Ladies and gentlemen, welcome to the Intrum Q1 Call 2020. For the first part of the call, all participants will be in listen-only mode, and afterwards there'll be a question-and-answer session. Today, I am pleased to present CEO Mikael Ericson and CFO Anders Engdahl. Please begin your meeting.
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 the 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 one hour to this call, it unfortunately will 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 result 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 increases by 14% compared to the first quarter of last year. If you look at the stability of the company, at the end of the first quarter, the end of March, we actually had SEK 13.5 billion in available liquidity in the group. 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. It has 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. 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. As I said in the beginning, we had ample available liquidity in the end of March of SEK 13.5 billion.
In this circumstance, 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 73%, a little bit over 70% of our total collections 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 a 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.
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 are on a margin conservative. Effects impact our leverage level, and despite a strong cash EBITDA contribution, the net debt to EBITDA is 4.5 at 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 primarily our new segment, Strategic Markets, due to the lockdown in Spain, Italy, and Greece. In the other 22 markets, we note 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 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 the 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 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. There will be a backlog to deal with, and that challenge will be evident in all of these markets in Southern Europe. There is a clear pressure 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 non-performing exposures in the months to come, and I think that is obvious for everyone. We are committed to our leverage target of 2.5-3.5 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 SEK 11 million in line with keeping the portfolio stable, and we do not see any material M&A activity during the year.
Many larger portfolio transactions have, natural course, been delayed in the first quarter, but there are small evidence in the market of a, 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 two months. To conclude, we expect continued challenges in the next two quarters with flat or similar results in Q2 and Q3 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 number four, 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 fee 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 two months. Turning 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 two-thirds 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. You can say that our markets or our operations have been open in all markets from day one in this pandemic. As I earlier said, we have been and are able to operate also in Spain, Italy, Greece, France, and Portugal, which has been clearly impacted. Other markets, besides those five, have been affected to a lesser extent, and now we see the markets are gradually opening up. We, of course, are coordinating all our efforts on group level to secure that local guidelines are followed and our staff is protected. Turning to slide six, 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 often 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 quarters to this 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 solutions 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 one outsourced IT infrastructure. It is actually an infrastructure that has served us very well during this pandemic, but we have also implemented 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 we are now accelerating the transformation towards one Intrum. There are a lot of evidence and discussions in the markets, of course, of the consequences of COVID-19. Our clients expect growing volumes of late payments and non-performing 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 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. Now, Anders, over to you for the first quarter in more detail.
Thank you, Mikael, and good morning, everyone. We turn to page eight, group financials in summary, in the presentation. As you can see, in total, we do see an effect of COVID-19 into our financial results for 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, 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. Our reported EBIT is SEK 459, which includes the negative revaluation effect of SEK 636. EBIT adjusted was SEK 1,095, down 19% year- over- year, which 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, and our cash EBITDA are up 14% year- over- year to SEK 2,633.
Our leverage ratio increased 0.2 times to 4.5 in the quarter, which is fully explained by the change of the currency between, particularly, the SEK-EUR 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, particularly, from EUR 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, moving to page nine 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 one percentage point to SEK 1,705. 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, which corresponds to service line margin increase of 1 percentage point to 25%. Cash EBITDA contribution from the segment was SEK 499,, -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, 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 percentage points year- over- year, down from an already challenging quarter one 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 of Europe had a pronounced negative effect on the business in Q1. In quarter seasonality, if you will, March is normally the strongest month of the quarter, and clearly, with the strong effect of the lockdown in March, it did have a meaningful impact on the quarter overall.
In April, we continue to see a challenging operating environment, but 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 claims we serve in these markets are secured and rely on the courts being effective. Moving to page 10, 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 for 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 investment for portfolio investments adjusted for the book value revision is 11%, and if we look on the underlying, excluding the SPV, it was 13%. New investments in the quarter was 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 two times the normal quarter. We also do 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 is 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 is important to note that our experience points to that we will recapture lost collections over the life of the portfolio, so from that perspective, it is a matter of a timing effect. In terms of market outlook, 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.
It is 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 crises shows that in a crisis scenario similar to what we are 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, and 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 after 12 months, we reach 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, and that was supported by a 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 15% CAGR since the combination between Intrum Justitia and Lindorff, and our cash EBITDA is SEK 11.5 billion, corresponding to a 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, and our cash EBITDA, excluding the pro forma for M&A, is SEK 11.0 billion. That corresponds to a cash EBITDA margin of 53%. If we deduct the interest, tax, and other non-cash 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 4.5 times. 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 4.1 times, and the SPV leverage itself, so the leverage that is remaining in the SPV itself, is currently standing at 2.4 times, which means had we consolidated actually the SPV, we would have meaningfully reduced the group leverage ratio. Clearly, Intrum has had elevated leverage ratios 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 investments, we wanted to present you with a worked example.
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 the 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 2.7 times, which means that it is actually accretive to a leverage ratio already within 12 months, and it's actually also at the lower end of our long-term target leverage ratio range. 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 upcycle, we have experienced over the last few years, we have benefited from lending volume growth, increasing debt sales, strong repayment capacity, and backward collectability, but also we have seen limited new case inflow in CMS, and we've also seen expanding credit lending criteria. Now, when we face the downside, we see that we expect higher NPL formation, increased case flow into CMS, and demand for our services, but also a more challenging collection rate. Overall, we see that these factors help to balance the peaks and the troughs of the cycle, creating a more limited cyclicality environment that has both legs to stand on. With that, I hand it back over to you, Mikael.
Thank you, Anders, and let's then turn to page number 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 experience in the markets. 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 midterm 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 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 we 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 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 the net debt to cash EBITDA between 2.5-3.5. 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 date 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 non-performing 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 see that we did not use that much more than the 30 minutes, and we open up for Q&A.
Thank you. Just as a reminder, if you do wish to ask a question, please dial 01 on your telephone keypad now, and if you find your question is answered before it's your turn to speak, you can cancel by dialing 02.
Our first question comes from the line of Ermin Keric of Carnegie . Please go ahead. Your line is open.
Thank you, and good morning, and thank you for taking my question. That's where we were supposed to be in. Just the first question: when you guide for flatish 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?
Perhaps I can start by saying that, no, that's correct. We are guiding towards a flatish adjusted EBIT for Q2 and Q3, and we also have guided towards—we are currently experiencing collection rates, which are in line with the 2019 performance as we saw at the time, which does also point to a relatively flatish cash flow profile.
However, it may not be completely in sync. As you know, it does differ from time to time, but sort of directionally, I think it is the right guidance.
Okay, thank you. You did some buybacks during the quarter and start of Q2. Could you just talk us through sort of how you are thinking between pursuing more portfolio investments and growing your own book relative to buying back the shares?
Good morning. It is Mikael here. No, I think that is 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.
At the time, we saw that the 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. This is always the balance that we and the board will do, whether how to allocate the capital. 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 backbook, which we at the time saw as the best investment we could do.
Wonderful.
In terms of the CMS and strategic markets, would you be able to share sort of how much of your revenues are based on sort of base fee in terms of your AUM rather than collection performance that we can sort of see as stable regardless of how performance develops in the short term?
We do not 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 lockdown in the Southern European markets. That tells you that the variability has a significant component of variability driven by successes effectively being dependent on resolutions to the court system.
Thank you. Just one last question, if I may.
You say that the leverage target is still intact, but in the report, it seems like you're aiming to reach it basically by 2022. Should we read into that that you rather see 2021 as a sort of golden opportunity to rather grow your book at tracked 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 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.
In that sense, we try to be cautious also in our projections during 2021-2022 at this stage. Of course, we will see growing volumes, but it is important for us to underline our commitment to the deleveraged target in itself.
Great. Thank you.
Thank you. Our next question comes from the line of Johan Ekblom of UBS. Please go ahead. Your line is open.
The cash flow and the buyback. I mean, on slide 13—
I'm sorry, you are breaking up. We could just hear a couple of words there, Johan.
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.
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 are 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 repayments, and 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 do not think that's important to accelerate that process? I just want to see kind of why you're comfortable pushing out the reduction in leverage given where your bonds are currently trading. I guess related to the investment part, how do you think about the longer-term financing costs?
I mean, clearly where bonds are trading today, it would be hard to make the maths work. I guess we can assume some kind of normalization, but what's your thinking long-term in terms of cost of that? 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'd be great. Thank you.
Shall I start then and then Anders complement my answer? Because that was a long question and several of them, Johan. Let me try to start with—No worries.
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 it is a balance that we always do. What is the most relevant and create best value for the company? Buying back shares comes at the expense of, in that case, buying back portfolios or doing other types of investments. 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 should not look at the buyback of shares as on top of everything else we do. It is actually the balance between different parts of investments that we do. What we actually do is we are investing in our own backbook, 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 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 give 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. 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 financing 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. I think anyone can guess what 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. In terms of the specific question about the SPV leverage, perhaps Viktor, you can walk through that quickly with the group.
Yes, sure. I think if you look, Johan, on slide number 15, we tried to help you on modeling the SPV and where we stand today. Obviously, it has been a good deleveraging from about 3.5 in mid-2019 to the 2.4 level where we stand today.
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. You mentioned the debt was reduced by about 12%, corresponding to SEK 2.7 billion or so. You should also bear in mind that the cash flows were also used to increase the cash position by about SEK 500 million. There is a minor impact from FX of about SEK 0.3 billion, some working capital, and we also paid, of course, our interest. That is all specified, and you can see that it is accumulating up to a cash EBITDA of just south of SEK 5 billion if you do the maths on that. That should actually correlate with what you see in the balance sheet.
You can take additional details offline 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 the 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 in the structure, which is a much smaller number than what is in the annual report. Perhaps Viktor, you can also give an offline explanation if needed.
Yeah. I mean, if you could disclose that senior number in the quarterly or annual report, that would probably help us. Just a final quick question. You said that you might be or you will be making use of some of the government furlough schemes, etc.
Have you done that in Sweden, and what's the comment been 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 terms of securing contracts for employees.
Perfect. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Robin Rane at Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Hi. Thank you for taking the question. On the negative revaluation 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?
Then secondly, also on the revaluation, you say that this reflects your expectations for 2020, and my interpretation of that is, and also your comments from your presentation, is that you do not really—it is 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, let's say, Spain and Italy or other countries? Thank you.
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 number 12 in the presentation, that we see quite a concentrated effect in the markets in Southern Europe.
From a revaluation point of view, the revaluation reflects that geographic view with a much more benign impact in the northern half of Europe. Which means northern or significantly less impacted. 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 this will have obviously a disproportionate portion of the total revaluation in the quarter. It is obviously spread across all, but 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.
Do remember that 80% of our book is unsecured, and only 20% of the book in total is secured, and that is also obviously reflective in the total contribution to the revaluations in the quarter.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Mats Liljedahl of Handelsbanken . Please go ahead to your line. It is open.
Yes. Thank you. Good morning. I think most have been answered, but a follow-up to Johan, perhaps. In terms of rating agencies, I see that you are on negative outlook from both S&P and Fitch. How is the dialogue with the rating agencies considering the share buybacks? I know they had in the previous comments, they said that leverage was really important. Now you postpone it. How is the dialogue going with them?
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 is going through the roof at 1,100 basis points. If you could shed some light on that, it would be helpful. Thanks.
I may back in also that. I mean, in terms of rating agencies, we have an active dialogue with all three of them. It is a positive and constructive dialogue, and we continue to do so. Clearly, they have—well, two of them have come out with rating updates during the crisis, and we obviously take that into consideration in our deliberations of how to allocate our capital.
It is important for us to demonstrate continued deleveraging to our long-term target range, which is obviously part of that discussion and 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—well, 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, and we have had for a longer time now, a very cautious approach to forward flows per se. We are very selective about the counterparties where we have a forward flow commitment. It is a smaller, well, it is a minor portion of our total capital commitment in any year is to forward flows. We only do it with our, what do you call it, long-term partners where we have a more strategic client relationship. In those instances, it clearly is, from a 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, Mats, 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. As Anders has talked about now a couple of times, I am more or less independent of the capital markets for a number of years to come. We also exit the first quarter with a very strong liquidity position in the group. That for us is clear evidence that we have a strong position going forward. That I want to take comfort in. Yeah.
Okay. Thank you. 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.
I mean, obviously, that was made as of closure of March, and I would guess that asset values haven't increased since during April. Could you just confirm the exact timing for that revaluation was end of March, or how should I see it?
Yeah, that's correct. I mean, we do a revaluation, as you know, by quarter end. 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. We have been cautious in this, and we have accounted for delayed in our cash flows in the quarters to come.
We do a revaluation of the book of 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 then is actually on the margin on the conservative side. Also today, we are comfortable that that revaluation has fully captured the delay in the cash flows that we expect in the portfolio.
Okay. Thank you.
Thank you. Next question comes from the line of Ramil Koria at SEB. Please go ahead. Your line is open.
Thank you, Viktor. Thank you, gents, for this presentation and for taking my questions. 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. On the remaining 80% on the unsecured side, what has been assumed in terms of unsecured performance squaring sort of unemployment rates and fiscal policies so far covering the sort of the decreases in household income?
Look, we have made an assumption based on our experience. We have a very significant amount of data going a long period back in time. Clearly, we have in particular a significant amount 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 the crisis like the ones we're facing now.
As I also showed in the chart in the presentation, how that plays out in terms of timing. Clearly, we are seeing a very rapid decline, much faster than in the financial crisis in 2008, 2009. 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.
Gotcha.
I mean, just finally, in terms of seeing some signs of CMS volumes increasing, please remind us, how do discussions typically go? At which point do you receive the volumes? I mean, how should we sort of model that sort of the coming few quarters here, do you think?
This is, of course, a difficult question, and you can hear that we talk about our own expectations as such. We have, of course, regular dialogue with all our clients. I remind you, we have more than 80,000 clients throughout Europe, everyone from small entrepreneurs up to large financial institutions. 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. 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. Our conclusion, but I mean, it is a conclusion and an expectation, is that we will see growing volumes coming through, especially in Q3, Q4 leading into 2021, and more active dialogues with our clients.
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.
Perfectly clear. Thank you.
Thank you. Next question comes from the line of Helen Rodriguez. Please go ahead. Your line is open.
Hello, there. Thank you very much for taking the question. Can I please ask, just going back, I know you've talked about the buyback, but just from a sort of overview, it was a time in the market when most companies, big U.S. companies, were all drawing down their liquidity lines. We've had everybody applying for government schemes and so forth. 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. 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. A second question would be, you've done your stress tests and so forth, and you're sort of paralleling to the financial crisis, but it's also the case that people are saying that this is unprecedented times, unprecedented times. The example of the financial crisis really may or may not be that relevant. I 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 difficulties ahead, but that does not 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 regarding last year to buy back shares. It is part of the different investment alternatives that we have in the group. We balance that with M&A carve-outs, investment in portfolios, and buying back shares. At every single time, we look at different alternatives and how to use that investment capacity. This time, it seemed to be the best investment that we could do, and that was to.
Yeah. 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?
Yeah. 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. At this time, it was deemed to be the best investment that we could do.
Okay. All right. Thanks.
In terms of the scenario analysis, clearly, we have done a very significant amount of stress testing, but it is back in March at the time of the revaluations. We'll continue to update that as we go along. We don't work with one scenario.
We work with a range of scenarios, including ones which are significantly more challenging than the ones that we're 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've received more data over the last six 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.
We are seeing that 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. I think there is a range of clearly outcomes that we have been working with. We have also been working with what is the ultimate output in average for the group in total. Given that we are actually seeing a more 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. I think that which means that we are slightly on the conservative side overall.
Got it. Thank you very much.
Thank you. Next question comes from the line of Alexander Nordhagen of Goldman Sachs.
Please go ahead. Your line is open.
Hi. Thank you very much for taking my questions. Just a couple. I noticed that April, you said collections were in line with last year. I mean, one, I do not know what collections were in April last year, but your portfolio is 13% higher year- on- year. 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 do not give specific month-by-month guidance like that, but to give at least some form of benchmark, and obviously, everyone can see what our collections were in Q2 last year, it demonstrates that we are on the track which was in last year. We are also seeing that we have slightly more optimistic outlook for May and June compared to April.
Also remember, April is a very short month with Easter in the middle of it and so forth. The comment is there to give a little bit of guidance in terms of the totality of the outcome in April and for people to be able to quantify it somewhat. 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. I mean, I would guess then the central 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?
As I said, we do not give those numbers specifically, but it is a reference to be able for people to have something to hold on to by referring back to our collections of Q2 last year.
Okay. Great. Just on purchases this year, is there any guidance you can give us on what your portfolio investments might be for the full year?
What we have guided towards is that we now, at the moment at least, as long as we are in this uncertain environment, have reduced our investment pace to what is effectively a maintenance level, which means that we are covering our replacement rate, which has fluctuated a little bit but is approximately in the area of SEK 5 billion per year. It is not an exact guidance, clearly, but to give people an understanding of which sort of ballpark we are talking about.
Okay. Great.
I mean, it's 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 it might be saying that your collections are in line with your forecast so far or would be. I don't think that is what you're saying. If you could explain that chart a little bit better on the right side of 12, I'd appreciate it.
Yeah. The line is cumulative, right? The drop versus the active forecast means that there's a relative underperformance in the early first 12 months.
You see the inflection point where it starts to go up towards the 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've effectively recovered to the active forecast after 24 months. That's the experience from the financial crisis. I think that's also what's common to the. Clearly, this is a new crisis. It's not the 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 it's more of a timing of collections. In terms of exact.
I mean, 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 one, should give you a quantum of impact in total from the top, and then we should start to see a gradual improvement.
Okay. Great. 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 could just say, was first here, 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? 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. 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 and, but that composition differs by country. We have a much more automated infrastructure in the northern half of Europe compared to the south. That is also why you do see a higher degree of manual payments and the restrictions in the economies in the southern European part impacting to a greater extent than what you have in the northern half, which also contributes to the stability of the unsecured payments in the northern part of Europe. No, it's not quite as simple as saying 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.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Gurjit Kambo at JPMorgan. Please go ahead. Your line is open.
Hi. Good morning. Most of my questions have been answered, actually. Just got one follow-up. Just when we think about the sort of guidance sequentially for sort of stable adjusted EBIT and then the comments around year-on-year collections broadly stable in April, obviously, year-on-year, your EBITDA is going to decline pretty significantly. I'm just trying to square up the year-on-year flat collections versus, I guess, the flat sequential EBITDA guidance.
Sorry. Not quite sure I know.
Yeah. I guess. I guess are you sort of saying if you look at the year-on-year EBITDA profitability, it clearly will decline pretty significantly. Whereas you're saying the collections year-on-year have been pretty stable, so I'm just trying to would that not imply that sequentially you would see some improvement there? 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 May, June. On the contrary, I think that we have a positive development year-on-year in May, June. We're looking at, obviously, its current view of where the market is going. I think we were in line in April. I think we have a more constructive view on May and June.
Our guidance is clear that we're expected on an adjusted EBIT basis to be on a sequentially quite a flat development into Q2 and Q3.
Okay. Fine. Just one quickly on the tax rate. I know the guidance is for 20%-25%, but just sort of nearer term into 2020, is there some sort of deferred tax assets you can get benefits 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 the middle of that range. We were so also in this quarter, clearly, with the reported loss that became a positive from a tax perspective. We continue to guide in that range and towards the middle of that range.
Okay. Great.
Thank you very much.
Thank you. Our next question comes from the line of Sonal Sodhi of Morgan Stanley. Please go ahead. Your line is open. If you have your phone on mute, you will need to unmute it.
Hello? Can you hear me now?
Now I can hear you.
Yes. Hi. Good morning. First question is, again, just going back to this question on Q2 adjusted EBIT. Last year, adjusted EBIT was around SEK 1.5 billion. You are saying this year it is going to be in Q2 around SEK 1.1 billion, which is the level of Q1. Where is the difference of that SEK 400 million coming from?
Look, I think that we have a different composition of the business to some extent compared to Q2 last year.
You need to take that into account as well because you also have some of the markets which have a, call it, a lower contribution in Q1 that are part of the mix now in Q2. They were not there in Q2 2019 outside of particularly in the strategic markets. I think that it's not a one-point answer, but I think it's quite a clear guidance in terms of the total adjusted EBIT and also from the collection point of view, what we're seeing on our own portfolio. Clearly, there are also parts of the business which are decently contributing in the second quarter compared to the first. There are composition differences in the guidance, but we're giving the guidance of the portfolio.
Because if I look at Q1, the entire difference of Q1 2020 versus Q1 2019 is because of the decline in earnings from the joint venture from SEK 350 million odd to SEK 80 million. That is basically all your decline in adjusted EBIT in Q1. 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 zero? You are saying on your own business, if I exclude the JVs, you are doing fine in terms of collections both on the core CMS side and on the portfolio side. That is 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 in Italy as well. That is obvious.
Whether exactly it will be the same result as in Q1, I cannot comment upon, but I would not expect it to be lower than Q1.
Just lastly, thank you, in terms of the leverage, you are at 4.5. Any sense that you can 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. It would be good to know what the near-term target is also, so we know your commitment to leverage versus other investment opportunities.
Yeah. No, I think on that, it is clearly challenging to see deleveraging in 2020.
Clearly, going into 2021 and 2022, we do expect to see the deleveraging resumed and to reach our targets by the end of 2022. Hopefully, that helps.
Yeah. Okay. Thank you.
Thank you. Our next question.
All right. We are now coming up. We are 15 minutes after the end time. Do we have many more questions now, or?
We do have three people still in the queue.
All right. I hope we can then so I do not have to cut anyone off. Just keep mindful of the time, please.
Sure. The next one comes from the line of Magdalena Polan for BlueBay . Please go ahead. Your line is open.
Hi. Quick question. Can you just advise within your larger markets what each of the regulatory regimes have 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. Operating in 25 different markets, there are different, you can say, situations in all markets. Overall, I would say it is not a material impact on the business as such because many of those types of initiatives that you see are directed towards performing loans, not through non-performing exposures. On the contrary, we see actually quite a lot of activity I have seen for quite a long time now from regulators pushing and actively trying to deal with the non-performing exposures in the different markets.
Thank you. Our next question comes from the line of Rickard Hellman of Nordea Credit Research. Please go ahead. Your line is open.
Thank you. Based on your holistic view on investments, have you evaluated buying back bonds as well?
Are you allowed to do that, or are you restricted in any way with your RCF? Thank you.
I can answer that. No, we're not restricted in any way to also look at buying back bonds. We are considering all investment opportunities and evaluate them at all times now. Clearly, that has been one of many, including the investment on portfolios and the share buybacks that we have looked at and considered. We do not preclude that that could be something to consider in the year to come. It is nothing that we have action upon at this point.
Thank you.
Thank you. Our final question comes from the line of Johan Ekblom of UBS. Please go ahead. Your line is open.
Apologies for having a quick follow-up. Can you just detail what the revaluation impact was on the Italian SPV portfolio?
No, we don't discuss that separately. There is an impact of also an adjustment in the SPV in the quarter, yes.
Okay. Thank you.
Thank you. If 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 of our 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. 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.
We are actually well prepared to meet continued demand in the marketplace going forward. With that, I thank you all for participating. I'm sorry for us taking more than close to one and a half hour of your time, but I hope it's been valuable for you all. Thank you very much and have a good day.