Earnings Call: Q3 2021

Oct 21, 2021

Ladies and gentlemen, welcome to the Interim Q3 2021 Report. Today, I'm pleased to present President and CEO, Anders Engdahl and the CFO, Michael Ladona. For the first part of this the call. All participants will be in listen only mode and afterwards, there will be a question and answer session. Speakers, please begin. Good morning, everyone. My name is Anders Zengdahl. I'm the CEO of Jerome. And with me today, I have Michael Ladderner, our CFO. And happy to take you through the Q3 2021 the report. So if we start by turning to Page 3 of the presentation, starting with the highlights of the 3rd quarter. So over the past months, we've continued to see a positive economic development as vaccination campaigns have successfully allowed societies the 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 a 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 SEK 3,000,000,000 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 SEK 1,600,000,000 in new portfolios. We continue to see attractive underwriting return levels. Our 1 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 4 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 corporate disclosure project reporting. And if we turn to Page 4. 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. 1st, we've seen non financial claims return to normal in most places, albeit with lower average balances. 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 strong momentum in our new business flow, where we've during the 3rd quarter the 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 5. 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 NPL 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 would 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 will 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 the slide during 2021 and expect to continue to see further growth into 20222023. Acquiring fresh cases fresher cases will mean faster cash conversion, shorter wells and ERC curves. Turning to Page 6. Our 1 interim transformation program is proceeding well and overall according the plan. Our global front office project is well ahead of plan and we now have, as I said, approximately 300 agents across covering across 14 markets and across 4 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 4,000,000 to 4,500,000 cases during the coming weeks. We've consumed approximately 60% of the expected investment spend or budgeted spend for the program. And overall, this means we are on track to deliver the SEK 1,000,000,000 of benefits from the program for the SEK 1,000,000,000 of investment into the transformation. Turning to Page 7. In terms of KPIs, case migrations are now accelerating after having fine tuned our migration concept during the Q2, 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, that we will start decommissioning legacy systems during the Q4, 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 1 interim operational an operating model vision. Our FTE cost to collect KPI is on track, albeit we've seen a short term impact of lowercase inflows in CMS in the RTM numbers inflating the ratio somewhat. As case inflow reverts to normal, this effect is the expected to go away and we will see the ratio trend down as the benefits are realized during 20222023. 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 asset to continue to drive innovation and intelligent automation on our global technology platform. 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 organic growth ambitions over the coming years. Turning to Page 8. Sustainability is core to everything we do and what Interim 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, Interim has joined the Carbon Disclosure Project, which evaluates company's 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 Michael for a review of the financials. Thank you, Anders, and good morning. I'm looking at Page 10, Group Key Financials. The 3rd 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 $5,300,000,000 the balance sheet, down 4% compared to Q3 2020. Similarly, cash EBIT was €1,400,000,000 down from 1 $700,000,000 in the Q3 2020. Cash EBITDA was $2,900,000,000 for the quarter and SEK 11,700,000,000 on a rolling 12 month basis. This compares to a rolling 12 month cash EBITDA of CHF11,900,000,000 at the end of Q2 2021 with a decrease of CHF0.2 billion due to the exceptionally strong Q3 2020 being removed the calculation. A decrease in net debt of $600,000,000 to $48,700,000,000 over the quarter that was not sufficient to offset the decrease in cash EBITDA, implying a seasonally elevated leverage ratio of 4.2x 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 $2,900,000,000 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 tax this 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 Q1 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 nonfinancial 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 the 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 $1,000,000,000 and cash EBIT at $396,000,000 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 Q1 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 $1,200,000,000 and cash EBIT at $482,000,000 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 3rd the quarter with broad based outperformance across jurisdictions as well as asset classes. We had gross cash collections of just under $3,000,000,000 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 CHF 112,000,000 the write up is countered by a write down in joint ventures of CHF 219,000,000 largely due to the slower than expected the recovery of legal system efficiency in Italy highlighted in the Strategic Markets segment. We are currently investigating a refinancing of Italian SPV, which owns the portfolio interim together with partners acquired in 2018. We expect that such refinancing will lead to a reshape a delay of the associated expected remaining collections curve. Cash revenues and portfolio investments increased by 12% to CHF 3,200,000,000 compared to Q3 2020. Cash EBITDA increased by 14% to CHF 2,400,000,000 for the same period. Cash EBIT increased 21% versus the Q3 2020 and came in at 907,000,000 We made portfolio investments of $1,600,000,000 in Q3, which brings us to $5,400,000,000 deployed year to date, well ahead of the €5,100,000,000 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 the average unlevered underwriting IRR was 4.1 times in Q3, up year over year. During the Q3, we issued EUR 1,000,000,000 5 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 insight relevant preference curves, highlighting the strength of our funding franchise. During Q3, we increased available liquidity to CHF 19,000,000,000 with no significant upcoming maturities until 2024. I'm now turning to Page Steen 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 at 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 SEK 24.04 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 2 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 in Q4 impacted by the 2nd 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 twenty twenty two 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 translate into normal NPL 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 OPI 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. Our first question comes from the line of Jakob Haslovic 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 4 over the next few quarters as well. 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 under 12% over collection. And you have over collected 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 positive consumer and business sentiment and confidence levels. That has obviously continued to underpin the very strong performance on the PDPI 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 shorter term, we continue to see a very favorable environment on the PI side, both from a back book 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 the Q4 2020 release. We will continue to do so over time as the performance bears out. Okay, great. But could we get some more flavor on which countries are overperforming? Because you that Italy is underperforming, and that's why you did the right down of SEK 291,000,000. But then you have a positive revaluation of portfolios of SEK 112,000,000, which you didn't mention. I mean overall, we can say the on balance sheet portfolio performance is very broad based. It's 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 Bertellius of ABG. Please go ahead. Thank you. So my question is a little bit regarding how you see the incremental supply of the European NPL stocks. On the CMD, you talked the balance sheet that 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 the incremental supply. 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 2020 3. 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 NPL Supply. And I mean, the NPL management It's going early in the value chain as well, which means that we are seeing earlier intervention, which Portstar 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 the impact 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 the 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 the situation going forward. Now as I've mentioned, the recovery in 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 a refinancing. And that will then obviously impact in terms of reshaping and presumably delaying the 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 the data into the beginning of 2022. Can you share some color, please? We're currently working on it and investigating a number of different options. Our next question comes from the line of Wolfgang Felix of Sarea. Please go ahead. Yes. Hi. Thank you. Two areas of questions, please. In each case about the portfolio purchasing side of your business, the same 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 2 Think about your future purchasing ambitions in that area because I suppose if I put the 2 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 be disproportionately sort of 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 Tractic as we now built up and we're continuing 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, but in line with the part 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 3 years ago. We have seen the, 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, and 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 If you were to sort of think of it in IRR terms without giving kind of specific levels, but how much would those IRRs be perhaps higher today than they've been 3 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 they've been fluctuating a little bit quarter quarter, but overall, we're seeing a very good and healthy spread between the funding cost 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 sort of 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 in maybe with the outlook 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 I would 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 Richard Hellman of Nordea Credit Research. Please go ahead. Thank you and morning. First, just a detailed question about the strong contribution from working capital this the quarter. I'm not sure if I missed that on your slide, but this is 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 and L as they are earned. Okay. And hence, it We should expect that to revert as well or am I wrong, Al? Yes, over time. Yes. Okay. Thank you. Second question is, again, a follow-up on this SPV refinancing. I mean, Yes. Just to be clear here, I interpret this that, I mean, with a new funding. You will I mean, 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 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 leveraged transaction, that has an impact on the shape and timing of the residual cash flows. Okay. So it's only your cash flow to Ingram from the EV that will be impacted. I interpreted as the collection car would be No, no, no. No, absolutely. But our collections curve as presented 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, I mean, do you have some kind of assessment on how much cash flow you have received from that TEV compared to the business the case presented when the NTSO 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? I think what I would point to is to what I've 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 a significant impact in Italy, in particular, and And then obviously also in that transaction, and we 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. Yes. Yes. Okay. Yes, I'll stop there. Thank you very much. Our next question comes from the line of Corrine Cunningham of Autonomous. Please go ahead. Good morning. My questions are on the same topic actually, excuse me, 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? And 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 on 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 as the accounting treatment doesn't change, that doesn't have a bearing. Okay. Thank you. Our next question comes from the line of Lars Dusser of Deutsche Bank. Please go ahead. Yes. Good morning, everyone. I have two questions. First of all, I see that there was a net working capital in flow during the quarter of SEK 1,000,000,000 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 and L as they are earned. Understood, understood. So do you expect an unwind of this down the line? Or how should 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 and L As the amounts are earned, yes. Got it. 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 countercyclical argument in that industry that you say, look, When the back book is performing well, the front book might not grow, while 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 have said on the call today, that we are in a situation where actually the back book is outperforming dramatically. You printed again 112% of global 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 the 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 bank's balance sheets working its way through the cycle here from currently expectations of increasing credit quality deterioration from no and I mean, which is evident already in terms of Stage 2 exposures in the bank's reporting and then ultimately into NPE expansion. So that's what's really driving the expansion of the investment opportunities for the I mean, no, 1 to 2 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 we 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 more matured cases being the results as the pressure from the banks used to settle earlier in the cycle due to the need to contain NPL ratios and calendar provisioning So that's what's been driving that. I think the so that's sort of independent a little bit of the macro picture itself 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 add one last question on that. If I now think about that 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, 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 the 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, long term continue to be at the more average levels that we've seen in the past. We also continuing to which is an important factor to drive outperformance this 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 PII back books. Great. Thank you very much for that Anders. Thank you. Thank you. Our next question comes from the line of Wolfgang Felix of Sarria. Please go ahead. Yes, sir. Thank you. One more follow-up, if I may. Then you touched on this before already. How do you see the quality of assets that are coming to market a changing pandemic now in terms of where I suppose the ECB is pressuring some of the financial institutions to light the notebooks and overall, I guess, what have been presented to you. So I would sort of maybe I can start and Michael, you can fill in. But overall, the quality of the orders for sale is high. We see we're coming through a period where So we have not had disproportionate, at least in recent periods. And as I said, we're seeing more fresher claims coming for sale, where our origination criteria have not expanded, that they've been stable and rather quite normal, meaning that there hasn't been any drift from under from an origination criteria point of view. And the quality so 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. And Obviously, one of the factors with fresher vintages coming to sale is that a more proactive approach as possible as these cases have not migrated down in intrinsic quality for years 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, an 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 balance bigger or smaller other is there more in one part of the market than in the other part of the market? So perhaps does that yield any difference in profile going forward? Overall, if we look at the total deployment on 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. That said, in terms of geographically, we are seeing a higher proportion of mixed portfolios, including SME exposures, the factors in the Southern European markets compared to the Western or Northern European markets, for instance. So there are some differences across the markets. That overall, when we look at how we expect to deploy, it will we're expecting it to be similar to what has been in the past. Thank you. Our next question comes from the line of Ermin Kerwich 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 EBITDA on 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 a slower 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 times From 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 things around SEK 4,600,000,000 in the coming 3 years of cash flows In that curve, frankly. I mean, given that we're investigating the refinancing together with our partners at this moment. Obviously, it's fair to make a 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 SBVs. 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, etcetera. Do you see any risk for that impacting your collectability now in the coming quarters. Not short term. 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. 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 And our next question comes from the line of Jakob Haslovic of SEB. Please go ahead. So 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 EUR 6,100,000 in the last quarter and it was EUR 5,800,000 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 the delay of and the reduction of new case inflows, and it's an RTM metric. We are seeing a delay of that also that effect in terms of how it will how it impacts the FDA cost of collection ratio. So 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 we expect that effect, we expect to normalize and not be visible as we see the collections the inflows normalized over the next number of quarters into the first half of twenty twenty two 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 from the program. All right. So you're confident that the cost to collect will fall while you still will be able to catch up with the aggregated trade migration, Which you are starting to fall behind a little bit. Exactly. So as we're I mean, it's not the only case migrations. So you also commented upon the front office side of it the meaningful contribution to the benefit realization as well. And as that is ahead of plan, overall, we are on track when we look at the benefit realization plan that we have for until the end of 2023. And therefore, No, as those benefits are realized, that will start to translate into the fee cost flat 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 yes,