Intrum AB (publ)

Good morning, everyone. My name is Anders Engdahl. I'm the CEO of Intrum. And with me today, I have Michael Lederner, our CFO. And I'm happy to take you through the third quarter 2021 report. So if we start by turning to page three of the presentation, starting with the highlights of the third quarter. So over the past months, we've continued to see a positive economic development. as vaccination campaigns have successfully allowed societies to reopen, which has allowed the summer to be somewhat more of a normal summer vacation period with travel resuming, leisure activities being more back to normal, and discretionary consumer spending is picking up again. We've also seen continued strong business and consumer confidence levels maintained, which has led to a gradual normalization of business and consumer behavior. For interim, that has meant a reversal to more normal seasonality pattern, where Q3 is and has been a seasonally softer quarter. However, at the same time, we've continued to see a high level of commercial activity, which has allowed us to secure a number of important new client mandates, both in CMS and strategic markets. In terms of new case inflows, we're seeing they're continuing to come back towards the normal level, And we're currently about 5% below pre-pandemic levels. On the PI or the portfolio investment side, we're continuing to see strong cash collections in our back book, amounting to approximately 3 billion Swedish kronor in the quarter, corresponding to about 112% performance versus the active forecast. In terms of new investment, it has been a good quarter where we've deployed approximately 1.6 billion Swedish kronor in new portfolios, we continue to see attractive underwriting return levels. Our one interim transformation program is progressing well and according to plan. Our global front office project is well ahead of plan and we're scaling up rapidly our global capability. We now have approximately 300 global front office agents covering 14 markets across our four global sites, which is leveraging our common front office technology and processes. In terms of our migration to our common technology platform, we have tripled the cases migrated during the quarter. And last but not least, we're continuing to execute on our ESG agenda with the implementation of the task force for climate related financial disclosure, as well as the carbon disclosure project reporting. Then if we turn to page four. Economic sentiment continues to remain positive as societies have opened up and returned towards more normality. And the fact that we've seen a somewhat more normal holiday season is a very positive step toward post-pandemic normality. As I mentioned, we see new case inflow gradually reverting towards pre-pandemic levels, which is for us a leading indicator for the CMS business. First, we've seen non-financial claims return to normal in most places. albeit with lower average balances, and we now expect that financial claims will revert over the coming quarters as a consequence of increased consumer spending and normalized and increased use of credit. For us, this increased volume will ultimately convert into normalized revenues and margins in our servicing businesses, especially CMS. Also, the high level of business activity is for Interim demonstrating itself in terms of a strong momentum in our new business flow, where we've, during the third quarter, secured a number of important mandates, including, for example, a new mandate from a large Swedish niche bank. And in the strategic markets, we see positive development in our new AUM inflow, especially in Spain and in Italy, where we've been able to be awarded several new UTP mandates that will come into production during 2022. Turning to page five. The post-pandemic opportunity is now becoming increasingly clearer as moratoria have ceased in most jurisdictions. The majority of European banks are expecting a deterioration in asset quality, especially in their SME books. At the same time, European banks are under pressure from regulators to reduce and contain the pandemic impact on their NPN ratios. We therefore continue to expect the favorable environment to continue to develop with earlier intervention from banks to restructure sub-performing credits to limit NPL formation, which means more small businesses will be able to survive, which is good for society, for economic growth, and for employment. We also expect this to be the case for granular SME and mortgage segments, which require an industrial approach, where interim is well-positioned, especially in Southern Europe, And it is now evidenced by the new mandates awarded on the servicing side. We also see this translating into PI opportunities as banks would want to move exposures off balance sheet. We have existing technology and solutions to support our clients with this. Overall, we have seen significant growth in portfolio supply during 2021 and expect to continue to see further growth into 2022 and 2023. Acquiring fresher cases will mean faster cash conversion, shorter wells, and ERC curves. Turning to page six. Our one interim transformation program is proceeding well and overall according to plan. Our global front office project is well ahead of plan and we now have, as I said, approximately 300 agents covering across 14 markets and across four sites. leveraging our common front office technology infrastructure. This is important as it secures an important part of the value realization in the transformation plan. Case migrations into our common technology platform is now accelerating, and as mentioned, we tripled the number of cases migrated to the common platform during the quarter, and we are on track to migrate to further four to four and a half million cases during the coming weeks. We've consumed approximately 60% of the expected investment spent or budgeted spent for the program. And overall, this means we are on track to deliver the 1 billion of benefits from the program for the 1 billion of investment into the transformation. Turning to page seven. In terms of KPIs, case migrations are now accelerating after having fine-tuned our migration concept during the second quarter. And we are also expanding our migration capacity to be in a position to continue to accelerate migrations during 2022. Importantly, we're now completing migration out of several legacy systems, and we will start decommissioning legacy systems during the fourth quarter, which is an important step towards reducing the complexity of our legacy technology setup. Furthermore, we're now implementing our global operating model to ensure that the organization and operation is aligned with our one interim operational and operating model vision. Our FD cost-to-collect KPI is on track, albeit we've seen a short-term impact of lower case inflows in CMS in the RTM numbers, inflating the ratio somewhat. As case inflow reverts to normal, this effect is expected to go away, and we will see the ratio trend down as the benefits are realized during 2022 and 2023. Furthermore, we have completed our data management project as part of the transformation program, aligning our global data infrastructure to our global data hub, which allows us to close this project. And we will now accelerate the buildup of our global data and analytics capability. This will allow us to leverage our global data assets to continue to drive innovation and intelligent automation on our global technology platforms. This will be positive for our productivity, as well as for developing our client and customer experience in our servicing offering. Enhanced client and customer experience is crucial for us, both for client loyalty, as well as supporting our organic growth ambitions over the coming years. Turning to page eight. Sustainability is core to everything we do and what Intrum stands for. In order to continue to build on the very favorable ESG ratings received from both from Sustainalytics as well as from MSCI earlier this year, we now support task force for climate-related financial disclosure and are now adopting the principles for effective disclosure. In addition, Interm has joined the Carbon Disclosure Project, which evaluates companies' climate efforts and mitigating actions. Overall, we continue to work hard on reducing our carbon footprint in line with our stated targets and, in addition, offset the remaining impact achieving climate neutrality. With that, I will hand it over to you, Michael, for a review of the financials.

Thank you, Anders, and good morning. I'm looking at page 10, group key financials. The third quarter was seasonally softer, especially when compared to the strong, exceptional rebound observed in Q3 2020. This development is very much in line with the expected return to a more normal seasonal pattern, a slower summer period, and increased activity into the year-end that I described during the Q2 earnings call. The seasonality we experienced during Q3 is a further indicator that consumer and business behavior continues to normalize across the jurisdictions we operate in. It, however, also makes the comparison to the exceptional Q3 2020 less meaningful. In this context, it is important to note that cash revenues, cash EBITDA, cash EBIT, and cash ROIC increased when comparing the latest rolling 12 months with the full year 2020. When looking at the year to date, organic cash revenues in constant currency grew by 5%. Cash revenues came in at 5.3 billion, down 4% compared to Q3 2020. Similarly, cash EBIT was 1.4 billion, down from 1.7 billion in the third quarter 2020. Cash EBITDA was 2.9 billion for the quarter and 11.7 billion on a rolling 12-month basis. This compares to a rolling 12-month cash EBITDA of $11.9 billion at the end of Q2 2021, with a decrease of $0.2 billion due to the exceptionally strong third quarter 2020 being removed from the calculation. A decrease in net debt of $0.6 billion to $48.7 billion over the quarter was not sufficient to offset the decrease in cash EBITDA, implying a seasonally elevated leverage ratio of 4.2 times at the end of Q3. Cash ROIC for the quarter was 7.8%. On a rolling 12-month basis, returns increased to 8% compared to 7.7% at year-end 2020. I'm now turning to page 11. Here, I would like to emphasize the continued strong recurring cash earnings generation power of our business, even during a seasonally softer quarter. For Q3, recurring cash earnings came in at $2.9 billion, implying an annualized cash earnings yield relative to total shareholders' equity of 13%. As in past quarters, a key contributor to the cash generation was the continued strong performance in our portfolio investment segment, complemented by a seasonally softer development in credit management services and particularly strategic markets. Credit management services is also experiencing a more gradual normalization of revenues in the wake of COVID, but I will go into more detail on this later. Another point to note here is the increase in replenishment capex, primarily driven by strong collection performance. We also observed slightly higher cash taxes year over year due to an improving underlying result, as well as phasing of tax pay. I'm now focusing on the segments, starting with page 12. In CMS, we see some seasonal effects, but also a more gradual path towards revenue normalization. It is important to note, however, that the key leading indicator, case inflows, is moving in the right direction, with new case inflows in CMS now at minus 5% on average versus pre-pandemic levels at the beginning of 2020. This is a significant increase from the minus 15% experienced at the low point during the first quarter 2021, with the subsequent development confirming the inflection we communicated at the time. Improving new case inflows are an important step towards normalization in CMS, but a number of further steps are required for full normalization of revenues. For example, the current claims mix exhibits a higher proportion of lower value claims typically originated by non-financial clients, with a gradual increase of higher value financial services claims expected over time as consumer and business behavior translates into, for example, missed installments or unpaid credit card bills. Such a development will over time drive the normalization of revenues with the commercial successes Anders mentioned earlier today set to contribute to further growth in due course. CMS cash revenues for the quarter came in at just under $1 billion and cash EBIT at $396 million, both down compared to the exceptional Q3 2020. The segment cash ROIC was 8.2% in Q3. Now looking at page 13. Strategic markets, in line with pre-pandemic patterns, experienced a seasonally slower Q3. very much highlighting the success of vaccination campaigns and progress in reopening societies. Greece and Spain continue on the positive underlying trajectory observed during the past quarters, while Italy is still impacted by pandemic-related challenges, in particular with some moratoria prolonged to the year-end and the efficiency of the legal system still significantly impaired. As mentioned during past earnings calls, we only see a slow improvement in legal system throughput in Italy over time. The efficiency gap versus pre-pandemic levels has improved from about minus 30% during the first quarter to minus 20% during Q2, and now minus 10% in Q3. While this development is gradually moving into the right direction, there also still remains a pandemic-related backlog of cases to be resolved over time. Cash revenues came in at $1.2 billion and cash EBIT at $482 million, both down compared to Q3 2020. Strategic markets had a cash roic of 12.3% in Q3 and 16.2% on a rolling 12-month basis. Now turning to portfolio investments on page 14. Portfolio investments continued on its strong performance trajectory during the third quarter of with broad-based outperformance across jurisdictions as well as asset classes. We had gross cash collections of just under $3 billion during the quarter, corresponding to a performance versus the active forecast, our collections expectation, of 112% for Q3, as well as on a rolling 12-month basis. This has enabled us to take some of this outperformance into the book value with a net write-up of $112 million. The write-up is countered by a write-down in joint ventures of 219 million, largely due to the slower-than-expected recovery of legal system efficiency in Italy, highlighted in the strategic market segment. We are currently investigating a refinancing of the Italian SPV, which owns the portfolio interim, together with partners, acquired in 2018. We expect that such refinancing will lead to a reshape and delay of the associated expected remaining collections curve. Cash revenues and portfolio investments increased by 12% to 3.2 billion compared to Q3 2020. Cash EBITDA increased by 14% to 2.4 billion for the same period. Cash EBIT increased 21% versus the third quarter 2020 and came in at 907 million. We made portfolio investments of 1.6 billion in Q3, which brings us to 5.4 billion deployed year-to-date. well ahead of the $5.1 billion deployed during the full year 2020, with another quarter yet to come. I'm now looking at page 15. The spread or return gap between our cost of funds and the last 12-month average unlevered underwriting IRR was 4.1 times in Q3, up year over year. During the third quarter, we issued $1 billion five-year domestic NTN bond with proceeds used to repay outstanding amounts under our revolving credit facility. We were able to take advantage of a constructive market environment and price the new bond inside relevant reference curves, highlighting the strength of our funding franchise. During Q3, we increased available liquidity to $19 billion with no significant upcoming maturities until 2024. I'm now turning to page 16 and looking at the progress towards our medium-term financial targets. Rolling 12-month key performance indicators are again impacted by a more seasonal pattern in Q3 2021, particularly as the exceptional rebound observed in Q3 2020 is now removed from the calculation. Cash ROIC now stands at 8% up year over year. Recurring consolidated rolling 12-month cash EPS is 24.04 SEC per share. The leverage ratio is seasonally elevated at 4.2 times. Overall, we continue to execute towards achieving our medium-term financial targets by focusing on our two key priorities, transformation and organic growth. And now back to you, Anders, for some final remarks.

Thank you, Michael. Then if we turn to page 18. So to summarize, We expect a seasonally stronger Q4, and unlike last year where we saw an exceptional catch-up in Q3 and a Q4 impacted by the second wave restrictions, we expect 2021 to follow more of a normal seasonality pattern. Underlying, we expect to see a gradual normalization in servicing over the coming quarters into the first half of 2022 as volumes return and increasing volumes translates into revenues. We first see, as Michael said, the non-financial lower balance volumes have come back to a large extent and expect to see financial higher balance volumes return as consumption normalization translates into normal MPL formation. Beyond that, we expect that our strong pipeline of new deals, both in CMS and strategic markets, will provide a good underpinning for our growth ambitions over the medium term. On the PI side, we expect a busy Q4 investment season that allows us to invest at the level that provides a good starting point for growth of PI into 2022 at continued attractive return levels. In our transformation program, we expect to continue to ramp up our global front office operations, to accelerate case migrations into a common technology platform, and to continue to develop our global data and analytics development center. And with that, we're ready to open up for questions.

Ladies and gentlemen, If you have a question for the speakers, please press 01 on your telephone keypads. Our first question comes from the line of Jakob Heslevik of SEB. Please go ahead.

Hi, good morning, everyone. Just some quick questions from my side. Your leverage ratio increased slightly to 4.2 times Should we expect the ratio to be over four over the next few quarters as well? Or when do we see a slight improvement in this ratio? And do you still feel comfortable with your target for 2022?

Sure, I'll take this one. Obviously, we've seen a slower recovery in CMS, which makes the path into our targets a little more challenging than initially planned. We remain, however, committed to our medium-term targets, including a leverage target of 2.5 to 3.5 times.

Okay, thank you. That's good. Next question is on your portfolio investments. It was once again very impressive at 112% overcollection, and you have overcollected all three quarters this year. So how sustainable are these levels going forward, and How should we think about this for both Q4 and next year?

I mean, coming back to what I said a little earlier, we do continue to see a very positive economic backdrop and positive consumer and business sentiment and confidence levels. That has obviously continued to underpin the very strong performance on the PI side. That said, we also continue to have very solid and strong operations underpinning it, and I think we've been very happy with how we've been able to continue to drive that over the past quarters. As you said, I mean, we've seen this now since the beginning of the year, and we don't expect that to change in the short term. Medium term, it's obviously hard to predict, but I think, you know, shorter term, we continue to see very favorable results. environment on the PI side, both from a backward performance point of view, as well as from a new investment point of view with increasing supply and attractive return levels.

Just to add to that from a slightly more technical perspective, as I mentioned, we've taken some of that overperformance given that it's been so persistent into the book value, which obviously sets a slightly higher bar for the coming quarters. And as we've mentioned in the context of a the Q4 2020 release, we will continue to do so over time as the performance bears out.

Okay, great. But can we get some more flavor on which countries are overperforming? Because you said Italy is underperforming, and that's why you did the right down of 291 million. But then you have a positive revaluation of portfolios of 112 million, which you didn't mention.

I mean, overall, we can say the on-balance sheet portfolio performance is very broad-based. It is across the entire footprint. I mean, there are always some that are exceptionally good, but what is quite striking, and we made this comment in previous quarters as well, it is very broad-based, and it's not one particular country that stands out positively or negatively.

Okay. Thank you.

Our next question comes from the line of Patrick Bratellius of ABG. Please go ahead.

Thank you. So my question is a little bit regarding how you see the incremental supply of the European MPL stocks. On the CMD, you talked about that it could double or even more than that by the end of 2021 can you share a little bit more color on how you see this going forward from your perspective right now is that pushed back and where are we in in the incremental supply uh we i mean as i commented upon we are this year seeing a very meaningful increase in supply in the market it's substantially up from 2020

we are continuing to expect that supply to grow into 2022 and 2023. The fact that the majority of banks are expecting to continue to see deterioration of asset quality, in particular in certain segments like SME, as was pointed out, is also supportive of that transmission from lower asset quality into MPL supply. And the NP management is going earlier in the value chain as well, which means that we are seeing earlier intervention, which supports our servicing side, as well as earlier sales in the cycle. And there are a number of drivers for that. Obviously, the regulatory pressure, calendar provisioning, and things like that are continuing to... drive the banks to act earlier in the cycle. And that is supportive of our view that we will continue to see an increase in supply over the coming periods.

Okay. Fair enough. And then my second question is a little bit regarding this write-down you did in Italy. Can you share some colors what you believe will be the what you expect to be the run rate of earnings here going forward now that you have done this write-down in the JV?

Sure, I'll take this one. Just to give a bit of color and background, obviously you're aware we took a more significant write-down at the end of last year, reflecting COVID and our perception of the situation going forward. Now, as I've mentioned, the recovery and the legal system efficiency has been somewhat slower than initially expected, so we have now taken a further adjustment reflecting the situation as we see it. But in terms of being specific to your question, as I mentioned before, we are together with our partners investigating and refinancing, and that will then obviously impact in terms of reshaping and presumably delaying the expected remaining collections curve associated with that particular exposure.

Okay, fair enough. Can you share some details of when do you expect this refinancing to be done? Is it Q4 or is it that into the beginning of 2022? Can you share some color, please?

We're currently working on it and investigating a number of different options.

Okay, fair enough. Thank you. That's all for me.

Our next question comes from the line of Wolfgang Felix of Saria. Please go ahead.

Yes, hi, thank you. Two areas of questions, please. In each case about the portfolio purchasing side of your business, in particular, you've been giving us and perhaps reaffirming some leverage targets you say there is more volume coming to the market now. How should I then, within those two, think about your future purchasing ambitions in that area? Because I suppose if I put the two together, that wouldn't allow you to go out and purchase enormous amounts beyond what you've been doing in the past. Is that correct?

I mean, we've been guiding somewhat in this respect over previous quarters, and we're not changing that guidance in that this increased supply that we're seeing this year and into the coming periods allow us to go back to an investment level that provides growth on the PI side. I'm not expecting that to happen. to be disproportionately in terms of growth, but to provide growth on the PI side. The fact that we have an increasing supply also helps us be able to maintain attractive investment return levels as we are able to trade off opportunities against each other and across our geographic footprint. That is a positive, obviously, for us to maintain that attractive supply. attractive that we now built up and we continue to deliver upon. I mean, if you look at investment underwriting levels year to date, this year they're more or less exactly the same as we saw last year, although significantly higher investment volumes than we saw last year. So I think that is very conducive to continuing to be able to grow the investment side at attractive returns. But we're not thinking around outsized growth as it needs to be, you know, in line with the thought of our deleveraging targets.

Okay, well, thank you. And you've been a bit more on that theme. You were saying that you're seeing a very meaningful increase in supply. How do you see any increase in cash chasing that supply from yourselves and your competitors in the market, I suppose? Is it, would you say it's proportionate therefore? Because I think the entire sector is better capitalized than it was two years ago.

And we have seen as, you know, we call it improvement in availability and balance sheets of some of our competitors in the market in this period. which has allowed others also to continue to deploy into the growth of supply in the market. But so far, I think the underwriting returns that we are seeing is confirming that it's still a good balance and good equilibrium in the market from a supply and demand side. And as supply continues to expand, we also continue to expect that we can continue to deliver an attractive underwriting return levels.

If you were to sort of think of it in IRR terms without giving perhaps specific levels, but how much would those IRRs be perhaps higher today than they've been three years ago?

I would point you to page 15 in the presentation where I think you can see the RTM average net unlevered IRR underwriting returns that we have been achieving and then been fluctuating a little bit quarter to quarter, but overall we're seeing a very good and healthy spread between the funding costs and the underwriting return levels, and they continue to be attractive.

Okay, thank you. And then maybe just one second field of questions, more because I'm being asked all the time and I don't know what to answer. Also on the PI side, just from a macro point of view, Obviously, rising interest rates should have a negative valuation type of effect and rising inflation possibly a positive one. How do you think of the macro environment and how do you look at your book with the macro outlook that we have today?

I mean, as you said, there are both positive and negative factors into that equation. I think if we look over time, the difference between funding cost and underwriting return levels have continued to move in tandem for quite an extended period of time. And I would expect that to be the driving point in terms of how that develops over time. So we'd expect that to remain stable and for us to continue to be able to invest at attractive return levels as the market adjusts, if the environment adjusts.

Okay, well, thank you.

Our next question comes from the line of Rikard Hellman of Nordea Credit Research. Please go ahead.

Thank you. Good morning. First, just a detailed question about the strong contribution from working capital this quarter. I'm not sure if I missed that on your slide, but what is it and is it sustainable?

Sure, I'll take that one. The movement in working capital that you referred to reflects the timing of payments in connection with our Greek securitization structures. So with these amounts to be reflected into the P&L as they are earned.

Okay. And hence, we should expect that to revert as well, or am I wrong?

Yes, over time.

Yeah. Okay. Thank you. Second question is, again, a follow-up on this SPV refinancing. I mean, just to be clear here, I interpret this that, I mean, with a new funding, you will have external valuation below your current valuation. Is that correct?

That's not what we're saying here. All we're saying here is that we always try to optimize the transactions we're invested in. And here, in this case, it's a transaction we've also invested into together with partners. And together with these partners, we're looking at refinancing the transaction, so optimizing the financing of the transaction. Obviously, as it is a levered transaction, that has an impact in the shape and timing of the residual cash flows.

Okay, so it's only your cash flow to income from the EV that will be impacted. I interpret it as the collection curve would be... No, no, no.

No, absolutely. But our collections curve represents what we expect to receive out of the transaction and timing thereof. So effectively, this is the impact of the refinancing on us. But as I said, we're investigating various options, and therefore the final effect remains to be seen. Okay, that makes sense.

On that note, do you have some kind of assessment on how much cash flow you have received from that EV compared to the business case presented when the Intesa transaction was conducted?

I think one way to look at it is to look at our disclosures because we show the cash flow from JVs and historically that the majority of that has been produced by our Italian joint venture.

Okay. But are you below or in line or?

I think what I would point to is to what I said in previous earnings calls, where when I go back to the situation as it was at the beginning of 2020, we were pretty much in line what we expected out of that transaction. But obviously then we had a pandemic impact, which had some significant impact on Italy in particular. And then obviously also in that transaction, and we've reflected that in the write-down at the end of last year. And obviously we continue to very actively monitor the situation and have now taken smaller, further action given the challenges in bringing the efficiency of the legal system back to full speed that we observed pre-pandemic. Yep. Yeah, okay.

Yeah, I'll stop there. Thank you very much. Our next question comes from the line of Corinne Cunningham of Autonomous. Please go ahead.

Good morning. My questions are on the same topic, actually, the Italian SPV. As a result of these changes, is it likely that the accounting treatment or consolidation will change? Is it going to move from an SPV to full consolidation? How is that going to impact your debt to EBITDA ratio, if at all? And I'm not quite clear whether you were implying that there could be some more fair value changes to come about because of this refinancing or if that's really independent of the refinancing. Thank you.

So in the accounting treatment, we don't expect any changes in the accounting treatment. So this is purely a change to the financing that we're investigating. In terms of other effects, obviously we take our best view of the current situation as it presents itself to us into consideration, and that has been reflected into what we've done this quarter.

Thank you. And any impact on the debt to EBITDA ratio?

I would argue if the accounting treatment doesn't change, that doesn't have a bearing.

Okay. Thank you.

Our next question comes from the line of Lars Duser of Deutsche Bank. Please go ahead.

Yeah, good morning, everyone. I have two questions. First of all, I see that there was a net working capital inflow during the quarter of one billion, which was quite material compared to the previous quarters. What was driving that?

Just repeating what I've said before, that the movement in working capital reflects the timing of payments in connection with our Greek securitization structures. with the amounts to be reflected into the P&L as they are earned.

Understood, understood. So do you expect an unwind of this down the line, or how shall we think about that? Is that a cash in you have received upfront?

This is, you should expect an unwind over time as it's reflected in the P&L as the amounts are earned, yes.

Got it. Very clear. Thank you for that, Michael. And then the last question, really. If we go back now and we think about the counter-cyclical argument in that industry that you say, look, when the back book is performing well, the front book might not grow. Well, if the back book encounters pressure, of course, that will also come with attractive front book opportunities. At the moment, how it feels like, and that's what you said on the call today, that we are in a situation where actually the back book is outperforming dramatically. You printed, again, 112% of overall collections, while at the same time you're telling us that actually supply is up materially as well. And the front book outlook is very strong. So how does this add up?

don't you expect that one has to give here down the line that you have to experience some back book pressure to really lever a front book opportunity I mean as we said we continue to expect continued supply increases on the back of the pandemic related effects on the banks balance sheets working its way through the you know, through the cycle here from, you know, currently expectations of increasing, you know, credit quality, you know, deterioration from, you know, and then into, which is evident already in terms of stage two exposures in the banks reporting and then ultimately into MPE expansion. So that's, you know, that's what's really driving the, you know, the expansion of investment opportunities for the coming one to two years, and this tends to take some time before it works its way through. We're starting to see the early signs of that, but there's a lot more to come in that area. Also, as we said, we are expecting the flow that is coming to be fresher cases coming to market compared to historically where we've seen older cases or matured cases being sold, as the pressure from the banks is to sell earlier in the cycle. due to the need to contain NPL ratios and calendar provisioning and so forth. So that's what's been driving that. I think that's sort of independent a little bit of the macro picture itself and the supportive environment that we are experiencing in terms of positive business and consumer sentiment. That is really the recovery theme from a macro point of view.

Understood. If I just, you know, add one last question on that. If I now think about that, you know, stimulus maybe across Europe is unwinding in some countries more than in others. At the same time, we know we have quite inflation pressure on, I mean, you know, on the energy side, clearly, but also in other areas of life, which disproportionately will have an impact on your customer base. How do you think about that down the line in terms of how the back book collections could be impacted by that increasing strain these people are feeling financially?

It is quite hard to predict exactly how it's going to play out. I think if you look historically, we have been delivering overperformance in the range of 105 to 110%. We've been trending somewhat above that in recent quarters, but I do not see a reason why we wouldn't, over the medium term, the long term, continue to be at the more average levels that we've seen in the past. We also continue to, which is an important factor to drive our performance, is continuously to drive the operational excellence in our operation. We're seeing very good results on that side, and combining that with the transformation program, and as I commented upon as well, our significant investment into building out our global data and analytics capability to continue to drive productivity, including performance on the PI backbooks.

Great. Thank you very much for that, Anders. Thank you.

Thank you.

Our next question comes from the line of Wolfgang Felix of Saria. Please go ahead.

Yes, sir. Thank you. One more follow-up, if I may. Then you touched on it before already. How do you see the quality of assets that are coming to market changing part of the pandemic now in terms of where I suppose the ECB is pressuring some of the institutions to lighten up their books and... overall what has been presented to you?

Maybe I can start and Michael you can fill in but overall the quality of portfolios for sale is high. We see we're coming through a period where we have not had disproportionate at least in recent periods, and as I said, we're seeing more fresher claims coming for sale, where origination criteria have not expanded, that they've been stable and rather quite normal, meaning that there hasn't been any drift from an origination criteria point of view, and the quality The only differential I would say that we are seeing is that gradually we're seeing fresher vintages coming for sale.

No, I would agree to that. Obviously, one of the factors with fresher vintages coming to sale is that a more proactive approach is possible as these cases have not migrate it down in intrinsic quality for years and years. So I think that also lends itself to our experience and our industrial approach. And I think the other element is also that the trend towards SME cases that we see where, again, industrial proactive approach works very well.

Okay, thank you. And in terms of types of assets or so, is there a shift or so, do you think, in terms of where exactly the opportunity lies? Are the balances bigger or smaller? Is there more in one part of the market than in the other part of the market? And perhaps, does that yield any difference in profile going forwards?

Overall, if we look at the total deployment that we make, we continue to invest the significant majority of our own balance sheet investment into consumer unsecured portfolios. We have about 20% of mixed and secured portfolios on the balance sheet, and we don't expect that to dramatically change. That said, in terms of geographically, we are seeing a higher proportion of mixed portfolios, including SME exposures and secure exposures in the Southern European markets compared to the Western or Northern European markets, for instance. So there are some differences across the markets. But overall, when we look at how we expect to deploy, we're expecting it to be similar to what it has been in the past.

Thank you. Our next question comes from the line of Ermin Keric of Carnegie. Please go ahead.

Good morning, and thanks for taking the questions. I believe previously you said that you target to be around 3.8 times cash or bidon leverage by the end of this year and then within your range by the end of next year. Today it sounds like you're at least seeing it like a little bit more challenging. Would you still... kind of stick with those guidances, or is it more that you'll just be within your range mid-term, you don't want to specify it being in 2022 anymore?

I mean, I'd just go back to what I said before. Obviously, the slow recovery in CMS in particular makes the path a little more challenging than we had initially thought. But As I said before, we do remain committed to our medium-term targets, and that includes the leverage target of 2.5 to 3.5 times.

Okay. Thanks. Then on the SPV, sorry for coming back on it again, but the ERC curve you're providing currently, is that then not relevant at all, basically, or how should we think about those? I think it's around $4.6 billion in the coming three years of cash flows. in that curve currently?

Armin, given that we're investigating the refinancing together with our partners at this moment, obviously it's fair to make a sort of clear statement that we expect this to shift, both in terms of shape as well as introducing some delay, given what a refinancing does in these types of SPVs. But overall, we don't expect the quantum to change materially. Okay, thank you.

Then just one last question. You obviously have very strong collection performance currently, and it seems like you see the outlook being more of the same, basically. We've heard quite a lot about rising energy prices, etc. Do you see any risk for that? impacting your collectability now in the coming quarters?

Not short term. You know, then what happens medium term is obviously more difficult to predict. But no, we don't see that really impacting to a great extent short term. But as I said, I think over the medium to long term, we will expect us to be in line with our historic track record.

Got it. Thank you. May I remind everyone that if you wish to ask a question, please press 01 on your telephone keypad. And our next question comes from the line of Jakob Heslevik of SEB. Please go ahead.

Sorry, everyone, just a really quick question. I'm looking at the full-time employee cost to collect, and it's up to 6.3% now, and it was 6.1% in the last quarter, and it was 5.8% in Q1. When will we see it trending down again?

I commented a little bit about that in my presentation. So what we're seeing is that because we've had the delay of the reduction of new case inflows, and it's an RTM metric, we are seeing a delay of that effect in terms of how it impacts the FDA cost of collect ratios. It's not really the cost side of the equation that has been impacting the increase, but rather the collection side that has been impacting the increase short term. That effect we expect to normalizing not be visible as we see the collections and the inflows normalized over the next number of quarters into the first half of 2022, and then that the benefits that we're seeing from the transformation program as they start to come through, that we are confident that we can follow the track that we've laid out for the program. So there's more of a short-term technical point rather than a difference in how we see the realization of benefits for the program.

So you're confident that the cost to collect will fall while you still will be able to catch up with the aggregated case migration, which you're starting to fall behind a little bit.

Exactly. So as we're, I mean, it's not the only case migrations. As I also commented upon, the front office side of it has a meaningful contribution to the benefits realization as well. And as that is ahead of plan, it, you know, Overall, we are on track when we look at the benefit realization plan that we have until the end of 2023. And therefore, as those benefits are realized, that will start to translate into the cost of less number as well. And this short-term effect from the lowercase inflows in CMS will evaporate over time.

All right. Thank you very much.

Okay. Thank you.

There are no further questions at this time. Please go ahead, speakers.

Okay, well, thank you so much for joining, and, yeah, have a nice day. Thank you.