Earnings Call: Q1 2021

May 11, 2021

So welcome to our Q1 presentation. Today, we will have a shorter introduction, then I will present highlights from the quarter, mixed with some events after the quarter and give some more insights on the improved customer journeys in our digital platforms before I hand over to Robert, who will drill down on the financials of the quarter. So if we then turn to Page 2. We are the number one challenger for larger and midsizeecom merchants in the Nordics. We offer a partnership with merchants and a top modern checkout solution that includes our pay after delivery products and direct payment options offered through partners. The checkout is top notch when it comes to customer experience, flexible payment options and integrated shipping options. We have also built a fully digital customer experience in our popular app. The after purchase experience is important to get returning customers, both for the merchants and us. Geographically, our focus is on the Nordic markets, where we offer our PAD products. Our checkout is also available outside of the Nordics to be able to support merchants that have an international offering. The digital payment offering is at the heart and center of our business. We have 2,500,000 active customers. And through our digital channels, we offer additional products. We currently offer personal loans and savings in Sweden and have during the last year started to offer services through partners in the areas of insurance and sustainable consumption with the aim to increase the relevance and interactions in the platforms, which strengthens the relationship with our customers. If we then turn to Page 3. The Q1 was characterized with continued high activity in e commerce. Our merchants continue to see solid growth, and we grew with our merchants and through adding more partners on the platform. The volumes for our PED products grew with 27%. Our bottom line results have improved compared to the Q1 of 2020, and that is driven by the continued stable credit quality that we have. Our income development is a disappointment this quarter. We grew income with 1.4% compared to 1st of 2020. Positive is that our underlying business continued to grow, and we grew the customer base and merchant base, but a number of factors affect the income comparison negatively. As mentioned in the presentation of the last quarter results, Less income stemming from the 4th quarter volume is recorded in the Q1 as volumes came earlier in the Q4 compared to the historical pattern. We also see negative effects from regulations in Denmark and Norway, which which also will affect comparisons negatively in the second and third quarter. And the last main factor is that we get less late fees. The last thing is the result of the improved customer journeys that we have developed in our app, and we think this definitely is the right way to go and that the negative effect that we now see on the income side comes with gains when it comes to increased number of returning customers to attract more merchants, to improve costs and credit quality. Our personal loans We continue to develop well with growing volumes and stable margins, although growth continue to be at a lower level but stable level since the pandemic started. When it comes to the cost Development, we continue to have a stable cost level, although putting more and more volume on our platform. I'm pleased that the efforts that we continuously are doing in this area is paying off. This does not come with less investments in improving our customer offerings, but from improved services and processes. I'm also pleased that we are recording lower losses than the same period last year. As with cost, we are constantly working on improving our credit underwriting. And with more data and improved predictive models we are improving. I'm humbled to say that we do not see deterioration stemming from the pandemic. Our underlying credit quality in Payment Solutions is improving, and we are reporting a level of losses at 1.3% of the originated volume, which is a level that we've been running the business on over the last quarters. When it comes to personal loans, we have been quite risk averse since launch, and we tightened our underwriting further and the start of the pandemic. And during last year, we launched our customized underwriting model, and we continue to see that we have a very stable underlying and quality. During the Q1, we implemented an updated PD model for the personal loans, including a larger part of internal behavior. This is a natural progression given that we now have been running the portfolio for over 3 years and thereby have gathered sufficient historical data since the launch in 2017. With the model update, we record net reversals for the quarter, which is an effect of solid performance that we have in our portfolio. If we then turn to Page 4. As we put more merchants on our platform, we continue to see a smaller share of volume coming from our previous sister companies, winning Q1. This quarter, other merchants stood for 63% of the volume compared to 51% a year ago. And looking at the right graph, we're illustrating where the volume growth of 27% or SEK 332,000,000 in pub volume comes from. So merchants that were live on our platform before Q2 2020 grew with 35%. And in this group, you, of course, have a wide variation. New merchants that went live from Q2 2020 onwards, represents approximately the corresponding growth as the older merchant growth. The 3rd column illustrates the churn volumes that we have and that we see somewhat lower growth from the previous group merchants. So growth from external merchants are in total plus 56% year over year. If we then turn to Page 5, we constantly work on improving our checkout to provide the best solution to the merchant and consumer at the time of the purchase and to improve the post purchase experience. That is the core of what we do. In the beginning of the year, we improved our integrated shipping offering, And after the end of the quarter, we integrated Vipps and Mobile Pay in the checkout for Norway and Denmark. To have the most relevant payments and delivery options available is key for conversion and for flexibility for the customer. We hope that we also will be able to offer switch in our checkout in Sweden, but here the infrastructure around this and the larger bank's infrastructure has been an obstacle for us to introduce Zwish. But our ambition is to be able to have the opportunity to offer Zwish in the Czech where it makes sense. With the introduction of Vipps and mobile pay and with the rollout of the updated customer platforms in the other Nordic countries, which we did in the Q4 last year and in Q1, we have improved our Nordic offering substantially. And this has already started to pay off in attracting merchants with a Nordic footprint. In Q1, we onboarded a few merchants, among them, Scandinavian Luxury. We also signed Stronger, a strong brand to choose us among many for their Nordic business. And after the quarter ended, we also signed Twist Check for their Nordic markets. Both merchants are expected to be onboarded in the second half of the year when their current contracts expire. Last week, we also announced that we signed and went live with Blush, a 100% Norwegian merchant. This, of course, is a milestone for us to have a pure Norwegian merchant, and it also strengthens our position within Beauty. Plus is also the 1st merchant who has Vipps enabled in our checkout. Outside of the merchants mentioned, we also have increased interest from smaller and mid sized merchants and have signed a few of these deals in the quarter as well, even though we have not targeted our offering towards this group. Please turn to Page 6. Sustainability is important for Cliro, and we want to do our part. We, as consumers, will always consume. So the question is how we can do it more sustainably. We have noticed that this engages our customer. And clear with an important link between e merchants and consumers through payments. So we decided to use our position and platform to develop products and services that help people to understand how they consume today, but even more importantly, how they can act more sustainably. So we started with launching a service called Retouch Smart earlier this year in the kilo app with the aim to reduce the number of returns since this is attained for the merchants, for us and for the consumer. And in April, we followed with launching another service in the app called Lifestyle Profile, where users can see their personal carbon footprint. The purpose of the service is to increase awareness about sustainable consumption. So with the lifestyle profile, Keyros app users answers lifestyle related questions and then link to the actual bank transaction to learn the carbon emissions from each purchase and transaction. In this way, they gain insight on how their lifestyle and consumption habits affect the climate. The long term goal through increased awareness is to help customers reduce their carbon emissions. This is important for us, our merchants and the consumers, and therefore, we are proud to be in the forefront with these initiatives. Please turn to Page 7. During the quarter, it was 1 year since we launched our new app in Sweden, and it has been a huge success. And according to Cinch, it was the 2nd most downloaded financial app in Sweden after Zwish. The app is popular, gets strong ratings, increases our digital interactions with the customers, and the services comes with improved customer journeys and other positives, which I'll try to illustrate a bit further in the coming pages. So please turn to Page 8. This page I've shown before, you can see that we have a growing the customer base and that we continue to grow the digital interactions with the customers. Since start, we've had 5,000,000 across the Nordics and our active customers are 2,500,000 compared to 2,100,000 12 months ago. And there is an even steeper growth in the customer interactions, so customers using our digital platforms more, which has several benefits. Please turn to Page 9. We want to achieve a simple, seamless and transparent digital customer journey. To make it simple and transparent to the customer is key both for us and the merchant to get returning and happy customers, all the way from getting a notification that a purchase is complete through receiving the invoice, looking at what you purchased to complete in your payment with OneClick. Please turn to Page 10. Our area, financial services and buy now, pay later, has received a lot of attention in regard to customers not being able to pay or pay their invoicing by. Regardless of whether I think that, that criticism is fair or correct, it is a clear focus for Kildio to make it easy for the consumer to use our products and to handle their payments. In our digital channels, we have enabled services that makes it simple for the customer to handle their payments in time. We have multiple methods available. We notify and remind the customer when a payment is due. They can prolong the due date, pause the invoice when there is a return and schedule the payments or pay directly with a click. The investment we've made in our after purchase flow for the customers puts Cliro on top in the Nordics when it comes to customer experience. We see positive results from the investment in a number of areas. Reduced contact ratio, efficiency gains reduced reminder rates, positive customer experience, reduced debt collection share, positive customer experience and improved credit performance. But most of all, altogether, it improves for the customer, something that is more and more important for the merchants in choosing their payments partner. The negative impact we have on the income from less late fees is for us seen as a positive as it increases the sustainability of the model and of Clidro. With that, I would like to hand over to Robert to drill down some more on the financials in the quarter. Thank you, Carolina. Operator, please go to Page number 12. So let's look at the financials and primarily focus on the Q1 figures. The quarter was, as Carolina mentioned, characterized by high e commerce activity. The underlying business momentum continued with a strong 17% lending book growth and a 27% pad volume growth. Income growth with 1.4%, which is, of course, not satisfactory, but also has its explanations. The slow income growth is connected to lower operating income margin in PUD, as I will further describe in the segment presentation. If I'm disappointed with our income development, I'm on the contrary pleased with our cost control and the increased efficiency we see in the business. Although volume growth was 27%, cost growth at 1% and at a slower pace than income growth. Loan losses are coming in at significantly lower level than previous year's same period, and we do not see any deterioration in credit quality connected to the pandemic. The underlying quality in our portfolio has We have, in the quarter, updated the PD model for our personal loan portfolio for the first time since launch in 2017. This has caused a release in reserves moving the loan losses downwards. Next Page, number 13, please. So let's turn our eyes towards the segment and start with Payment Solutions that stands for 82% of our income generation. Volumes processed on our platform grew with 27% in the quarter, which is the strongest growth rate in more than 2 years. Operating margin reached 21.9% in the quarter, which is margin, although lower than last year's same period. As pinpointed in the Q4 presentation, Volume came in relatively early in Q4 compared to the historical pattern. This And consequently, the relative income boost in Q4 had a reverse negative effect in Q1. We have, during the last year, put substantial time and in improving our customer interfaces. We have a new web and new app, and we have added new services to further improve We have made it easier for customers to pay their bills in time. We believe that these Investments have been necessary in order to be relevant and that they will pay back over time with more recurring customers and more merchants on our platform, which in its turn will generate more volume and income to our platform over time. As Carolina illustrated, the new services have also increased efficiencies in the sense that less Customers need to contact our customer service. Customers can now handle more things on their own, which will further improve our ability to scale. Having said that, we see less reminders sent out to customers and consequently less income in the quarter. Apart from that, and as mentioned in the Q4 reporting, we have headwinds from regulations in Denmark and Norway. This affects income negative in the comparison. Compared to last year, you see a lower margin in the segment. We expect the income margin that we are running the business on now to be rather stable going forward. The loan losses are lower than last year, and the loss level is rather stable to the long term trend. Next Page number 14, please. As you know, we have millions We process over 7,000,000 transactions yearly, which means that we generate a lot of interactions and data about our customers. We have in total more than 12,000,000 touch points yearly with customers. That gives us good opportunities to target additional products to our customer base. Saving accounts was the first product out, And we have grown from nothing in 2017 and now stand for 92% of our funding. The second product out was personal loans that now stands for 18% of our income generation with near to EUR 1,000,000,000 lent out to the public. We have achieved this growth by targeting our best customer base without using expensive brokerage or marketing, which means that we have close to 0 cost of acquisition. On top of that, our setup is highly automated and few resources associated with it, meaning that our fixed cost connected to this line of product is very limited. The internal data we have regarding our customer base also gives of advantages when it comes to the underwriting. So from an income perspective, personal loans with its Thickness also serve as a complement to the more seasonal payment solution. Having that said, let's focus on personal loans during the quarter. The income growth reached 24%, and the loan book grew with 21%. And as mentioned in the Q3 and Q4 presentation, When it comes to new lending within personal loans, we have chosen to be a bit more cautious in our underwriting due to COVID, which we also seen that demand has dampened somewhat, and the growth during corona has been around 5% quarter over quarter. Worth to mention is that we have kept operating margin level flat quarter over quarter throughout the entire 2020 and now Q1 'twenty one. We continue to see good opportunities to grow our lending book as we attract more customers through our payment solutions and increase the digital interactions with them. The underlying credit quality in the segment has been stable and no negative effect on customers' ability to pay with note due to COVID. We see a negative loan loss level in the quarter due to The update is a natural evolvement, given that we now have been running the portfolio for over 3 years and thereby have gathered sufficient historical data to be able to fine tune the model. Next Page, number 15, please. We continue to have a stable cost development, although processing 27% higher volumes in the quarter. It is a development we are pleased with. It continues to be a focus for us to build a scalable platform. The quarterly year over year cost growth is 1%. And as you know, Payment Solutions is a seasonal business and especially in the adjusting intensive last quarter of the year. That is the reason for us going down CHF 5,000,000 in cost compared to Q4. With that said, we will continue to invest in our organization and platform in the coming years. Our ambition is to grow income faster than cost over the year, but there may be variation in timings between quarters, depending on seasonality and the timing delay in between volume and income. Our cost base is, through the majority, built up at fixed cost, leaving good room for scalability and leverage in adding more volume to our platform. Next Page number 16, please. Let's take a closer look at the credit quality, and let's start with Payment Solutions. And as you know, for Payment Solutions, we compare the credit losses in the P and L to the already originated credit volume. Historically, we have had volatility related to sales and write downs of portfolios not included in our continued sales agreement. So in the adjusted graphs, we have taken out these effects and the extra provisioning we now are having due to COVID. The credit loss level was unusually high last year, same period, and that was connected to the increased provisioning due to COVID and the loss that in implementing our clean balance sheet strategy. Today, we have a very limited exposure of lending to customers that are not part of our continued sales agreement. So the risk of volatility are now low. The underlying credit quality and payment solution has been rather Stable, we see positive development in the underlying credit quality and a bit lower prices in our sale agreements, which affect losses negatively, but all in all, very stable development. Let's move on to personal loans. The adjustments that you see in Q1 is due to the updated reservation model for personal loans. The updated model is based on considerably more data than the model that was implemented when the product was launched in 2017. The effect, by going over to the new model, reduces provision with SEK 7,500,000. Given that, the credit quality in personal loans is stable year over year, reaching 2 point 2% adjusted rolling 12 months. So to sum up, we do not see any worsening credit quality in our books due to COVID and the underlying credit quality is stable. The underlying credit loss levels rolling 12 months It's below the previously communicated target, both in Payment Solutions and in personal loans. Next Page number 17, please. Before I hand over to Carolina, we should have a brief look at capital and liquidity. The capital situation is strong with almost 15% to EUR 320,000,000 in headroom towards regulatory requirements. That gives us a solid ground with good possibilities to realize our growth ambition. Regarding liquidity, as you know, we have a diversified funding platform with deposits and a multicurrency credit facility that fits our business very well since we are having a fast moving cash flow in Payment Solutions and a more stable movement in personal loans. The absolute majority of our financing is coming from deposits from customers in Sweden, and we have a growing funding in euro. The euro funding gives us more flexibility, and we can use So all in all, we see that we can grow our balance sheet considerably without altering our financing needs. And with that, I will hand over to you again, Carolina. Thank you, Robert. Next page, please. So to summarize the quarter once again, we see good business development and solid volume development. We continue to grow our merchant base and attract new medium and large sized high profile merchants who chooses us over competition. We will continue to onboard and sign more merchants. Our high profile signing build Tiemago live date has been delayed from our previous estimates and is expected to be launched during this quarter and is also expected to give substantial growth in volumes and customers. We have a growth strategy, and a few weeks ago, we also communicated that we have complemented that growth strategy with the potential to do acquisitions to further strengthen Sida's position in digital payments. I see this as another tool in our journey to be the number one challenger when it comes to payment solutions in the Nordics. We were disappointed with the income growth in Q1, and I expect some improvements in the coming quarter. And I'm slightly positive when it comes to the outlook on our credit quality based on the good performance I see from our customers. Next quarter results will be presented in a little bit more than 2 months on the 20th July. So with that, I conclude this presentation and open up for questions and hand over back to you, operator. Thank And we have a question from the line of Ermin Carrick from Carnegie. Please go ahead. Your line is open. Good morning, and thanks for taking the questions and the presentation. Quite a number of questions that you have on it. If we maybe start with Payment Solutions and the growth outlook there. A few questions maybe in one go there. So could Could you talk a bit more about activities for new merchants? How many you've signed but haven't onboarded yet? And then also I thought Flush was quite interesting because as you say, it's basically the first merchant that domiciled outside of Sweden. So What enabled that was the integration of VIX? There was a tipping point or is it a merchant that was easier to get Because you already served sister companies like 11 and Nordic Steel. And just generally, have you increased your focus on merchants outside of Sweden now going forward. Good start with that, maybe. Yes. I think we can start with start from the back. So in terms of increased focus in the Nordics, I mean, what we see when we discuss with merchants that many really care about both the checkout and the after purchase experience. So now when we have strengthened our after purchase experience in our digital platform, We believe that we're better suited to service both the merchants and the customers in the other Nordic countries, and therefore, we have put an increased focus in getting that ability to really be good in the Nordics. When it comes to blush, for them, Vipps was very, very important. And also the introduction, of course, from Blush comes with recommendations. So does many of the deals that we discuss with comes from recommendations from partners that are using us and that are really happy with the service that we provide. And then I'll hand over to Andreas to answer the first part of the question. Yes. When it comes to signed merchants not yet onboarded, we, of course, as Carolina mentioned, have Bill Tianna, who we Expect to launch to onboard in Q2. And then we have the signings of Twist, Shake and Stronger, which we expect to go live in the second half of twenty twenty one. And then we have a number a small number of other merchants, but with lower less volume expected from them than from the one I mentioned. Then when it comes to the general interest promotions. I think I'll lead to Carolina to answer that question. So and what was that question, Edmond? Sorry, I missed the first part of your first question. Sure. Now I was just if you could talk a bit about the general activity to acquire new merchants. And if I could maybe already add on that from what Andrea said, It sounds like you're also taking on some maybe smaller merchants than sounded like your target group initially. Are you working with those For merchants differently, I presume you can't offer them the same kind of hands on partnership service If they have smaller volumes, if you're still going to get the same scalability on it. Yes. I think It's true, the statement that you're saying that the smaller merchants will not be giving the same level of physical interaction as larger merchants, But they will still get a lot of the good value that we automate in our processes when it comes to today's The information, knowledge and development of our joint business. So of course, we work differently with smaller merchants. And when it comes to the general interest, I think I have to say that in general, the more business that we make, the more interest we raise. Put that down to your questions or a minute. Yes, definitely. Thank you. Then I'm also just thinking In terms of the interest margin on the Cadence Solutions, it's been around 12.5% or so on average in 2020, and now we saw it falling to around 11.5% in Q1. Is that driven by seasonality with more volumes in Q4 and Over less than Q1 or is that sort of lower interest on late payments that's coming through there as well and not just on the commission income line? I think, it's down to that question. I think what we said in the presentation was that We expect that the total income margin will be rather stable in Payment Solutions from here. Then we have in the quarter, we have A few negative effects when it comes to the net income margin, and that is related to that it's one day less compared to Q1 in 2020, which affects net interest income negatively. We also have some negative effects from the regulation in Denmark, which will also affect The comparison is somewhat negative in Q2 and Q3. And then I'm trying to think of the third one, but Maybe Robert can help me out on the part one. It's 3 main Yes. The third one is that we have a Slightly lower growth in the interest bearing book in that quarter because when you look at The net loan book growth, you have to remember that you have invoices, you have the NPLs and you have the various different products. So that is the third one. The important message, Herman, is that we expect The total operating income margin in Payment Solutions to be rather stable from this level that we had in the quarter. Okay. Thank you. Then if we move over to the digital banking side. So you've updated or calibrated your provisioning model. You previously had kind of target of being below 2.5% in loan loss ratio for the personal loans. How should we think about that now with this updated tuition model? I think that you should think about it as what the adjusted rolling 12 months that we are on right now and kind of have been on that is a roughly adequate level. Okay. Got it. Then perhaps lastly on more general questions. So you mentioned a bit on the Potential for M and A, could you give us any more flavor on that? Would it be solely for Payment Solutions? Would you be looking at Adding some capabilities or is it more geographical exposure or what are you mainly looking for in that area? I think that what we would be looking at is areas that will be strengthening us in terms of our payments business. And that can be a wider range of things that can suit that plate. Okay. A cryptic answer, but I'll just have to go with it. But I think it's important to believe that, I mean, what we want to do is things that are payment related. Yes. Then lastly, I mean, with the vaccine rollout and things, Fuku is starting to normalize a bit, How are you thinking about What is the rollout? You cut out there. I'm sorry. So with the vaccine rollout and hopefully things just generally normalizing now in the world. How do you think about launching new financial targets and how we should think about SCIERO long term? We have no decision made yet, but we and we will need to get back to you when we can get back to you in terms of from financial targets because we know that, that is something that will be of help for yourselves and for us in terms of how to communicate it. So we don't have any to communicate at the moment. Okay. Thank you very much for taking the questions. That's all for me. Thank you. There are no further questions at this time. Please go ahead, speakers. Thank you. We have one question from the webcast as well. So I will read that question and then I will leave over to Carolina to answer the question. In the coming quarters, Is the growth of pad volume going to be more in line with the growth of revenues? Okay. So I think that the expected growth of revenues should be rather kind of connected to the expected development of our loan book, because the PD volume is the volume that happens on all our payment methods, and that's a mix of invoice, part payments and buy now, pay later. But So you shouldn't see that the PAD volume is equal to revenue development within Payment Solutions. But the increased payd volume, of course, gives us a bigger opportunity to grow our loan book. So expected Income development should be linked to the expected growth of the loan book. And just to emphasize what Well, Robert and Andreas already have said that we expect our income margin in relation to our loan book to be relatively stable from the level that we are for the quarter for our Payment Solutions business. Is that all from the chat? That's all from the chat. Do you have any more questions from the operator? No further questions. So with that, then I say thank you all for attending, and I hope to see or hear from you again in the end of July, 20 July. Thank you.