Earnings Call: Q3 2021

Oct 26, 2021

Welcome to the Clearum Q3 2021 Report. Throughout the call, all participants will be in listening only mode, and afterwards, there will be a question and answer session. I am pleased to present our first speaker of the day, CEO, Carolina Brantmann. Please go ahead with your meeting. Thank you, and welcome to our Q3 presentation. I will start by giving an introduction on some highlights in the quarter as well as some financials before I hand over to Robert, who will drill on the financials of the quarter. Slide 2, please. In Q3, we continue to grow our business volumes. Both payment volumes and lending continue to grow. The growth is a consequence of the underlying growth for our previous merchant partners within ecom as well as the result of us continuously onboarding new partners. Growth rates for payment volumes was somewhat lower than the last quarters as we see some effects from societies coming back to more of a normal environment post COVID. In Q3, there is also, in general, a lower activity versus second and especially Q4 when it comes to seasonality. Our margins continues to be stable within our segments. As we've discussed in Q1 and Q2 reports, the margin within Payment Solutions is lower than last year, but has been stable throughout 2021. We continue to improve processes and are moving forward when it comes to exploring the SME segment in Sweden. The year, as part of that process, we've started a cooperation with Viking Groupen, one of the largest e com platforms in Sweden. In the highly evolved digital ecosystem we operate within, the ability to create a frictionless onboarding experience for our merchants, e commerce platforms and partners is vital to our growth. And during this quarter, we took an important step in this direction by opening up our API definitions for public access to both existing as well as new potential merchants, e commerce platforms and partners, making it easier to, at an early stage, integrate with Clio's payment solutions through our developer portal. During the quarter, there was a lot of media attention related to e mail marketing of our private loan offering. Our intention has always been to market the product to consumers of ours, which could have an interest of our offering. It has always been easy to opt out from our marketing, and the marketing has been limited to customers that have used Clearus credit products and that were above 20 years of age. When the criticism reached our business, we immediately took contact with our merchant partners and quickly decided to stop the marketing. After that, the Swedish consumer agency opened a supervisory matter, and we, of course, fully cooperate with the agency on this matter. I think it's important to mention that the matter is connected to our e mail marketing and not to the product itself. Our private loan is highly appreciated from our customers. Next page, please. If we look at the financial outcome on a high level for Q3 compared to Q3 last year. Pay after delivery volume grew with 12% and total lending was 60%. When looking at the 5 quarter trend, you see the importance of the 4th quarter. We are now a few weeks into the peak quarter, and volume wise, it has started positively. We and our merchants are ramping up for the big shopping events like Black Week and Christmas, and the Q4 is usually the quarter with the highest volume and the largest inflow of new customers. The income growth in the quarter was 4%, which is in line with the growth levels we reported last quarter, and this is below our ambition. The quarter, we have a strong quarter of the lower income margin, which mainly is driven by lower reminder income. As a result of improved customer processes and regulatory changes. This has a negative effect on our income the quarter, it comes with better customer experience and has a positive effect on our credit quality. And our credit risk continues to have a positive development. The continuous development of our credit processes is paying off. So when we look at income and deduct credit losses, the graph risk adjusted income, we have a growth of 11%. When it comes to costs, we have a 10% increase versus last year, but costs have stabilized at the level we saw in Q2. And looking at the last 5 quarters, you can see that our OpEx has been quite stable from Q4 2020, the quarter, our depreciation has increased. The increased depreciation is due to a combination of quicker amortization and somewhat increased investment in our technical platform and services towards merchants. Summing all together, our operating profit for Q3 is at the same levels as we had in Q3 2020. The year, if we then look at the development year to date, you will recognize the trend. We have somewhat higher pay after delivery growth and low single digit income growth. But as for the quarterly isolated figures, the year, we see a big improvement in credit losses, which leads to a 13% growth in the risk adjusted income, which is above the 7% cost growth. All in all, for the year, the operating profit has improved with SEK 10,000,000 to a negative SEK 30,000,000, largely driven the year. Next page, please. The year, as usual, we will also have a look at the development for the pay after delivery volumes, so volumes with our Inogen products. All in all, PAS volumes grew with SEK 175,000,000 or 12%. And merchants that have been on the platform outside previous Clear Group from Q3 last year grew their volume with 12% and represent half of the growth in the quarter. The other half comes from new merchants, which here mainly are BIL and Siamma, Blush and Scandinavian Luxury. Then the churn of Oeste and E evens out the growth that we have from our largest merchants, Nelis and CERION. If we look at the development from our geographic dimension, Sweden still holds approximately 80% the total pay after delivery volume, although Norway has the fastest relative growth rate in the quarter with a growth of 46%. The growth in Norway is primarily driven by the recent onboarding of Ziztsema and Plush. And with that, I hand over to Robert to drill a bit more on the financials of the quarter. Thanks, Carolina. The year, operator, please go to Page 7. Let's look at the financials and primarily focus on the Q3 figures. The underlying business momentum continued with 16% lending book growth, slightly higher than last quarter growth of 15%. The year, income growth was 4% in line with Q2, which is of course not satisfactory, but also has its explanation. As mentioned in both the Q1 and Q2 report, the slower income growth versus balance growth this year, it's primarily due to the lower operating income margin in Payment Solutions, driven on one hand by regulatory changes, the year, but also by improved customer journeys. In Q2, we grew costs year over year reaching EUR 91,000,000. We have kept that Q2 cost level flat over into Q3. We continue to see improvement in loan losses with steadily improving ratios in both segments. Loan losses are for the 2nd quarter in a row coming in lower than previous year, the year, although our lending is growing with 16%. Next Page number 8, please. Let's turn our eyes towards the segments and start with Payment Solutions that stands for 81% of our income generation. The loan book grew with 12% year over year, which is the same growth rate as previous quarter. Operating margin reached 22.3% in the quarter, which is a very attractive margin, the quarter, although 2 80 basis points lower than last year's same period, but at the same level as Q1 and Q2 this year. The year, as pinpointed before, the underlying volume development gross income, the quarter, we see less reminders sent out to customers and consequently lower margin in the quarter compared to last year. Apart from that, Q3 is the last quarter of headwinds from regulations in Denmark and Norway. The loan loss level is lower than last year and rather stable to the long term trend. Next Page number 9, please. Let's focus on personal loans during the quarter. Both the income and loan book grew with 20% year over year. As Carolina mentioned, we decided to stop our e mail marketing early in September, which will lower the growth rates going forward. The quarter, we have kept operating margin level rather flat quarter over quarter throughout the entire 2020 2021. The underlying credit quality in the segment has improved and no negative effects on customers' ability to pay was noted. The year, next Page number 10, please. As you know, Payment Solutions 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 a more stable development, although slightly negative. The trend is driven downwards due to the lower income margin in the segment and upwards by improved loan loss levels. For digital banking, we see a strong growth in the margin, obviously deducting the cost of risk. The trend has been positive and we have improved the risk adjusted income margin with almost 100 basis points year over year. The year, we operate this segment with a very low cost base. Next Page number 11 please. Let's take a closer look at the credit quality. This macro outlook has improved and we haven't seen any deterioration in the credit quality since COVID started, we have released the last extra provisions held since COVID outbreak. This affects both Payment Solutions and Personal Loans positively in the quarter, as you can see in the adjusted graphs. For Payment Solutions, we compare the credit losses in the P and L to the originated credit volume. As you can see, the credit quality has been rather stable than last quarters. We see positive development in the underlying credit quality the year, we have somewhat lower prices in our sales agreement. This gives us a very stable development. The personal loans, we compare the credit losses in the P and L to the gross loan book. We have seen good development in the credit loss levels during all quarters of the year driven by improved underlying credit quality. Given that the credit quality in personal loans is improving 30 basis points year over year, reaching 1.9% adjusted growth in 12 months. So to sum up, we see good trends both in Payment Solutions and in Personal Loans when it comes to our credit risk. The year, next Page number 12, please. As mentioned, our ambition is to grow income faster than cost over the years, the quarter, we have a very strong quarter, but there may be variations in timing between quarters. In Q2, we grew the cost base reaching SEK91,000,000. Q3, we have that cost level flat. And as Carolina mentioned, if you look at the last quarters, you can see that our OpEx has been quite stable from Q4 2020, but that our depreciation has increased. The increased depreciation is due to a combination of shorter amortization period and somewhat increased investments in our technical platform and services towards merchant. So looking ahead, As you know, Payment Solutions is a seasonal business and especially in the last quarter of the year. We have Black Friday, Cyber Monday and Christmas shopping, which drives merchant sales and thereby our volume and consequently variable costs. When looking at Q3 2020 and Q4 2020, one can draw the conclusion that cost will move with the same magnitude this year. We do not expect that increase in cost in Q4 this year as last year. This seems we have put substantial time and effort to lower our variable cost per transaction. Having that said, we stand firm with our ambition to grow income fast the year, but there may be variations and timings between quarters. Next, Page number 13, please. The capital situation is strong with almost 15% or SEK 280,000,000 in headroom towards regulatory requirements. The year, the same with liquidity having funding both from customers in euro and SEK and the multi currency credit facility on top of it. The year, combined, it gives us good possibilities to realize our growth ambitions. And with that, I will hand over to you again, Carolina. Thank you, Robert. So moving to the final slide. Next slide, please. Time to sum up and look a bit ahead. We're continuing to grow our business and volumes, but when comparing to last year, it is at a lower margin. The year, looking ahead, I think we'll continue to see some margin pressure relating to reduced income from consumers. We need to offset that margin reduction with gradually transforming our business model and balancing the future earnings sourced from both end consumers and merchants. We need to scale our business and that is done by growth. And that growth comes through providing an increased value to merchants and end consumers. So how do we do that then? Firstly, by continuing to strengthen our position as the largest in the largest merchant segment, which is our core offering. We have in a few years' time grown to be the number 2 player in the market in Sweden for larger merchants. We will continue to strengthen that position by growing into new segments and acquiring new customers. The sales processes are here sometimes longer than we wish for, but we continue to have many good ongoing dialogues, both in existing segments and within new segments and look forward to signing and go live with new deals. Secondly, SME. We've taken some small steps in exploring a more standardized offering towards the SME market Sweden. Key for us in the SME road map is 3 things: a standardized offering, improved onboarding processes and go to market strategy through platform partners to efficiently reach more merchants and to simplify onboard. We believe there is an attractive income margin within the segment, the year, we need to be efficient when we develop the offering for that attractive margin to filter through the P and L and to mitigate pressure we see on consumer margin. The improvements we make in processes the year, linked to SME will also benefit our larger partners. To enter the SME market will not be done in a quarter or 2, but I do not see why we, over a longer time horizon, should have less of an ambition than we have in the large margin segment. Thirdly, to be able to deliver on our future growth ambitions and to provide more value to our merchants and consumers, we adjusted our organization and our ways of working in the beginning of October. The adjusted organization will have an increased focus some payments and are expected to enhance our execution power within our strategic focus area and that it also will enhance our efficiency going forward. Efficiency is also crucial to tackle the the year. We have, during the last year, lowered our variable spend per transaction and it continues to be an important this year. This year, we can see that variable expenses are nominally lower or the volumes are increasing, which increases our scalability. When it comes to our fixed costs, which is the larger part of the cost base, the year, the aim of the changed organization is that we now have reached the size that we need to be to be able to deliver on our growth agenda. So before opening up for questions, I just want to share where we are here at Neff. We're 3 weeks into the seasonally strongest quarter, and from a volume perspective, we started fairly strong. The year, in addition to that, we have welcomed significant process to the Kilo family, and our expectation is that stronger will be light during the coming weeks. So I look forward to the coming weeks months to finish off the year of 2021. And with that, we conclude our presentation and open up for Our first question comes from Eren Karimich from Carnegie. Please go ahead. Good morning. Thanks for taking the question. If we just start maybe on the merchant acquisition momentum. The HUD has been growing quite nicely still even though the income has been lagging. But just one important driver of that is adding new merchants. And if we look now more recently, the acquisition momentum has been quite slow compared to maybe one and a half years ago or so, would you say the competition has increased? Or has your focus not been as strong on the large merchants as before while you've been trying to also venture out in the SME area? Or how would you explain that? I think it's an excellent question. I mean, there is tough competition in the market, but I don't think you say that it has impacted in the market, but I don't think I can say that it has impacted our signing of merchants more than it has done previously. We, of course, wish to sign and onboard more merchants that we've done recently, but I feel confident that we have good dialogues with the merchants, But there are no sales processes and Q3 is usually also quiet because of holidays being part of the quarter. But I feel positive for the future. Have you noticed anything? I mean, I suppose it's hard to give any tangible as I thought, but more maybe in the communication with potential merchants from adding, for instance, Blasch in Norway when it comes to the potential to add more non Swedish domiciled merchants? I think having if you are Norwegian, of course, is a testament that the offer in Norway is strong. And I think as we discussed before, I mean, our focus has historically been Sweden with the Nordic merchants And that continues to be our primary focus, but we are, of course, also welcoming other Nordic players to our senior family. Thank you. Then you mentioned that you open up APIs to more external parties. Is that something you see as kind of a competitive edge compared to peers? Has that been something that's being requested by are your partners? Or how should we see the impact from that move? I think the importance of having a more than developer portal in a tech company is there. And I think that where we have been historically hasn't been really at par with the technical pieces that we actually have been providing. So I think we are now with what the work that we're doing really adding something and giving the year, we have a lot of focus and more an openness to what we have and how we do things, which I think is beneficial. Because I think you can see your developer portal a little bit like your kind of employee value proposition, but for Techy's people. Got it. Then if we move on to the Digital Banking segment. I believe in Q3, you had around SEK 55,000,000 of net new sales on the lending book. Obviously, you discontinued the email marketing during September. So what's your expectation for the lending growth on the consumer loan side going forward? I mean, I think comparing year over year, I think we will continue to the year growth, I think it will be somewhat slower than what it would have been had we continued this email marketing channel as such. But sorry. And I think we might have talked about this in a different the Forum, you and I, but I think the number of applications are roughly down 20% in September compared to kind of the July, the August figures. So I think that kind of gives you a little bit of a data point. Yes. Thank you. And then perhaps lastly on Q4 and how we should think about head growth, obviously, last year, we had lockdowns and everything. So we had a lot of the Christmas shopping coming in during Black Week, which then also spilled over in more income already in Q4, I think historically the volumes coming Q4, but the income is coming Q1. How do you see that timing coming out this year? I think we're positive because we're welcoming new merchants coming into the quarter. But I think that when you're looking on the seasonally strong quarter, I think to predict how Black Week and Christmas shopping is going to be and how kind of the supply chain is going to work for merchants this year, we're selling physical goods or we're financing the sale of physical goods. I think it's very, very difficult to predict For myself, but I think we have some positive this year with welcoming new merchants, and I think we're looking forward to being a very this quarter when it comes to seasonality. Wonderful. Great. Thanks for taking the questions. Thank you, Ahmed. Our next question comes from Erik Vistuben from Sanskodak Vlodet. Please go ahead. Eftel, the call, I remind you that if you do wish to ask a question, please press 1 on your telephone keypad. There are no further questions, I hand back to our speakers. So then I'll just thank you for dialing in and listening to our Q3 presentation, and I look forward to sharing our Q4 in the the Q3 of February. Thank you very much. Thank you.