Earnings Call: Q2 2021

Jul 20, 2021

Thank you, operator, and welcome to our Q2 presentation. As usual, I will start by giving an introduction on some highlights in the quarter before I hand over to Robert, who will drill down on the financials on the board. If we then turn to Page 2. We are the number one challenger for larger and midsized ecom merchants in the Northeast and we have our strongest position in Sweden. We offer partnerships with merchants and the top modern checkout solution that includes our pay after delivery products and direct payment options offered to partners. The checkout is top notch when it comes to customer experience, to flexible payment options and integrated shipping options. And we have also built a fully digital to customer after purchase experience in our popular app. And the after purchase experience is important to get returning customers, both for the merchant and us. Geographically, our focus is on the Nordic markets where we offer our PAD product. But our checkout is also available outside of the Nordic to be able to support merchants that have an international offering. The digital payment offering is the heart and center of our business. We have a growing customer base now reaching 2,500,000 to customers, which is an increase with approximately 20% compared to a year ago. And through our digital channels, we offer additional products. We're focusing on our savings products and personal loans offering, but we also offer additional services and features through partners. If we then turn to Page 3. The 2nd quarter 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 PV products grew with 17%, which is somewhat lower than the last quarter. But remember that Q2 is the Q1 where we have a comparison that was also a quarter with the pandemic. Our income development is improving compared to the last quarter. The statutory income growth was 15%, But adjusted for the nonrecurring items that we had in the Q2 of 2020, income grew with 5%. This is below our long term ambition, but still a step in the right direction compared to the last quarter. And positive income is growing faster than the 5%, whilst income from reminder fees is decreasing. Positive is that the underlying business continued to grow, and we grew the customer base and merchant base. The positive income from customer and merchants continue to grow, but we still have some factors which affect the income comparison negatively. And as we said in the last quarter, the income margin for Payment Solutions this year is lower than what we saw in 2020, but still on a very attractive level. As mentioned in the presentation of the last quarter results, We see negative effects from regulations in Denmark and Norway, which also will affect income comparisons negatively in the Q3 as well. Our ambition and investments in digital services to make it easy for our customers to pay their invoice on time also has a negative effect on income in comparison with last year and lowers our income growth somewhat. But it is the right way to go to build a sustainable income model and to improve the merchant and customer offering. Our personal loans offering continued to develop well with stable growth, stable margins and improved credit quality. June was our best month for new lending since the start of the pandemic, and July is also performing well so far. When it comes to cost, we have during the last year had a very flat development, but this quarter costs are growing. This is due to several investments, among them the infrastructure shift we have been doing to continue the journey towards the cloud and also some increased costs due to being a listed company. The infrastructure shift is an investment needed to be able to scale for the future. Our old infrastructure has limitations and moving into a hybrid model where some applications have been moved to the cloud and some are in the new on premise environment in the data center is a big improvement. The cloud journey shall pave the way for increased scalability and improve our speed of future development. I'm happy that we've managed the shift so well without any negative impact on our merchants and customers. Losses and credit quality are continuing to improve, and I'll get back to that later in the presentation. If we then turn to Page 4, we continue to sign and onboard new merchants to our platform. This quarter, we onboarded Bilskiemma's Nordic Click and Collect late in May. The cooperation has started well. And already in June, this TMR was a top five merchant for us when it comes to volume. We also onboarded the Norwegian beauty company Blush, which was our first pure Norwegian merchant. We also continue to sign new merchants. And during The second half will go live with some larger, fast growing merchants like Stronger, Technik Crossett and Twistcheck and also some smaller partners within Beauty. In general, we've seen an increased interest from midsized merchants looking for a closer partner with well developed digital services for the end consumers. We're currently developing a more standardized offering for SME merchants and also discussing with potential partners to be able to streamline and simplify our offering for the segment of merchants. If you then turn to Page 5. As we put more merchants on our platform, we continue to see a smaller share of volume coming from our to previous sister companies within Kiel Group. This quarter, other merchants stood for 57% of the volume compared to 51% a year ago. And looking at the right graph, we're illustrating where the volume growth of 17% or SEK248 1,000,000 in PAD volume comes from. So, merchants that were live on our platform for the Q3 2020 grew with 13% and stood for approximately a third of the nominal growth. In this group, you, of course, have a wide variation of growth levels. New merchants that went live from Q3 20 and onwards represents approximately 2 thirds of the nominal growth in pulp volume. And the 3rd column illustrates the churn volume we have and that we see a lower growth from the previous group margins. Growth from external merchants are in total 32% to the overview. Please turn to Page 6. We want to achieve a simple, seamless and transparent digital customer journey. And to make it simple and transparent to the customer is key both for us and the merchants to get returning and happy customers. All the way from getting a notification that the purchase is complete through receiving the invoice, looking at what you've purchased to completing your payment with one click. It is a clear focus for Clear to make it easy for the consumers to use of products and to handle the payment. In our digital channels, we have enabled services that makes it simple for the customer to have the payment 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 Click. The investments we've made in our after purchase flow for the customer puts Clio on top in the Nordic when it comes to customer experience. And we see positive results from the investment in a number of areas, including reduced contact ratio with our customer service team, lower reminder rates and reduced debt collection share, which leads to positive customer experience and improved credit default. So let's talk more about credit underwriting and credit performance. Please turn to Page 7. One important element in our business model is, of course, our credit balance. We need to be automated fast to change and have models that can predict the likelihood that a customer that wants to take a credit also has the ability and willingness to handle that credit. We have built our own credit decision engine and scoring models, which combines internal and external data. The models are constantly improved, both when it comes to more data and more advanced techniques. The investments that we have made means that we, to date, can be much faster to do adjustments or roll out new models based on performance and improved knowledge. And during the last year, we've also launched our own scoring model for personal loans and for some products and market segments within Payment Solutions, where we previously mostly relied on generic scorecards from credit bureaus. Altogether, this improves our ability to make the right credit decision, but also to price, we expect. Please turn to Page 8. A year ago, when the pandemic began, We were concerned that we might see some deterioration in credit quality. Now more than a year later, We can conclude that our credit quality so far instead has improved. And this is the result of the actions we took, better models and fine tuned underwriting that we've implemented as well as the improved customer after purchase flows that I've talked about. Our credit risk performance in Payment Solutions has been very stable, but the underlying performance has improved, which is somewhat offset by negative effects from lower prices in our continuous sales agreements on nonperforming loans. All in all providing a very stable loss ratio over the last year. When it comes to personal loans, We have been quite risk averse since launch of the product, and we tightened our underwriting further in the start of the pandemic. And during the last year, we launched our customized underwriting model, and we have, during a longer period, had a positive trend when it comes to the loss ratio. Our rolling 12 month loss level is now at 2%. And the last two quarters, we have been below that level. This quarter being at a very low level, which I wouldn't extrapolate, but I'm happy that we perform as well as we do. This improves the risk adjusted margin, which Robert will cover later. And with that, I would like to hand over to Robert to drill from more on the financials in the quarter. So please turn to Page 9. Thanks, Carolina. Operator, please go to Page 10. Let's look at the financials and primarily focus on the Q2 figures. The statutory income grew with 15% and expenses were 8% lower than last year's same period. However, in Q2 last year, we had non recurring items both on the income and on the cost side, thereby affecting the year over year comparison for this quarter. On the income side, we changed the timing of revenue share to merchants, so it point sided with the customer income. This affected the income negatively by SEK 8,400,000. In addition, we broke down assets to a value of SEK 15,600,000 increasing depreciation and thereby total expenses. So to better reflect the underlying performance of Cliro, this presentation from now on exclude the mentioned nonrecurring items we had in Q2 last year. Next Page number 11, please. As you know, corona has had material effect on online shopping intensity since the outbreak last year. This quarter is the Q1 actually having the corona effect included in both periods. The underlying business momentum continued with 15 Lending book growth slightly lower than last quarter's growth of 17%. We see an improved income growth of 5% in the quarter, an improvement versus Q1 and a positive step in the right direction. However, growth is lower than our ambitions, causing income growth to be slower than the cost growth in the quarter. As mentioned in the Q1 report, the slower income growth versus balance growth is primarily due to the lower operating income margin impact driven on one hand by regulatory changes, but also by improved customer journey. Loan losses are coming in lower than previous year, although our lending is growing with 15%. We do not see any deterioration in credit quality connected to the pandemic. And as Carolina said, The underlying quality in our portfolio has improved as we continue to develop better scoring tools with more data available. Next Page, number 12, please. 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 17% in the quarter, which is somewhat lower than last quarter. But remember, it's the Q1 the pandemic is included in the comparison period. Operating margin reached 22.5% in the quarter, which is a very attractive margin, although lower than last year same period, but higher than Q1 'twenty one. As pinpointed in the Q1 presentation, We have a new web, a new app and we have added new services to further improve the customer journey. We have made it easy for customers to pay in time. We believe that these investments have been necessary in order to be relevant and that they will have a positive effect over time with more recurring customers and more merchants on our platform, which in turn will generate more volume and income to our platform over time. Having said that, we see less reminders sent out to customers and consequently lower margin in the quarter compared to last year. Apart from that, we also have headwinds from regulations in Denmark and Norway. Next quarter is the last quarter having these regulatory effects. So to sum it up, we expect the income margin within the segment to be rather stable going forward with some variations between quarters due to seasonality of the business. The loan loss levels are lower than last year and rather stable to the long term trend. Next Page, number 13, please. Let's focus on personal loans during the quarter. The income growth reached 17% and the loan book grew with 20% year over year. And as mentioned in the previous quarterly presentation, when it comes to new lending within personal loans, we have We've also seen that demand has dampened somewhat. Well, as Carolina said, we see some early positive signs of a change here, and June was our best month into new lending since the start of the pandemic. Worth to mention is that we have kept the operating margin level rather flat quarter over quarter throughout the entire 2021. The underlying credit quality in the segment has improved and no negative effects on customers' ability to pay was noted due to COVID. We see good improvement in our loss levels. And by keeping the income margin flat, we have been able to improve the risk adjusted income margin in the segment. Next Page number 14, please. When the pandemic started, we were concerned that we might see a deterioration in credit quality. But the opposite has rather happened, driven by continuous improvement in our underwriting process. The improved loan loss level impact our risk adjusted income margin positively, which is the margin after deducting debt losses from income. As you know, PAD is a seasonal business and margins can therefore be volatile in individual quarters. However, looking at the 12 month rolling trend for the risk adjusted margin, we can see more Stable development, although slightly negative. Trend is driven downwards due to the lower income margin in the segment and upwards by improved loan loss levels. As previously mentioned, the income margin is expected to be rather stable going forward. For digital banking, we see a strong growth in the margin taken out of the covering for risk. The trend has been positive, and we have improved the risk adjusted income margin with almost 1 percentage year over year. And remember that we operate this segment with a very low cost base. The momentum gives us good opportunities to scale with more volumes coming into our platform. Next Page number 15, please. As mentioned in previous quarterly presentations, our ambition is to grow income faster than cost over the years, but there may be variations and timings between quarters. In Q2, cost increased with 10%, setting us in at the cost level excluding D and A SEK 4,000,000 higher than Q1 2021. The The cost increase in the quarter is primarily connected to our cloud journey we have undertaken and being a listed company acting on a highly regulated market. Depreciation increased with 14% year over year. The intangible asset over the period was stable. The increased depreciation in the quarter is primarily due to the fact that we have started to depreciate all intangible assets in the second part of 2019. Having that said, we stand firm with our ambition to grow income faster than cost over the years, but there may be variations and timing between quarters. Our cost base is through majority built up by fixed costs, leaving good room for scalability and leverage in adding more volume to our platform. Next, Page 16, please. Before I hand over to Carolina, we should have a look at capital and liquidity. The capital situation is strong with almost 14.6 to send our SEK 300,000,000 in headroom towards regulatory requirement. That gives us a solid ground with good possibilities to realize to our growth ambitions. As you know, we have a diversified funding platform with deposits and a multi currency credit facility that fits our business very well. The absolute majority of our financing is coming from deposit from customers in Sweden, and we have a growing funding in euro. So all in all, We see that we can grow our balance sheet much more without altering our financing needs. And with that, I will hand over to you again, Carolina. Thank you, Robert. Slide 17, please. Okay. So with that, it's time for me to sum things up and to look forward as well. Our positive business momentum is continuing with increased volumes and we continue to sign and onboard new partners within Payment Solutions, which is the heart of our business. Payment Solutions is a tech driven business where we constantly improve our checkout and processes together with our partners. We are focused on larger and midsized merchants in the Nordics, where the merchants really appreciate the close partnership we offer them and the improved easy digital journey for the end consumers. Regarding the after purchase flow, We, together with the market leader, really stand out compared to peers. And merchants appreciate the competition between different to yours. And we have seen a clear and rising interest from merchants below SEK 100,000,000 turnover, which has kind of been the hurdle side for us earlier on in our offerings and solutions. As I mentioned earlier, We're looking into how we potentially could serve these merchants with a more standardized offering and how we could work with potential platform partners within this area. When it comes to digital banking services, we see positive sign of increased interest for our market leading offering, with June being the best month since the start of the pandemic and a promising start to July, although being a holiday month. As mentioned before, our income growth has been below our ambition for the last two quarters, even though we see some improvements this quarter. We are focusing on improving from here. I'm happy that our credit performance has been improving steadily. It is important for us. Equally important is to manage our cost base wisely, although continuous investments are needed to enable the competitive business. We stand firm with our long term ambition to grow income faster than cost, but there might be variations between quarters. Our next quarterly report will be published on the 26th October. And with that, I would like to hand over to the operator to open up for potential questions. Thank an an introduction. Our first question comes from the line of Herman Kirits of Carnegie. Please go ahead. Your line is now open. Good morning. Thanks for taking the question. So I could start on the Payment Solutions actually. On the number of merchants that you have live, now you're at 47. I believe you were at 48 in Q1 and since then you've added both steel CMI and flush. Could you tell us something about the 3 merchants minimum that you must have dropped during the quarter? So it's the Hoa Senge Group and Volkemets that have been reduced since that. And how much volume is that we should expect that's falling off? And did that impact already in Q2 or is that something we should see going forward? So in terms of how much it impacted the Q2 results is on the slide together with the kind of dampened on growth rate of the previous growth merchant. So it's kind of combined with the churn that you see on page which page was that? To the volume page. Yes. But I was thinking, did they go up basically in the end of the quarter or has that been that are visible throughout the quarter. It's been for the entire quarter more or less. Okay, perfect. Then if you just think about the growth going forward, we've heard now in a number of quarters that you see quite high activity of discussions with merchants and you do have a pipeline of a few that's expected common Gordian in H2. But Has there been anything that's been surprising you and how hard it's actually post those negotiations because arguably we haven't seen growth really come through at least until we're signed up at the time of our company. I think for The merchants, they are the largest site merchants. I mean, both there are longer durations in terms of the contract, so the process takes time. If you're asking if anything is surprising, I think some have held up on actually making a switch and prolonged to their existing partnership for a shorter period of time instead of doing a switch while it's been waiting for certain things. But I think that's also normal processes. So nothing is really surprising. But it is a tough and competitive in markets where it is important that we strengthen our offering both to the merchant and to the end consumers there because that's becoming more and more important for the merchants. Got it. Thank you. Then I can move on maybe to the cost side where you talk a bit about the new infrastructure that you put in place. Could you tell us a bit about if this work is finalized or is this something that's still ongoing in terms of moving it out? And also, if we should expect anything to become visible in terms of cost growing faster or so in the coming quarters from this. And then also a bit back towards the growth outlook, is this in any sense helping you to actually Address also those smaller merchants that you're talking about that you're showing some interest about joining the Clear platform. Good question with kind of many questions in it. But I'll try to start with your first question was, is The shift completed now. So the infrastructure shift as in moving into the new environment, because there won't be any immediate cost or spending. But when we talk about the scalability, what we mean is that we have a very fluctuating volume over the year depending on the season. And by having a containerized environment running in a public cloud, the infrastructure will be able to scale both grow and shrink with the actual needs instead of being holding capacity always for the maximum load, which then leads to overcapacity for larger periods of time. And the new infrastructure kind of with the new hardware, That's complete for this period. But the move into moving more and more things into the cloud has started and will continue for a couple of years until we have moved the entire infrastructure that we want to be in the cloud. So to that answer the question because then when you talk the question about to medium sized merchants. What this really enable us to is kind of the grow and shrink with the actual capacity needed for that period in time. So that's what this enables us. Okay. That's very clear. And just in terms of costs, is this kind of already in the cost trajectory we've seen or Is there anything additional coming on from the additional parts you want to move to the cloud? So in terms of when you have a service In the cloud, it goes on OpEx, whether you do infrastructure investment that goes on CapEx and through depreciation. So there will be, of course, potentially like the shift in terms of between those lines, but it won't be any impact on the totality as such. Absolutely, got it. Thank you. Then moving to the digital banking, You mentioned that the June sales were actually the highest you've seen since the start of the pandemic. But if you look to Q2 as a whole, the net sales were actually Quite low compared to previous quarters. Could we just guess what the number was for June and also kind of what we could expect for The second half of this year in terms of lending growth? I think that we actually, I don't have that number here. No, we don't have the number for June. But as you said, April, May was a bit slower and then we see June being the best new learning month since the pandemic started And July has started off well as well. So we're hopeful that we see a trend shift towards more with demand in the market, but it's a bit early to say that that's actually the case, but good signs of growing volumes. Okay. That sounds promising at least. Then perhaps last question from my side. On the provisional ratios For Stage 3, we see that that's been increasing now for a while and you're up to 46%, I think you were at 36% a year ago. How should we see that, Rodec, what is a good level where you're satisfied and don't feel the need to further strengthen those provision ratios? Can you repeat, because I missed you cut out in the beginning of the question in terms of what you said. You were asking about provision ratio? Yes, exactly. So the provisional ratios for Stage 3 loans, I believe have been increasing quite a lot over, let's say, the last year or so. So I think I get it to 46% coverage ratio there. What is a good level? When do you feel that you don't need to strengthen them further? I don't know if we are to guide upon that. I think Page 3 is such a small part of our total And then as we sell in forward close and solution rate guarantees, we have increased the provision ratios to be covered for future, I would say. But I don't expect them to actually go up a lot from here, but it's a small part of our credit portfolio. And I think what we primarily work on trying to optimize is to not have loans moving into Phase 3, but during the proper underwriting, so you will have a small percentage as possible that has to be put on the loan. And then, of course, the closure at default and the loss given default is driving a big portion of the provisioning in the later stage naturally given our model. Got it. That's all for me. Thank you very much. Thank you, Erwin, for always good questions. Thank you. We currently have no further audio questions. I'll hand back to the speakers for any further remarks. So we have one question from the webcast as well. So I will read the question and then I will leave it over an introduction. So the question from the webcast is income is slow growing, although volumes are growing faster than income. What will you do to improve the ironing capacity and start to have a positive result? And I think to answer that scale is needed. I mean, we have an attractive margin, but we need to continue put on more volume and more merchants and build our loan book as well. And we're strengthening our offerings towards merchants and our offerings towards consumers to enable that growth. I guess it's we'll see if you have a follow-up on that question by e mailing Andreas again. And he shakes his head here. So I think I'll say very much thank you from Robert, Andreas and myself and the rest of Cliro for taking time in this July beautiful summer day to come in and listen to us and have a good summer and talk to you later.