarter -- or strongest month of the quarter. And clearly, with a strong effect of the lockdown in March, it did have a meaningful impact on the quarter overall. In April, we are -- we continued to see a challenging operating environment whilst we are now seeing the gradual reopening with courts activity resuming in May and June, which makes us more optimistic for an improvement in the coming months, as the majority of the clients we serve in these markets are secured and rely on the courts being effective. Moving to Page 10 (sic) [ Page 11 ], Portfolio Investments. Portfolio investments saw a limited impact in March of COVID-19. Our gross collections for the quarter increased 7% year-over-year, and revenues adjusted came in minus 4% to SEK 1,721 million, which is driven by higher amortization and lower REO sales activity despite an increase in gross collections. The earnings from JV contribution was down SEK 279 million to SEK 81 million in the quarter. However, the cash flow from the JVs increased to SEK 152 million. Service line earnings for the total portfolio investments was down 20% to SEK 1,037 million, and cash EBITDA for the segment was SEK 2,239 million, up 14% year-over-year. Return on investments for portfolio investments on -- adjusted for the book value revision is 11%. And if we look on the underlying, excluding the SPV, it was 13%. New investments were -- in the quarter were SEK 1,650 million, and we invested predominantly in the northern half of Europe. Book value at the end of the quarter was SEK 36.3 billion, up 16% year-over-year. For portfolio investments in the quarter, we do have a revaluation of SEK 636 million, which corresponds to approximately 1.8% of the book value and is approximately 2x the normal quarter. We also do have -- we have no upward revaluations as we have normally had in most quarters due to the uncertainty of COVID-19. It is important to note, as also Mikael was referring to, that the revaluations are based on our future expected performance -- collections in the coming quarters, and it's not based on underperformance in Q1. We do expect to see a delay in collections with the most pronounced effect in Q2 and Q3 2020. Also, it's important to note that our experience points to that we will recapture those collections over the life of the portfolio. So from that perspective, it's a matter of a timing effect. In terms of market look, we do see many transactions delayed at the moment into the second half of 2020, and we do expect significant volumes in the fourth quarter and moving into 2021. In terms of return on investment, or IRR, on transactions completed since the COVID-19 outbreak, we have seen materially higher IRRs, but it does remain to be seen if the market will stabilize at these new levels once the dust settles. Moving to Page 12, Portfolio Investment Collections versus Active Forecast. In Q1 2020, our portfolio performance was 103% versus active forecast. And in March, our portfolio performance was 100%. In April, we do see collection levels, which are in line with our 2019 collection level, but although they should have been higher due to the investments made and the growth of the book, which is clearly the effect of COVID-19. But it's also clear that the impact is concentrated in the most affected markets in Southern Europe, whilst Western, Eastern and Northern Europe see a very benign impact. And that is, obviously, supported by the fact that we have 73% of our collections in total based on amicable collections and 85% of the payments generated from automated or online payments providing stability of the collections. If you look on the right-hand side, experience from previous crisis show that we would -- in a crisis scenario as similar to what we're looking at now, we would see an initial drop in collections at the onset of the crisis but with a subsequent recovery. The chart on the right overlays the 2008-2009 experience on our current portfolio shape and size. As you can see, we would move from a position of outperformance to a temporary position of underperformance. It is important, though, to see that the chart is cumulative. So as you can see, already at the 12 months, we reached the inflection point, and after 24 months, we are back to the active forecast in totality in total cumulative collections. Also, as you can see from the chart, over the life of the portfolio, we do not expect to lose any collections, which supports our view that this will be a delay in the timing of the collections. Moving to Page 13, Cash Flow Evolution. In the first quarter of 2020, our cash flow was SEK 2.3 billion, up 68% year-over-year. That was supported by strong cash EBITDA of SEK 2.6 billion, up 14% year-over-year as well as positive development of our net working capital. On a rolling 12-month basis, our cash flow is SEK 8.3 billion, which corresponds to a 15% CAGR since the combination between Intrum Justitia and Lindorff. And our cash EBITDA is SEK 11.5 billion corresponding to 14% cumulative annual growth rate. Looking at the cash generation of the group, cash revenue in the rolling 12-month basis is SEK 20.6 billion (sic) [ SEK 20.9 billion ], and our cash EBITDA, excluding the pro forma for M&A, SEK 11.0 billion. That corresponds to cash EBITDA margin of 53%. If we deduct the interest, tax and other noncash items in CapEx, that leaves us with SEK 7.7 billion of free cash flow. That is more than sufficient to cover our portfolio investments, our dividends and our buybacks. Moving to Page 14, Funding Sources and Maturity Profile. We are very pleased with the reshaping of our balance sheet that we did in 2019. We now have ample liquidity of total SEK 13.5 billion at the end of the first quarter 2020. We also have ample headroom under our covenants. On the right-hand side, you can also see our maturity profile, which shows that we have limited maturities in the next years, which means that we have sufficient capital generation and liquidity to meet all upcoming maturities and makes us independent of the capital markets for the coming years. We move to Page 15, Net Debt and Illustrative Impact from New Investments. As we stated, our cash EBITDA for the rolling 12 months is SEK 11.5 billion, and our net debt is SEK 51.3 billion, corresponding to a leverage ratio of 4.5x. However, that does include also our investment in the SPV in Italy. Our SPV in Italy, obviously, was an upfront investment, but has contributed limited to our cash EBITDA in the period. If we exclude the leverage contributed from the SPV investment, our underlying leverage ratio is 4.1x. And the SPV leverage itself, so the leverage that is remaining in the SPV itself, is currently standing at 2.4x, which means had we consolidated actually the SPV, we would have a meaningfully reduced the group leverage ratio. Clearly, Intrum has had elevated leverage ratios since -- over the recent periods due to the significant business expansion since the merger between Lindorff and Intrum Justitia in 2017. To illustrate the impact of growth in portfolio estimates, we wanted to present you with a worked example. So on the right-hand side, you can see that if you imagine that you buy a SEK 1 billion portfolio at 14% IRR and you fund it fully with a drawdown from RCF. Clearly, immediately after buying the portfolio, it does increase the net debt-to-EBITDA ratio and as we only gradually recognize the cash flow into our cash EBITDA. But already at 12 months, so in what is labeled Q4 in the chart, you can see that it goes down rapidly to 2.7x, which means that it is actually accretive to our leverage ratio already within 12 months. And it's actually also at the lower end of our long-term target leverage ratio range. So to wrap up this section, moving to Page 16 in the presentation, Resilient Business Model Through the Economic Cycle. Now in a shifting economic environment, we see the benefits of the integrated business model and the resilience through the cycle. Clearly, in the up cycle, we have experienced that over the last few years we have benefited from lending volume growth, increasing debt sales, strong repayment capacity and back book collectability. But also, we have seen limited new case inflow in CMS, and we've also seen expanding credit lending criteria. So now when we say it's a down cycle, we say that we expect higher NPL formation, increased case flow into CMS and demand for our services, but also more challenging collection rates. So overall, we see that these factors help to balance the peaks and the troughs of the cycle, creating a more limited cyclicality environment as we have both legs to stand on. And with that, I hand it back over to you, Mikael.

Well, thank you, Anders. And let's then turn to Page #18, Short- and Medium-term Focus in 2020. Our first priority is the well-being of our employees and, of course, mitigating the headwind that we experienced in the market. We track the health of our employees on a daily basis, and we pay special attention now when offices gradually open up again. It requires adjusting the working environment to local requirements, to secure the health of our staff. At the same time, we focus on both short- and mid-term actions to mitigate the effect of COVID-19. We are reprioritizing our initiatives to save cost with the ambition to restore the EBIT margin in 2021. We're also utilizing 2020 to accelerate the transformation of Intrum, as I've talked about before. As you remember, we entered 2020 in fairly good shape after delivering on an efficiency program in the second half of 2019. Reaching our target for 2020 that we stated in 2017 required a flawless execution, and we felt in the beginning of the year that our targets were within reach. Today, it is obvious that it will not reach our targeted EPS level in the end of 2020. Besides focusing, of course, on the short-term cost initiatives, we will also use 2020 instead to accelerate the transformation of Intrum that was initiated last year and led to the reorganization of the group that we have disclosed -- that we have talked about today. The transformation includes utilizing standardized and centralized resources to a much larger extent, both for support and front office activities. And it will allow Intrum to leverage our scale from all our markets and deliver cost-efficient solutions to our clients and secure our market-leading position. We will continue to build on our position as the preferred speaking partner to large financial institutions throughout our markets. We have not abolished our leverage target. The target is still to be at a net debt to cash EBITDA between 2.5 to 3.5. We will not reach it in 2020, but the ambition is there, and the target is clear. As you know, we have postponed our Capital Markets Day to after the summer. We will then take the opportunity to talk more about the transformation of Intrum and the long-term impact. And we will also give you new guidance for both our growth and EPS ambitions. We will see new nonperforming exposures being generated in Europe in the aftermath of COVID-19. That will drive additional demand for our services in many markets in the years to come. Intrum is very well positioned to capture that opportunity. We are prepared to meet that demand. With that, we complete the presentation, and I'm pleased to say that we didn't use that much more than the 30 minutes, and we open up for Q&A.

[Operator Instructions] Our first question comes from the line of Ermin Keric of Carnegie.

So just the first question, when you guide for flattish adjusted EBIT for Q2, Q3 versus Q1, should we expect any larger difference to the underlying cash flows relative to Q1? And also any larger difference in the composition between the segments?

Well, perhaps I can start by saying that no -- that's correct, we are guiding towards a flattish adjusted EBIT for Q2 and Q3. And also, as I guided towards -- we are currently experiencing collection rates, which are in line with 2019 performance as we saw it at the time, which does also point to a relatively flattish cash flow profile. However, it is -- it may not be completely in sync. As you know, it does differ from time to time. But -- so directionally, I think it's the right guidance.

Okay. And then you did some buybacks during the quarter and start of Q2. Could you just talk us through sort of how you're thinking between pursuing more portfolio investments and growing your own book relative to buying back the shares?

It's Mikael here. No, I think that's, of course, a relevant question. And with the kind of liquidity that we actually have in the group, of course, we are always balancing different investment opportunities, and one of them being actually buying back shares. And at the time, we saw that buying back shares actually created a very good and healthy value for us. And going forward, it actually depends on where the market will take us. And this is always the balance that we and the Board will do whether -- how to allocate the capital. So if you look at it, the buyback of shares was not something that on top, it was part of, you can say, our investment decision, basically investing in our back book, which we at the time saw as the best investment we could do.

Wonderful. And then in terms of the CMS and strategic market, would you be able to share sort of how much of your revenues that are based on sort of base fees in terms of your AUM rather than collection performance that we can sort of see as stable regardless of how performance developed in the short term?

We don't provide that level of split of the revenues into our servicing businesses. But I think that the pattern that you have seen is ultimately very stable performance in the CMS side of the business, whereas the strategic markets servicing has been much more significantly impacted because of the knockdown in the Southern European markets. And that tells you that the variability -- it has a significant component of variability driven by success that is effectively being dependent on resolutions through the court system.

And then just one last question, if I may. So you say that the leverage target is still intact. But in reported, it seems like you're aiming to reach it basically by 2022. So should we read into that, that you rather see 2021 as a sort of golden opportunity to rather grow your book at attractive returns? Or how should we read into that, given that you think operations will be at least closing in on normalization by Q4 this year?

No, I think it's a way for us to basically communicate that we are -- the leverage target is still there. We feel that we are taking a cautious approach in these uncertain times. We did, as you know, a revaluation of the portfolio based on our expectation of delayed cash flows going forward, not really in terms of what we saw in the first quarter in terms of collections versus our active forecast. And in that sense, we try to be cautious also in our projections during 2021, 2022 at this stage. But of course, we will see growing volumes, but it is important for us to underline our commitment to the deleverage target in itself.

Our next question comes from the line of Johan Ekblom of UBS.

The cash flow and the buyback, I mean, so on Slide 13...

I'm sorry, you're breaking up. We could just hear a couple of words there.

Can you hear me now?

Now I can hear you.

Perfect. I just wanted to come back at first to the free cash flow on Slide 13. So you're saying that there is SEK 7.7 billion of free cash flow. And if I think about the uses of cash, you have buyback and dividends committed about SEK 2.5 billion. You're saying you want to keep your book stable, which I guess is another SEK 4.5 billion or something like that of investment, and you have SEK 1 billion of repayment, yet you are far away from your leverage target. How do you justify the buyback when it would seem the market would want you to focus more on reducing your leverage? But clearly, you don't think that's important to accelerate that process. So I just wanted to see kind of why you're comfortable pushing out the reduction in leverage given where your bonds are currently trading. And then I guess related to the investment part, how do you think about the longer-term financing costs? I mean, clearly, the -- where bonds are trading today, it would be hard to make the math work. I guess we can assume some kind of normalization. But what's your thinking long term in terms of cost of debt. And then the second question is just a quick one on -- you showed quite a large reduction in the leverage in the SPV in Italy. But if I look at the annual report, I think the debt in the SPV fell by 12% during 2019. And I'm just struggling to square that with what you've said about reducing leverage rapidly in that portfolio. If you can comment on what I'm missing there, that would be great.

Shall I start and then Anders complement my answer because that was a long question and several of them, Johan. So let's get some time to -- no worries. But if you look at the beginning of it, I mean, if you look at the balance between different investments, I mean, buying back shares at the time looked like a very good investment. If you look at it from my perspective or Anders' perspective or the company's perspective, we will always like to invest more in, you can say, our clients and in portfolios. But this is a balance that we always do, what is the most relevant and create best value for the company. So buying back shares come at the expense of, in that case, buying back -- buying portfolios, doing other types of investments. Then you have to remember that we actually have a rapid growth in our cash EBITDA, supporting the deleveraging target going forward. What we see now is a delay in that process. That is unfortunate. But you shouldn't look at the buyback of shares as on top of everything else we do. It's actually the balance between different parts of investments that we do. And what we actually do is we are investing in our own back book, which we clearly see has a very strong and high value in itself. Anders, do you want to continue and complement that answer?

Sure. I mean also to your sort of second question, if you will, in terms of long-term financing costs, clearly, we are committed to reaching our longer-term leverage targets. I think what has been clear on the -- with the advent of the COVID-19 crisis is that the deleveraging path will be delayed, but that does not mean that we will not continue on that path and reach those targets. We gave the guidance that we, in our view, will be able to reach that at the end of 2022, and there will be a path from current levels down to the target range over that period. That will, in our view, support our cost of funding, if you will, in the long-term to reach those levels, but also, it's important to state, which is, I think, evident from the presentation that we've given that we are independent of the capital markets for the next coming years, which means that we do not have any need to go out and refinance any maturities for the next years, which will allow us to reach our target range well in advance of needing to do any finance operations. Where that level will clear at the end of the day, it's very difficult for us to have a view on in the light of the current turbulence. So I think anyone's guess is this -- can guess what that -- those levels will be. But clearly, we will continue to be on that path and be firm on that path to our target range in the medium term. And then in terms of the specific question about the SPV leverage, perhaps, Viktor, you can walk through that quickly with the group.

Yes. Sure. So I think if you look, Johan, on Slide #15, we've tried to help you on modeling the SPV and where we stand today. And obviously, it has been a good deleveraging from about 3.5 in mid-2019 to the 2.4 level where we stand today. And if you look at these numbers and also the LTV of the portfolio and combining what you have in the notes in the annual report, I think you can actually crystallize the cash flows coming out of that. And you mentioned the net -- the debt was reduced by about 12% corresponding to SEK 2.7 billion or so. And then you should also bear in mind that the cash flows were also used to increase the cash position by about SEK 500 million. And then there's a minor impact from FX of about SEK 0.3 billion from working capital, and we also paid, of course, our interest. And so that is all specified, and you can see that it's accumulating it up to a cash EBITDA of just south goal of SEK 5 billion, if you do the math on that, and that would actually correlate with what you see in the balance sheet. You can take additional details off-line if you want.

It's also important to note that what you stated as interest-bearing liabilities of the Italian SPV in the annual report is not the senior debt, but it's a total interest-bearing liabilities from a definitional point of view in the vehicle, part of which is part of the equity because of the capital structure of the SPV. What is relevant is the senior funding infrastructure, which is a much smaller number than what is in the annual report. But perhaps, Viktor, you can also give an off-line explanation if needed.

Yes. I mean if you could disclose that senior number in the quarterly or annual report, that would probably help us. And then just a final quick question. You said that you might be -- or you will be making use of some of the government furlough schemes, et cetera. Have you done that in Sweden? And what's the comment then if that's the case around your dividend and buyback?

We have not done it in Sweden. It's just a couple of countries where we have used it, but it has come with, you can say, local obligations in some of securing contracts for employees.

Our next question comes from the line of Robin Rane at Kepler Cheuvreux.

Yes. On the negative revaluation of -- that was made in the quarter, can you say anything about the geographical breakdown? Maybe you did, and I missed it, but any color on the geographical breakdown on the portfolio negative revaluations? And then secondly, also on the revaluation. So you say that you -- this reflects your expectations for 2020. And my interpretation is that -- of that is -- and also your comments from your presentation is that you don't really -- it's a delay, but not a lower total amount of collections that you forecast. However, is there any worries at all you think from lower recovery values on the secured portfolios should, for example, property prices go down and so on in these, say, Spain and Italy or other countries?

Perhaps I can comment on that. If you look at the geographic breakdown, obviously, we have reflected our expectation of a more significant impact, which is consistent with the comment I made as I went through the Page #12 in the presentation that we see quite a concentrated effect in the markets in Southern Europe. So from a revaluation point of view, the revaluation reflects, call it, geographic view with a much more benign impact in the northern half of Europe. So what it means is that northern half is significantly less impacted. So from a totality of impact point of view, we do see a significant impact in Spain, Italy, Greece, France and Portugal. And I would say that is -- this will have, obviously, a disproportionate portion of the total revaluation in the quarter. But it is, obviously, spread across all, but with -- in relation to the severity and expected severity of the COVID 19 impact. As for the comment on secured, clearly, it also covers secured exposures, and we have taken into account that there will be potentially an impact on [ HPI ] in the markets where we have secured exposures. But do remember that 80% of our book is unsecured and only 20% of the book in total is secured and that's also, obviously, reflective in the total contribution to the revaluations in the quarter.

Our next question comes from the line of Maths Liljedahl of Handelsbanken.

Most have been answered, but a follow-up to Johan, perhaps. In terms of rating agencies, I see that you are a negative outlook from both S&P and Fitch. How is the dialogue with the rating agencies considering the share buybacks? And I know they had -- in the previous comments, they said that leverage was really important. Now you postponed it. How is the dialogue going with them? And also, in terms of -- does the rating matter in your terms of negotiating with the banks when they are especially doing forward contracts? I also see your CDS, which is more on screens, but it's going through the roof at 1,100 basis points or so. If you could shed some light on that, it would be helpful.

Maybe I can answer that. And in terms of rating agencies, we clearly -- we have an active dialogue with all 3 of them. It's a positive and constructive dialogue, and we continue to do so. Clearly, they have -- or 2 of them have come out with rating updates during the crisis. And we, obviously, take that into consideration in our deliberations on how to allocate our capital. And also, it is important for us to demonstrate continued deleveraging to our long-term target range, which is obviously part of that discussion of equation as well. In terms of -- sorry.

The importance of a rating or CDS level or whatever, especially when you negotiate longer forward flows.

From a market point of view, clearly, we are one of the -- we are the largest and viewed by our clients as a stable and important counterparty for them. Clearly, it is important for us to be there for our clients and demonstrating a strong balance sheet position for us is important in these times to be able to be there for our clients also in times of stress like the one we're currently seeing. In terms of forward flows, we have a very cautious approach, we have had for a longer time now, a very cautious approach to forward flows per se. And we are very selective about the counterparties, where we have a forward flow commitment. So it's a smaller -- a minor portion of the total capital commitment in any year is the forward flows, and we only do it with our, call it, long-term partners, where we have more of a strategic client relationship. And in those instances, it clearly is, from relative to any of our peers, I think we have a positive stance in the view of our clients relative to the industry.

If I may add to this, Maths, if you look at it, I think one can take some comfort in all the activities we did last year on the balance sheet, refinancing the group and, you can say, to some extent, prepare the balance sheet and today, as Anders has talked about now a couple of times, more or less independent of the capital markets for a number of years to come. And we also exit the first quarter with a very strong liquidity position in the group. That, for us, is a clear evidence that we have a strong position going forward and the one we take comfort in.

Yes. Okay. And if I might just follow up on revaluation, you did SEK 636 million this quarter, and you still have SEK 36 billion in the portfolio. Was that -- I mean, obviously, that was made as of closure of March. And we -- I would guess that asset values haven't increased since during April. So could you just confirm the timing -- the exact timing for that revaluation was end of March? Or how should I see?

Yes, that's correct. I mean we do a valuation, as you know, by quarter end. But as we now said, it's important, when you look at actually our performance in the first quarter and our collections versus our active forecast, that doesn't imply that we needed to do a revaluation in the first quarter. We actually performed above our active forecast and in line with our active forecast in March, as Anders was saying earlier. But we have been cautious in this, and we have accounted for delays in our cash flows in the quarters to come, and we do a revaluation of the book close to 2% of the book value. And by then also doing no positive revaluations, basically expecting a delay in the cash flows. If we look at the performance in April and compare that, we can say that, that provision that we did in end of March term is actually on the margin on the conservative side. So also today, we are comfortable that, that revaluation has fully captured the delay in the cash flows that we expect in the portfolio.

Our next question comes from the line of Ramil Koria at SEB.

A lot of questions have been asked. So let me try to get some details on some of them. On sort of the modeling of asset quality on the secured side and potential sort of deterioration in asset prices ahead, understood. But on the remaining 80% on the unsecured side, what has been assumed in terms of unsecured performance, squarings of unemployment rates and fiscal policies so far covering the decreases in household income?

Look, we have made an assumption based on our experience. We have a lot very significant amount of data going long period back in time. Clearly, we have, in particular, a significant part of data from the financial crisis granularly by asset class and by country and type of claim at the time. We have used all of that data to also reassess the unsecured book to see what could be the impact of a crisis like the ones we're facing now. And as I also showed in the chart in the presentation how that plays out in terms of timing. Clearly, we're seeing a very rapid decline, much faster than in the financial crisis in 2008-2009. But it does, obviously, help us in the modeling and, obviously, overlaying the current shape of the book to get us to a forecast for how this can play out over the coming quarters. As Mikael was stating, the current trading and the collection levels that we see in April are slightly in excess of those assumptions, and we are modestly optimistic about an improvement over the coming months, which would support the fact that we are being on the conservative side with the total value of the revaluation also on the unsecured book.

Got you. And I mean, just finally, in terms of seeing some signs of CMS volumes increasing, please remind us how do discussions typically go? When -- at which point do you receive the volumes? And I mean, how should we sort of model that for the coming few quarters here do you think?

This is, of course, a difficult question. You can hear that we talk about our own expectations as such. We have, of course, regular dialogue with all our clients. And I'd remind you, we have more than 80,000 clients throughout Europe, everyone from small entrepreneurs up to large financial institutions. And it's -- I think it's fair to say it's very early to draw any conclusions on this. We follow our pipeline on a weekly basis on group level and what we can say is if we look at our pipeline, we see no deterioration in our pipeline in terms of servicing contracts and dialogues with our clients at all at this time. But on the contrary, we have anecdotal evidence, of course, around the markets with our country managers of active dialogues with our clients, that they are looking for more kind of long-term solutions, and that they are considering different actions, given that they see for themselves more difficult times ahead. So our conclusion, but, I mean, it is a conclusion and expectation, is that we will see growing volumes coming through, especially in Q3, Q4, leading into 2021 and more active dialogues with our clients. And I think that works well in hand with what we see in different comments in the different markets about the more challenging times that is ahead.

Our next question comes from the line of [ Helen Rodriguez ].

Can I please ask just going back? I know you've talked about the buyback, but it just from a sort of overview, and it was a time in the market when most companies, big U.S. companies were growing down their liquidity lines. We've had everybody applying for government schemes and so forth. So I'd just like to sort of hone in on what the thinking of the Board was in doing the buyback at a time when everybody else was really thinking about protecting liquidity? And what the thinking was? I mean I get that you're saying that it was an investment and so on, but it was just such an unusual time to be doing such a thing. And I just wondered exactly why the focus was so much on the equity price at that time rather than necessarily thinking about prudence and so forth? And then second question would be, so you've done your stress test and so forth, and you were sort of parallelling to the financial crisis, but it's also the case that people are saying that this is unprecedented times. So the example of the financial crisis really may or may not be that relevant. Just want to understand, in your downside scenarios, what GDP and what disposable income cuts are you assuming? Because you're saying that your servicing guys are looking at more of the difficulties ahead, but that doesn't seem to be modeled necessarily in your view of your unsecured book and your valuations.

All right. I'll try to comment on the first one and, Anders, you take the second one. Just reiterating, I mean, we have a mandate from our shareholders we got the last year to buy back shares. So it's part of the different investment alternatives that we have in the group. And we balance that with M&A carve-outs, investment in portfolios and buying back shares. And every single time, we look at different alternatives and how to use that investment capacity. And at this time, it seemed to be the best investment that we could do, and that was to...

Yes, sorry to interrupt. I mean I get that it was a good investment in theory, the timing of the investment that was so unusual. That's what I think people struggle with. Why did you have to invest anything at all at that moment?

Yes. But I'm just coming back to the same answer. I mean it is a judgment call that the Board is doing at every single time. And at this time, it was deemed to be the best investment that we could do. Anders, would you...

In terms of the service scenario analysis, clearly, we have done a very significant amount of stress testing. We did it back in March at the time of the revaluations, we'll continue to update that as we go along. That -- we don't work with one scenario, we work in a range of scenarios, including ones which are significantly more challenging than the ones that we are currently seeing come out in terms of -- if you look at the economic predictions from various institutes. I think that the scenario that is on the basis of the book value adjustment that we did was a cautious central scenario, if you will, at the time, which, I think, now as we received more data over the last 6 or so weeks, proves to be on slightly the conservative side compared to the scenarios that we are seeing in terms of GDP and unemployment development. It is also a reflection, obviously, of the totality of the economic development across the 24 markets where we operate. And we are seeing clearly that some countries are facing a more challenging environment, but also we are seeing that a significant number of countries are actually facing a much more benign development than we had in our stress tests. So I think it's -- there's a range of clearly outcomes that we have been working with. We've also been working with -- what is the ultimate output is in average for the group in total. But given that we are actually seeing a more, call it, benign outlook for many of the countries in the northern half of Europe compared to what we had in our scenarios, that actually helps to balance the scales, if you will. So I think that -- which means that we are slightly on the conservative side.

And our next question comes from the line of Alexander Nordhagen of Goldman Sachs.

Just a couple. I noticed that in April, you said collections were in line with last year. But your -- I mean, one, I don't know what collections were in April last year, but your portfolio is 13% higher year-on-year. So I was just wondering if you could give us a little bit more color on what collections are like in April perhaps versus March to begin with.

No, we don't give specific month-by-month guidance like that, but I'd give at least some form of benchmark and, obviously, everyone can see what our collections were in Q2 last year, we -- it demonstrates that we are on the track which was last year, and we are also seeing that we have slightly more optimistic outlook for May and June compared to April. And also, remember, April is also very short month with Easter in the middle of it and so forth. But it -- the comment is there to give a little bit of guidance in terms the totality of the outcome in April and sort of for people to be able to quantify it somewhat. But as I said, I think the outlook for May and June are, relatively speaking, compared to April, looking more positive than what we saw perhaps going into April a month ago.

Okay. So I would -- I mean I would guess that since your portfolio is 13% bigger that your collections are probably 13% or 14% or 15% lower than you would have expected them to be in April. Would that be fair?

Well, as I said, we don't give those numbers specifically, but it's a reference to be able to -- for people to have something to hold on to by referring back to our collections of Q2 last year.

Okay. Great. And then just on purchases this year, is there any guidance you can give us on what your portfolio investments might be for the full year?

Well, what we have guided towards is that we now, at the moment, at least, as long as we're in this uncertain environment, reduced our investment pace to what is effectively a maintenance level, which means that we're covering our replacement rate, which has fluctuated a little bit, but is approximately in the area of SEK 5 billion per year. It's not an exact guidance clearly, but to give people an understanding of which sort of ballpark we're talking about.

Okay. Great. And then maybe just more of a housekeeping one. On Slide 12, on the right-hand chart, I was wondering if you could just tell me what the Y axis is. Because to me, it looks like you might be saying that your collections are in line with your forecast so far or would be and I don't think that is what you're saying. But yes, if you could explain that chart a little bit better on the right side of 12, I'd appreciate that.

Yes. It's -- the line is cumulative, right? So the trough versus the active forecast means that there is a relative underperformance in the early 12 -- first 12 months. But then you see the inflection point where it starts to go up towards this active forecast again, which means that you have a dip in the first 12 months and then you have a relative outperformance starting to kick in after 12 months, which means that you effectively recovered to the active forecast after 24 months. That's the experience from the financial crisis. I think I was also confident, but clearly, this is very -- this is a new crisis. This is not a financial crisis, but it clearly gives us some guidance to the point, importantly, that we do see that we will catch up the collections over time, and that is more of a timing of collections. In terms of the exact numbers, clearly, I think the guidance that we were just giving in terms of the level of collections in April, which appears to be, at least, so far the most challenging month. It should give you a quantum of impact in total from the top, and then we should start to see a gradual improvement.

Okay. Great. And sorry, my final one. Just with respect to the way the virus spread through Europe from the south to the north, and I think Italy, you can just say, was first there, and it looks like the U.K. is going to be the last to get out of this. Have you seen the collections dip in accordance with that? So perhaps Italy was first impacted and the U.K. still is? Or is it not quite that simple?

It's not quite that simple because it also depends actually more about the composition of the payment flow. And as I commented upon, we have a very significant amount of automated and online payments based on payment plans, which means that there is a very strong -- but that composition differs by country. We have a much more automated infrastructure in the northern half of Europe compared to the south. That's also why you did see a higher degree of manual payments and the restrictions in the economies of the Southern European part impacting to a greater extent than what you have in north part, which also contributes to the stability of the unsecured payments in the northern part of Europe. So no, it's not quite as simple as saying that it's not one-for-one with the spread of the virus. It has much more to do with the collection infrastructure and the level of automation in the system and the amount of payment plans. It's also fair to say that we've seen negligible impact on default rates in our payment plans in this period.

Our next question comes from the line of Gurjit Kambo at JPMorgan.

Most of my questions have been answered actually. Just got one follow-up. So just when we think about the sort of guidance sequentially for sort of stable adjusted EBIT and then the comment around year-on-year collections broadly stable in April. So obviously, year-on-year your EBITDA is going to decline pretty significantly. So I'm just trying to square up the year-on-year flat collections versus, I guess, the flat sequential EBITDA guidance.

Sorry. I'm not quite sure I know what the question is.

I guess are you sort of saying, if you look at the year-on-year EBITDA profitability, clearly, it will decline pretty significantly? But whereas you're saying the collections year-on-year have been pretty stable. So I'm just trying to -- would that imply that sequentially you should -- you would see some improvement there? Or are you sort of saying that maybe May and June could deteriorate year-on-year?

No, I'm not saying that collections will deteriorate year-on-year in June -- May, June. On the contrary, I think that we have a positive development year-on-year in May, June, because they're looking at current view of where the market is going. So I think we were in line in April. I think we have a more constructive view on May and June. And our guidance is clear that we are expected, on an adjusted EBIT basis, to be on a sequentially [ high to flat ] development into Q2 and Q3.

Okay. Fine. And then just one quickly on the tax rate. I know the guidance is 20% to 25%, but just sort of nearer term into 2020, is there some sort of deferred tax assets you can get benefit from in the short term, which will perhaps bring that towards the lower end of that guidance?

Look, we continue to guide in that range. I think if you see, most of the quarters, we have been in around middle of that range. We were so also in this quarter, clearly, with the reported loss that became a positive from a tax perspective. But we continue to guide in that range and towards the middle of that range.

Our next question comes from the line of [ Sonal Sodhi ] of Morgan Stanley.

Can you hear me now?

Now we can hear you.

So first question is again just going back to Gurjit's question on Q2 adjusted EBIT. So last year, adjusted EBIT was around SEK 1.5 billion. So you were saying this year, it's going to be in Q2 around SEK 1.1 billion, which is the level of Q1. So where is the difference of that SEK 400 million coming from?

Look, I think that we have also a different composition of the business to some extent compared to Q2 last year. So you need to take that into account as well because you also have some of the markets which have, call it, a lower contribution in Q1 that are part of the mix now in Q2 that also were not there in Q2 2019 outside -- particularly in the strategic markets. So I think that -- it's not a 1-point answer, but there's -- I think it's quite a clear guidance in terms of the total adjusted EBIT and also from a collection point of view what we're seeing on our own portfolio. But clearly, there are also parts of the business which are seasonally contributing in the second quarter compared to the first. So there are some competition differences in the guidance, but we've given the guidance as a total.

Because if I look at Q1, the entire difference of Q1 '20 versus Q1 '19 is because of the decline in earnings from the joint venture from SEK 350 million odd to SEK 80 million. So that's basically all your decline in adjusted EBIT in Q1. So if -- so should I assume that basically another SEK 350 million that was there in Q2 from the earnings of joint ventures, that is basically going close to 0? Because you're saying on your own business, if I exclude the JVs, you're doing fine in terms of collections both on the core CMS side and on the portfolio side. So basically, that's the big delta year-on-year that the earnings from joint ventures are going to be severely impacted also in Q2?

Clearly, we do expect Q2 to be challenging for the SPV [indiscernible] as well. That's obvious. Whether exactly it will be the same result as in Q1, I cannot comment on, but I wouldn't expect it to be lower than Q1.

And just lastly, in terms of the leverage, so you're at 4.5, so any sense that you can get -- give us in terms of how that will go through the year and where you expect to end up in ballpark ranges for end of 2020? Any guidance would be helpful so that we can start building a bridge towards your 2.5, 3.5 in 2022. So it'd be good to know what the near-term target is also. So we know your commitment to leverage versus other investment opportunities.

No, I think, on the activity, it is clearly challenging to see deleveraging in 2020. But clearly, going into 2021 and 2022, we do expect to see the deleveraging resumed to reach our targets by the end of 2022. Hopefully, that helps...

Our next call...

We are now coming -- we are 15 minutes after the end of time, do we have many more questions now or...

We do have 3 people still in the queue.

All right. So let's -- I hope we can run -- so I don't have to cut anyone off. So you have to be mindful of the time, please.

Sure. The next one comes from the line of [indiscernible].

Quick question. Can you just advise within your larger markets, what is the regulatory regimes allowed in terms of payment holidays for the consumer?

I mean we follow this, of course, closely in all our markets, and that is also part of our normal kind of forecast. But operating in 25 different markets, there are different, you can say, situations in all markets. Overall, I would say, it is a -- not a material impact on the business as such because many of those type of initiatives that you see is directed towards performing loans, not through nonperforming exposures. On the contrary, we see actually quite a lot of activity. I had seen for quite a long time now from regulators pushing and actively trying to deal with the nonperforming exposures in the different markets.

And our next question comes from the line of Rickard Hellman of Nordea Credit Research.

Based on your holistic view on investments, have you evaluated buying back bonds as well? And are you allowed to do that? Or are you restricted anyway with your RCF?

I can answer that. No, we're not restricted in any way to also look at buying back bonds. We are considering all the investment opportunities and evaluate them at all times now. And clearly, that has been one of many, including the investment in portfolios and the share buybacks that we have looked at and considered, and we don't preclude that, that can be something to consider in the year to come. But it's nothing that we have actioned upon at this point.

And our final question comes from the line of Johan Ekblom of UBS.

Apologies for having a quick follow-up. But can you just detail what the revaluation impact was on the Italian SPV portfolio?

No, we don't disclose that separately, but there is an impact of also an adjustment in the SPV in the quarter, yes.

And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.

All right. Thank you very much for taking this time to listen. I hope that you all appreciate that we have increased our transparency in this quarter and also given some more firm guidelines for the rest of the year. I think as a final comment, I would say that we are actually satisfied with the first quarter given the circumstances. And we think that Intrum actually exits the first quarter in a clearly stable position, with strong liquidity, with SEK 13.5 billion as available liquidity. A refinanced balance sheet would make us independent of the capital markets. And we are actually well prepared to meet continued demand in the marketplace going forward. But with that, I thank you all for participating, and I'm sorry for us taking more than 1 -- close to 1.5 hour of your time, but I hope it's been valuable for you all. So thank you very much. And have a good day.