Earnings Call: Q3 2024

Oct 30, 2024

Earnings release

Summary

2024 earnings guidance fell to €68–76 million as insolvencies lifted Q3 risk provisioning to 1.5%. New business remained on target, while management expects a 1.5% loss rate in 2025.

Dr. Sebastian Hirsch and our CFO, Dr. Martin Paal. We will start with management comments on yesterday's news and have time for Q&A afterwards. Sebastian, please go ahead. Thank you, Anke, and good morning, ladies and gentlemen, and thank you for taking the time to join our call today at short notice. We are here today in a slightly different, somewhat improvised setting, as Anke mentioned. It was important to us to inform you spontaneously and as quick as possible after our ad hoc announcement tonight. My colleague Martin Paal has therefore joined us and will briefly run through the figures in a moment. As you've read, we decided yesterday to reduce our annual guidance for 2024 because we are now also feeling the impact of the continuously rising number of insolvencies in the SME sector. For this reason, risk provisioning rose to 1.5% in Q3, after previously remaining constant at a good 1.1% level in the first two quarters of this year. In our annual planning, which from today's perspective was somewhat too optimistic on this point, we had not anticipated the current intensity and I would argue could not have anticipated it at the time. Ladies and gentlemen, we are in a special situation, even for our 40 years history. The post-COVID phase with multiple sources of uncertainty has led to a general increase in insolvencies over the course of this year. Not only in Germany, where it is at its highest level since the financial crisis, but also in France and Spain, which are important markets for us. It has been reflected and materialized in the recent weeks. This initially means two things for our business. First, relative to previous periods, we see rapid defaults and terminations of contracts, especially more frequently without the usual early warning indicators such as return direct debits or going through different dunning stages. This is quite understandably common for insolvencies. Secondly, the bad debts also tend to be worse than in previous periods because complete defaults are more frequent, means the payment performance for non-performing loans is worse than in previous periods. Both effects are responsible for the increasing risk provisioning. To make a simple calculation, we had per 9M 2024, roughly 3,000 more terminations, mean 3,000 more net and non-performing loans. Let assume we are talking about an average ticket size of EUR 8,000-EUR 9,000. Let assume EUR 5,000 in average as outstanding amounts in the time of termination, then we are talking about EUR 15 million more potential loss for that running year. And within the second impact and within the insolvencies and the poor performance after termination I mentioned, it will materialize very soon and sooner as in previous quarters. In relation to the running contracts, we are talking about 30 basis points. So 3,000 more new terminations in relation to 1 million running contracts means 30 basis points. And this is also in line with the increase of the loss rate we see. Nevertheless, our high level of diversification provides a very solid protective shield, and it will be ongoing. Because this is why the absolute fluctuation on the long run are still acceptable. For the short term, it means we have to adjust our guidance nevertheless, and we had to reduce our earnings forecast for this year from EUR 95 million-EUR 115 million to EUR 68 million-EUR 76 million. This is painful but unavoidable for us. What I would like to emphasize in conclusion are four things. First, we had created a deep analysis to identify causes at an early stage and will also incorporate these into our decision-making process. We have always been able to calibrate our self-learning system very well, especially in such phases. Second, we currently see no impact on our new business. We are on target here in volume and contribution margin. Third, we are currently receiving an incredible amount of data points across Europe on the payment behavior of small, medium enterprises in this current environment. And for our business model, it's forward-looking, extremely valuable to utilize this in the long term, to utilize this data on defaults and performance measuring. And last but not least, we continue to regard our long-term target of a 1.5% loss ratio as stable, even if we have now approached this value more quickly than initially expected. And so I would like to hand over to Martin to give some comments to our figures, and after that we are ready for your question. Yeah, thank you, Sebastian. Thank you, Anke, and also a warm welcome from my side to today's call with some bad news, really bad news on the development of the current risk situation. Despite these adverse development, I think it is worth mentioning that we have seen a pretty positive performance in terms of operating figures. Not in terms of risk provisioning, but in terms of, for example, net interest income. We have seen here for the first six months an increase of roughly 6% of net interest income, combined with good profits as well from the service business, as well as from the new business of 8% in service business, over 20% profit from new business, amounting to a total operating income for the first 9 months of EUR 332 million, already taking into account risk provisioning that is higher as we had initially planned for. That was Sebastian already pointed out. However, if we have a look at the operating income before risk provisioning, we have seen an increase in the first 9 months of 9% compared to 2023. The other point I would like to highlight here is the cost development, where we are really cautious in terms of cost discipline as well. If we consider the cost development without the extraordinary effect of this writedown of the goodwill impairment in Spain, that makes up EUR 4.4 million. We end up with a cost increase of only 8% before this extraordinary effect. That means that we have here some operating leverage already or always taking into account not the adverse effects from the risk situation. However, at the bottom line, it is reality that we are facing, in the third quarter of this year, only a profit of EUR 12 million after tax and for the first 9 months of roughly EUR 57 million on a preliminary figures basis. We have seen in the risk provisioning totaling EUR 38 million for the third quarter of this year, making up in total for the first 9 months, some EUR 93 million risk provisioning that is already a level a little bit above the whole risk provisioning level of the whole last year, 2023, at Grenke. As I said, not only the risk provisioning is reflected or reflects that current adverse macroeconomic situation with this increase in insolvencies, but also led to an impairment, goodwill impairment test triggering event for our goodwill of the Spanish entity, leading to a writedown of this EUR 4.4 million only in the third quarter of this year. With that, I would like to turn the call back to Anke. Thanks for that. Thank you so much. We could just start with a Q&A session. We received some questions ahead of the call, which I would like to start with. The first one is from Mengxian Sun from Deutsche Bank, and it is about, miss payment rate. She says: "I remember the normal miss payment was roughly at 10%. What is the rate that you have seen for Q3? Yes. I hope you can hear me. Sorry for that. We had to change my microphone. If it works, it works. Miss payment rate. The point I mentioned before, the miss payment rate is quite stable. We are very close to 5%. That means the direct debit miss payments rate is, let's say, very normal. But in insolvency cases, we will not see the return of a direct debit. An insolvency is more or less rapid from one day to another and not a normal development to collecting the installments, then you go to a miss payment, then you go to a reminder process and so on. That is why the miss payment rate is very stable in our business. We have seen over the last couple of weeks an increasing number of insolvencies and a rapid increasing in termination. Let's say more or less direct termination. There is what I mentioned before, it is roughly 3,000 terminations more cumulated per 9M, so roughly 30 basis points from the running business. A follow-up on this. She said it was a surprise that Spain is mentioned as one of the regions causing increasing risk provisioning. Spain should be rather small on the Group level, right? How big is Spain of the total asset book? I think Martin can- Yeah. Spain is one of the six largest countries, the fourth-largest country in our Grenke world, so it has a significant impact on the overall portfolio. The goodwill impairment here for Spain had already suffered a small write-down last year. At the end of last year, we had already EUR 600 K of impairment on Spain, and the situation there has not been better since then. That led us finally, with this over the last quarter, even increasingly number of insolvencies, finally to the write-down of the total remaining goodwill of EUR 4.4 million. If I may, one comment to Spain. Martin mentioned that it's roughly 6% from the overall portfolio, so not that big, but one of our biggest countries. Looking to risk provisioning and settlement of claims for that year, Spain is accountable for roughly 15% of that result. So the portion there is much bigger than the portion in terms of assets, and that's the reason why Spain is one of the drivers for that development. Okay. Thank you for that. There was another question handed in ahead of the call which refers to net interest being twice as high 10 years ago. The question is, why is the company less efficient than 10 years ago? At the end, that's a point reflecting the increased costs over the last years. That's also reflected in the cost-income ratio that has increased since the last five years or so. However, we are aiming for coming back to lower levels of cost-income ratio to really increase our efficiency. I think we have highlighted our digitalization program that we have initiated last year, which really drives this efficiency. We are going, I would say, step by step in terms of efficiency, in terms of cost-income ratio. If we would not consider this extraordinary goodwill impairment in Spain, we would have a cost-income ratio below 58% for the first 9M, so pointing into the right direction. Yes, maybe one additional point looking back to the P&L. If I am right, IFRS 9 was implemented in 2018, 2017 or 2019. There the accounting approach for expected credit loss changed and also for risk provisioning and settlement of claims. Roughly 20%, it depends a bit on the structure, but roughly 20%, maybe 25% in risk provisioning is responsible for IFRS 9 and expected credit loss for the performing portfolio, and it was not inside the P&L 10 years ago. The last question is if the loss rate is roundabout at 1.5% and is within target rate or the target range. So why did you have to face such difficulties now? I think it is fair to mention that when we did our planning for 2024, we had a valid database to assume a loss rate below 1.5%. So we were planning with about 1.1%, 1.2%, where we would feel comfortable to reach our former guidance. However, the long average is 1.5%, and with now, just to give you a rough number of the sensitivity of this loss rate, we have a portfolio, a lease volume of roughly EUR 10 billion, so 10 basis points in terms of the loss rate already make up EUR 10 million in terms of P&L. So if we now go for maybe 20 or 30 basis points above what we have planned for, but still are in line with the long-term average of 1.5%, so this 20 to 30 basis points already make up EUR 20 million to EUR 30 million in terms of P&L. Thank you. We have now another question from our participant in the call, and it is Tobias Lukesch, please. Yes, good morning. Couple of questions on my side. Mr. Lukesch, can you hear us? I can hear you. Can you hear me now? Okay. Yeah. Yes. Please go ahead. Okay. Quickly on the guidance cuts, basically midpoint down EUR 33 million. If I understood you correctly, you were guiding for a kind of EUR 50 million impact for the quarter plus the EUR 4.4 million goodwill write-down. Is there another kind of EUR 50 million negative impact for Q4, which brings you at a kind of 34-ish in total for the whole year? Secondly, on the average volume of leased assets, you just mentioned the EUR 10 billion. Could you give us an average number that you expect for 2025? In connection with that, the loss rate going forward, talking about a 1.5 as a normalized rate pre-COVID. Now the guidance was below 1.5. We see now Q3 is 1.5, Q4 potentially as well. Is the 1.5 the new normal rate for 2025 and beyond? Thank you. Yes, I will start with the last question, was the second one. For the EUR 10 million is roughly the volume under management, so to say, for today. With our planning, we can assume that we will run in the direction of EUR 11 million for next year. It's absolutely right from today's perspective, it's fair assumption to take 1.5 for the year 2025 as a loss rate. We see the loss rate now, 1.5, expect nearly the same level for Q4 and may could be that there is some fluctuation, but 1.5 is a good estimation for the next year and will also be part of our planning process we starting now in detail for the next year. That's also part of the guidance adjustment on the one hand, the quarter now, Q3 and on the other hand also the Q4 quarter because we expect a loss level in non-performing loan level and so on, nearly on the same level as in Q3. Now regarding the second question on the leased volume, given our growth ambitions, and I think here it's also, again, fair to say that we are fully in line with growth of leasing business for this year and what we have planned for the next years. We feel pretty comfortable and that would mean something between towards the EUR 11 billion of leased volume. So something between EUR 10 billion and EUR 11 billion towards 2025. Okay, got you. There is a follow-up from Tobias Lukesch, please. Yes, in terms of the top-line development, if I understood you correctly, you were quite satisfied on the NII. You were also quite satisfied on the new profit of business. Also on the cost side, is there any P&L line where you should think that should also be a bit weaker or are we just talking here about the cost of risk effect basically? In terms of P&L lines and potentially also thinking about gains from disposals potentially, which recovered a bit in recent time, but were in a kind of mid-single-digit negative in the years before. Given the insolvencies, is there a risk that you will record some more losses on that gains of valuations and disposals basically? Thank you. Yeah. At first, when you look to the quarterly figures for that year and you can going forward with that in line with NII also with the other operating income results, that is absolutely fair. Compared to, let's say, assumption a year ago, main net interest income is a bit lower because, during the year compared to last year, interest rates are a bit higher and the decreasing in interest rates, which is now in the market, that will be timely, as always, to bring that in our P&L. It is always the case. In terms of the disposals on this, no risk in terms of the insolvency, but you are absolutely right for Q4, and it is always the case when you look to previous years, the result will be a bit weaker. It is quite a normal fluctuation, that in Q4, the result will be a bit weaker. You can also assume a slight negative result with a small single digit. That's fair because it was in the last years the same. It has a bit to do with the portfolio which is coming to an end. In Q4, it's normally the strongest new business portfolio four years ago in average. That's fair to assume that. Yeah, if I may follow up on the margin. I didn't catch that properly, sorry for that, at the beginning. Maybe you could touch again on the margin, especially would be interested on the asset margin side, how you see that developing. You just mentioned a bit lower NII due to higher interest rates. How do you see basically NII developing also with the latest bond issuance as you had? Maybe you can get a bit of a trajectory into Q3, Q4, how we should see that and then into 2025 basically. Thank you. Yes. As I mentioned, Martin, go ahead. Yeah. Our NII margin is somewhere around 6% currently, and we are pretty sure that we will have this constant or even slightly increasing over the next years. Why is that? Because on the one hand, we are passing through our refinancing costs into the asset side, so there is no real interest rate risk or risk transformation. We have seen over the year currently quite good margins in terms of our CM2 margin, which will enter the P&L especially in 2025 and 2026, which we have probably seen in our new business figures in the last two quarters. Then more or less, the CM2 margins of sometimes below 16% in times where interest rates were increasing sharply, these contracts will more and more phase out over the next years. So we are, yeah, pretty confident to have an NII rate of 6%, a little bit above. We have another question from Marius Fuhrberg. Please go ahead. Mr. Fuhrberg, can you hear us? It is your turn if you like. Otherwise, we take another question and you can settle your microphone maybe. This one is the question for you, Martin, and it is about the SdK presentation you gave some weeks ago, where you seem to be quite dissatisfied with the share price. It seems that you indicated that the share does not represent the real value of the company. Would you be so kind as to comment on your comments? Yeah, sure. Dissatisfaction still holds despite this, I would call it, a one-off effect in our risk situation because the basis for the valuation or the fair share price, I would say is really our portfolio that is still in our books and that we are currently contracting in these quarters and over the last quarters. That makes me very comfortable that our share price is still too low, even taking into consideration this risk provisioning now, this one-off effect, as I said, the basis and the substance of our company and the share price is in our current portfolio and the portfolios that we are now contracting. Okay, then we give it another try. Mr. Fuhrberg, can you hear us now? We would be happy to open the line for you. Otherwise, you can just send the questions over to us, and we will make sure we drop you an email. The next question comes from Simon Keller. Please go ahead. Hello, everyone. I hope you can hear me. Can you? Yes, we can. Yes. Okay, excellent. I was wondering how the higher risk level that we are seeing right now impacts the CM2 margin of new business, whether you need to be more cautious in the calculation of new business now. I was also wondering how or why this issue pops up now, because actually I think in Q2 already the peak in insolvencies peaked already in Germany as well as in Europe. How come you are affected with the delay? Is it because of risk provisioning calculations being, I don't know, made only every 6 months or in intervals? Maybe you can explain a bit on why this pops up now, and not 3 months or 4 months earlier. Yes. Thank you for your question first. The second question, why it pops up now. Both developments important. On one hand, the insolvencies and of course, when we see the insolvencies, there is a bit time lag between the real insolvency and when we getting the message at the end of the day. The second one is, despite the rapid impact on insolvencies, and not having the early indicators, as I mentioned before, with the return debit notes, with the dunning process and so on, is the performance after a termination. To say, we have two things. On the one hand, it is more volume running in a termination, and the volume which is in a termination means non-performing loans are performing worse than in the past, and that needs a bit time. You send a termination, you send also, let us say, a bad debt receipt to the client. He should pay, and then it is a bit of process, needs some weeks. What we saw in Q3, that it was very fast done, the process, and finalized. At the end of the day, materialized in terms of losses and NPLs, and that level was higher than in the past. That is why we saw that not in Q2, that is why we saw that in Q3 in coordination with our accounting figures, with adjusting the models. Of course we are adjusting our models quite frequently. Nearly each quarter, a real adjustment we make in terms of parameters and so on, each year. Also, the models for valuation, non-performing loans, and also performing loans in terms of expected credit loss are more or less merciless, and that's why that impact is pretty hard. The other question was in terms of new business. We did a detailed analysis. What does it mean for new business? Can we be more selective? Should we avoid some industries, some kind of ticket sizes, some scores or whatever? It's different from country to country. On the other hand, as Marty mentioned before, we see at the moment we're performing new business also in term of contribution margin two. The expected credit loss, and of course the adjusted expected credit loss with our today's knowledge is part of our CM2 margin. So it's after risk provisioning, expected risk provisioning. Because of the interest rates which are coming down, we have at the moment a very strong contribution margin. Of course, we see a bit earlier the bad debts. On the other hand, we have also a huge portion of performing loans, which are paying the contribution margin two over the whole term of the contract. That's what I mentioned before. The 3,000 more terminations is from a short-term notice. That impact we see from a long-term run, it means 30 basis points and bring us to a loss rate of 1.5%. That loss rate, 1.5, is more or less part of the contribution margin calculation, where we are calculating 6%-6.5% for an average of a bit more than four years. We have another question from the call, same topic. The question is: Has the company expanded the target customers to new sectors or industries where the company had less experience that has led to more insolvencies? This is from Mr. Assad. We expand our portfolio over the last couple of years to new object categories and of course to some kind of new clients, and so also for new industries. But the first analysis are not showing that we can point out some industry or some categories quite clear. It's more or less across the landscape. We also know that in our bigger ticket approach, when we're having more or less long-term running contracts, our scoring system is not that perfect as in the small ticket approach for EUR 10,000, but that was always the case. Especially for Spain and France, it's more or less across the industries, an impact we saw now and we have to deal with now. An example for France, in that year in France, the promotion of the government for the pandemic was running out, so there was a payback date to pay back the support of the state in France. That's one of the drivers and a bit of leverage for insolvencies in France. There's also not a specific industry we can point out within our datas. Thank you. It's again about Spain and how should we look at Spain being the one and only subsidiary where a goodwill writedown had to be made? Yeah. To give you a number, we have as of the end of last year, we had EUR 34 million on the balance sheet in terms of goodwill. Far most of that part is stemming from our goodwill in the Portugal entity, where we really do not see any risk in an impairment trigger this year and against the background of this insolvency is coming now. The second largest was already Spain, and this has now been written down to zero. The next one is Finland with EUR 3 million. So there are, at the end of this year, roughly EUR 30 million of goodwill on our balance sheet, and we see no risk of further impairments on goodwill. Mm-hmm. Okay. Thank you. Another question is, again, about the guidance. I think we touched about this. Again, a new focus here is, are you still considering new business also at risk cost of below 1.5% despite the fact that you just had to reduce net income forecast significantly? Were the 1.5% for the risk cost previously too optimistic? Yeah. From a P&L perspective, I already mentioned that we have calculated for this year with risk costs of 1.1%, 1.2%. For our new business, we lie on the long-term average towards 1.5%. Yeah. Okay. So far we have no further questions. Again, if you would like to speak up, please raise your hand. Just raise to indicate that you'd like to ask a question. Again, we give it a try. Marius Fuhrberg, please. I learned that you need to unmute yourself. Maybe this is the trick. Hope that it works. But we can't hear you, very unfortunately. So maybe you just get your questions over as I suggested earlier. Okay. Ladies and gentlemen, this concludes our today's conference call. You may disconnect now, and I'd like to remind you of our Q3 results which will be published on November 14th, as already communicated. We'd like to say thank you for your time. Thank you for joining us, and goodbye. Thank you very much for your time and for your questions. Thanks a lot.