Earnings Call: Q3 2020

Oct 21, 2020

Hi, and welcome to Cliro's First Quarter Report. Having been a separately listed company for all of 19 days, we've been looking forward to today to share our Q3 results and to tell you more about Cliro. Today's presentation will be slightly different from a normal quarterly presentation, and I'll start with a general business description prior to getting into the Q3 events and numbers. Today's presentation will be given by myself, Carolina Brandsman, the CEO and Robert Stando, CFO. Next page, number 2, please. Clear is a tech company offering payment solutions and digital banking services. We were founded 6 years ago by the, at the time, largest e commerce group in the New Orleans. And back then, there was a need for a payment provider who listened to the needs of the merchants and develop the products and services based on the needs of merchants and end consumers. So with that purpose, Clear was founded by merchants for merchants and that is deeply ingrained in our DNA. We offer our payment solutions across the Nordics and personal loans and savings in Sweden. And since day 1, we've had over 4,500,000 customers. And today, we are 2,300,000 active customers. Customers frequently use 1 or more of our products. And we meet our customers in our digital platform and have in the last 12 months had 10,900,000 interactions and those are increasing. We also service our customers on local language from our office in Stockholm on e mail, phone and chat. Please turn to Page number 3. We offer a payment solution that adds value for both the merchant and end consumer. And the most common way for the merchant to integrate is our full checkout solution. That is the way that the customer gets in contact with Clio for the first time in the merchant's checkout. Clio checkout is developed to optimize conversion and to maximize a convenient and transparent customer experience and at the same time, lend into the merchant site. Clear checkout offers both before and after delivery payment methods. Before delivery with direct and card payments that we offer with partners and pay after delivery with invoice, buy now, pay later products and fixed and flexible card payments. And these are the payment methods that we refer to when we talk about clear payments, which is the part that gives us our income. And depending on the merchant, the distribution between payment methods vary. But on average, 50% to 55% of the merchants' total sales goes through the Cliro payment methods. And in the last 12 months, we have had SEK 5,800,000,000 in kero volume. This setup works and is sustainable because it provides a value to all parties involved. For the merchant, our partnership model provides the value with a high conversion, improved cash flow and that we resume the credit risk. For the consumer, it is convenient and simple. It provides the pay after delivery so you can receive the goods before you pay, And it gives you the payment flexibility when you want or need that. And for us, for Clilio, it gives us more merchants and through that, relationships with millions of customers. Please turn to Page number 4. We acquire all our customers through the checkout. So when someone chooses the after delivery payment methods, they become a Clio customer. And in the last 12 months, we've had 2,300,000 customers making 6,500,000 transactions. And the last thing that meets the customer at the merchant site is a thank you page, where we can display different messages. And here the message is download the app, because we can then notify the customer, dear customer, it's now time to pay an invoice that is due. And when a customer logs into the app and moves around, we learn by their behavior. Customers not only use our products more, they also interact more and more with our platform. And in the last 12 months, we've had 10,900,000 interactions. And all of these customers using our products and the platform enables us to build up data. And data is central in our strategy to create customer relevance. To create and offer relevance, we need to understand their needs. And to do just that, we need data and the ability to turn insights to turn data into insights. And we have both data and the ability. Today, we combine our own data with external information and work with insights and predictive modeling across the customer lifecycle in both credit and our commercial areas. And the better we become, the more insights we gain, the more relevant we can become towards our customers and offer different messages, offer product information depending on the customer. Today, we cross sell loans and savings to our customers, and the data that we have available gives us 2 distinct advantages. It's the cost of acquisition and credit decisioning. We offer our loans in our own channels and do not use loan brokers, which results in a low cost of acquisition. And at the point in time when we make the credit assessment of the consumer, we have all the external credit information at our disposal, but we also have more recent and updated proprietary or payment information that helps us make a different and hopefully better credit assessment. We have since the launch of personal loans in 2017 been growing this product and have now a loan book of €896,000,000 with almost no marketing spend. The other product that we cross sell is consumer savings accounts. And today, that portfolio is at SEK 2,000,000,000. Saving account provides increased engagement and customer loyalty and is also a valuable funding source that currently finance 85% of our lending to consumers. Please turn to Page number 5. Our operating profit and profitability are impacted and derived from a number of factors. It starts with the merchant sales. And roughly half of the merchant sales is kilo volume and our sale grows with increasing number of merchants and our existing merchants' underlying growth. Customers choosing our payment alternatives in the checkout or at the later stage builds up our operating income in our segment payment solution. The more volume that we process on our platform, the larger the lending book will become and the more income we will earn on interest and fees. But there is a time lag. It is like a wave. First, we sign the merchant, then we onboard and start building up volume. And then there is additional time before the invoices and buy now creator purchases rolls over into loan books and the With new merchants comes new customers and the opportunity to cross sell additional products to these customers. And personal loan has since launch grown double to triple digit without using any marketing needs or extensive brokers. And this today creates the operating income for our digital banking platform. As a tech company acting in a highly competitive environment, we constantly develop our offering towards customers and merchants. And this is something that we have been doing and will continue to do in the future. Having said that, our plan is not to grow our cost in the same pace as historically. Large part of OpEx is scalable, enabling the opportunity to leverage our business model by adding more volume to our platform. And we expect to grow income faster in costs. That concludes the business overview part of the presentation. So let's move into the Q3 report. Next Page, number 6, please. In general, we have good business momentum and see stable to positive trends from that in our P and L. Although we are, of course, not unaffected by COVID-nineteen, which so far primarily affects growth in digital banking services and provisions for potential future losses. This quarter's income growth is the highest since Q2 2019, where both segments contribute positively. And as I said, we see a lower, although still high growth in digital banking services. But more importantly, we now have income growth in our largest segment, Payment Solutions. This is an effect of our ability to attract new merchants and more end consumers choosing our payment method. Next Page, number 7, please. One of the highlights for the quarter was, of course, to become a separately listed company. It's a process that's been going on for some time in getting the business ready and bell the second October was a milestone and a start of a new chapter for us. Next page, number 8, please. In both Q2 and Q3, our number of active customers increased by more than 100,000 customers and are now exceeding 2,300,000. And this follows the successful commercial execution of attracting and onboarding new merchants and is important for the entire business of Twilio. During the year, we have made several improvements in the customer experience in our digital platforms, which is where we primarily interact with our customers. Our new app and platform that we launched in Q1 has been a success. It has been one of the most downloaded financial apps in App Store and our customers use the app a rating of 4.4. We see that customers also interact more in the digital channel. And so far this year, our customer has logged in 8,300,000 times, is an increase with more than 30%. It is convenient for the end consumers, and it is cost efficient for us. Next Page, number 9, please. COVID-nineteen has so far not had a negative impact on our Payment Solutions business and our merchants in general. We are fortunate to act within a segment that have not been negatively impacted. There are, of course, some of our merchants that have had tougher times, but others have been more fortunate and really seen stronger growth figures as more and more customers and new customer segments are seeing the advantages with ecom. And for us, this meant that number of transactions And for us, this meant that number of transactions grew with 32% year over year and that our volume growth is the highest growth pace since late 2018 with 16%. We've been successful in attracting new merchants, and this is paying off. Our 2 largest merchants though are still our friends at Nelje and Serion. But this quarter, 56% of the volume came from other merchants, and this ratio is constantly growing, which is good to see. Next page, number 10, please. Regarding digital banking and personal loans, we still have a high growth rate year over year, even though at the slower pace compared to pre COVID. This reduced growth rate is a result of 2 things. We have chosen to be a bit more restrictive in our lending in combination with the dampening demand from March, April timeframe. We still see good potential to grow our lending, but it is important for us to do it with the right credit risk. And since future outlook for the general economy is more certain, we have chosen to slow down the growth. Today, we do not see any general signs of reduced ability to pay from our customers impacting our credit losses negatively, But we have increased provisions for future potential future credit losses driven by an expectation of an adverse macroeconomy in the future. And provisions that are in a better macro environment potentially can be restored. Next, Page number 11, please. Lastly, before I hand over to Robert to walk you through the financials in more detail, Wednesday, 1st July, was an important day. It was the day that the new law in Sweden regarding how to display payment options in the Checkout 1.84s. And we have for a long time prepared for this and focused on designing and building a checkout that is compliant with the new law and at the same time easy and intuitive for our customers to choose their preferred payment methods. We want to have a checkout brings value to our merchants and our customers. Now the new checkout has been in place for almost 4 months and it is meeting those objectives in a really good way. Our fear ahead of the legislation has so far not been visible in the checkout. We do not see any general difference in conversion rates or choice of payment methods. And when it comes to payment methods, it is clear that customers continue to make informed decisions on which payment option they prefer to use. And with that, I hand over to Robert, who will drill into the quarterly numbers in more detail. Thanks, Carolina. Next Page 12, please. As you know, Clear has 2 segments. We have Payment Solutions and Digital Banking. And let's start with the Payment Solutions segment that stands for 84% of our income. I will primarily focus on the Q3 figures in my presentation. The Payment Solutions business shows a solid momentum and growth with 16% in new volume lent out, which is actually the highest quarterly growth in almost 2 years. This growth occurs despite corona and Swedish legislation. It is due to a good organic growth of already connected merchants and new merchants coming in the first half of twenty twenty. Volume growth is an important long term driver in the sense that it, over time, generates growth in our lending book that eventually turns into income. That wave leads to lending growth over time. The lending book grows with 12% year over year reaching SEK 1,300,000,000. Positive is now that income is growing with 7%, which is the highest level since Q2 2019. This although we still have some headwind from the Finnish regulation change in 2019, taking the regulation into account, the income actually grows with the loan book. When talking about the loan loss level of our Payment Solutions business, it is important to note a couple of things. First of all, we lend out money to 2,300,000 different individuals with an average exposure of around NOK 2,000,000,000. That means that we have a very diversified portfolio. Secondly, we have implemented a clean balance sheet strategy during 2019. That means that we sell off non performing loans to debt collectors under solution rate agreements. We believe that this is a good way to reduce the risk exposure in our credit portfolio and enhance capital efficiency. Thirdly, the duration of the Payment Solution book is around 3 to 4 months ranging from 2 weeks to 3 years. That relatively large turnover of book means that the conventional credit loss ratio of a net loan book is less relevant. We are therefore providing loan losses of a new volume lent out, which we believe better represent the loan loss level for Payment Solutions. Loan loss level came in at 1.2% in the 3rd quarter. Next Page number 13, please. So let's focus on the digital banking services. As you know, we have millions of customers and process over 6,500,000 transactions yearly, which means that we generate a lot of interactions and data about our customers. We're having a total more than 10,000,000 touch points yearly. That gives us good opportunities to target additional products to our customers. Savings accounts was the first product out and have grown from nothing in 2017 and now stand for 80 5 this growth by targeting our best customer base without using expensive brokerage or marketing, which means that we have a close to 0 cost of acquisition. From an income perspective, personal loans with its stickiness also serves as a good complement to the more seasonal payment solution. Having that said, let's focus on personal loans during the quarter. The income growth reached 58% and the loan book grew with 37% year over year. When it comes to new lending within personal loans, we have chosen to be a bit more cautious in our underwriting due to COVID. We also see that demand has dampened somewhat. The growth during corona has been around 5% quarter over quarter. Positive is that we have successfully grown the book during the period with a higher margin on new lending compared to the portfolio margin without increasing our risk appetite. Our operating margin has grown 40 basis points year over year, reaching 7.2%. 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. When talking about our personal loan book, personal loan book, it's worth to mention that our average loan book size is around 70,000 and that we target a well diversified population of the market. As with the payment solution, we applied a clean balance sheet strategy, meaning that we sell off nonperforming loans to debt collectors under forward flow agreements. The underlying credit quality was stable and no negative effect on customers' ability to pay was noted due to COVID. Credit losses in relation to average lending came in at SEK 2.4 billion compared to SEK 2.3 billion last year. Next Page number 14, please. Regarding costs, in 2019, we invested a lot in improving our customer offering, building an organization for being a listed company as well as increased our depreciation of our built up intangible assets. This increased our costs during the year. During 2020, our focus has been on stabilizing the cost level and at the same time increased volumes and lending. Here, we have been successful and we have been rather flat on cost over the year, something that you can see in this quarter as well. So looking ahead, as you know, Payment Solutions is a seasonal business and especially in the last quarter of the year. We have events like Black Friday, Cyber Monday and Christmas, which drives merchant sales and thereby our volume and consequently variable costs. When looking at Q3 'nineteen and Q4 'nineteen, one can draw the conclusion that costs will move with that same magnitude this year. However, it's worth to mention that the cost move last year was driven partly by mentioned seasonality and variable costs, but also by investment in our organization and platform. We do not see the same increase in fixed costs in Q4 this year as last year. With that said, we will continue to invest in our organization and platform in the coming years, but not with the same cost growth as historically. Our cost base is to the majority built up by fixed costs, leaving good room for scalability and leverage in adding more volume to our platform. Next Page, number 15, please. Let's take a closer look at the credit quality, and let's start with Payment Solutions. Historically, we have had volatility related to sales and write downs of portfolios not included in our continuous sales agreement of nonperforming loans and the implementation of a clean balance sheet strategy. So in the adjusted graphs, we have taken out these effects and the extra provisioning we are now doing due to COVID. The credit loss level was unusually low last year same period, which was connected to, among other things, effects from the last step in implementing our clean balance sheet strategy with an agreement in Norway. We have made provision for worsening macro environment in all quarters of the year, summing up to SEK 5,200,000 and SEK 0.9000000 in Q3. We have also sold and written down portfolios outside the clean balance sheet strategy in Q4 'nineteen and Q1 'twenty. Today, we have a very limited exposure of lending to customers that are not part of the continuous sales agreements. So the risk of volatility from these kinds of portfolios are now very low. The underlying credit quality in Payment Solutions has therefore been rather stable the last quarters, reaching 1.2% in Q3, which is below our previous guidance of 1.25 percent over volumes. Let's focus on personal loans. The adjustments that you see is due to the provisioning for worsening macro environment, summing up to SEK 3,500,000 during the year and SEK 0.5 million in the quarter. Q4 'nineteen and Q1 'twenty is all about timing, and the SEK 2.4 million should be viewed upon as 1. Given that the credit quality in personal loans is stable year over year, reaching 2.4% in Q3, which is also below our previous guidance of 2.5% over net loan book. So to sum up, we do not see any worsening credit quality in our books yet. The underlying credit loss levels is under the previously communicated target, both in Payment Solutions and in personal loans. Next Page, number 16, please. So let's take a quick look at the entire P and L. First of all, it's worth noting that we, in accordance with our ambitions, now are delivering an income to growth slightly faster than our cost base. This is happening although the headwind from Finnish legislation still exists. Secondly, we have a positive trend on both income and cost when looking at the quarterly comparison in relation to the year to date comparison. That shows the positive momentum built up in the business with us taking on more volumes and transactions. All in all, it has been a good quarter that delivered in accordance to our expectations. Next Page, number 17, please. Before I hand over to Carolina, let's have a look at capital and liquidity. The capital situation is strong with more than 15% in headroom towards regulatory requirement that give us good possibilities to realize our growth ambitions. In Q3, a capital injection of SEK 125,000,000 was received via a shared issue. During the first half of the year, two events occurred that reduced the capital requirement by a total of SEK 100,000,000. First of all, we got approval from the Swedish FSA to use the alternative standardized method to calculate operational risk. Secondly, the contracyclical buffer was lowered in Sweden and other Nordic countries. Regarding liquidity, We have a diversified funding in deposit and a multicurrency credit facility that fits our business very well, having a fast moving cash flow in payment solution 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 launched this year in cooperation with Deposit Solutions. The euro funding gives us more flexibility, and we can use the swap market to retrieve competitive funding prices. All in all, we see that we can grow our balance sheet considerably without altering our financing needs. With that, I will hand over to you again, Carolina. Thank you, Robert. Please turn to Page 18. So to try to sum up the quarter in 1 sentence, we saw the highest income growth since Q2 2019 and the highest Payment Solutions volume growth since Q4 2019. And we have during 2020 kept our expenses and underlying credit loss ratios under control, and we are now well capitalized for future growth. So what is then our focus going forward? Commercial execution. It is important for us to continue to grow our merchants and customer base. 4th quarter is our seasonally strongest quarter when it comes to e commerce with Black Friday, Black Week and Christmas. And we and our merchants are preparing for a transaction intensive period. And that from a P and L perspective is more important, of course, for Q4, but even more so for 2021. Improved digital channels and customer experience will continue to be a focus key to engagement. Both Robert and I have stated that we do not yet see any indications on reduced ability to pay from our customers. But being in the middle of the pandemic means that we are humble for what might happen in the economy impacting customers. But our focus is always to ensure a sound credit risk appetite and underwriting. Cost control. We will continue to focus on a stable cost development, but of course, Q4 will have higher costs nominally than Q1, Q3 given the seasonally intensive quarter, as Robert showed with the variable cost always increase in the 4th quarter. Resulting on these four areas will enable us to prove scalability. Income growth shall outgrow the cost growth given that we have built a scalable platform and have good momentum in our business. So with that, I will give the word back to the operator to see if we have any questions from And our first question comes from the line of Armin Kirich of Carnegie. Please go ahead. Your line is now open. I have a number of them, but I'll maybe go 1 by 1 if that's okay. So the first one on the interest margin and personal loans that continues to expand. Could you tell us how much more delta there is between your funds book pricing and the back book you have right now? So in terms of our the price that we give to the new customer is around 9% and the portfolio is around 8.5%. So they are getting closer, but the new lending is still higher than the back book. Perfect. Very clear. Then in terms of the demand for personal loans, have you seen that, that has normalized yet or back to its pre COVID levels? Is it mainly your own underwriting material holding it back? Or do you still see some reduced demand? And also just in terms of growth you expect going forward, you've been adding some SEK 40,000,000 to SEK 45,000,000 net on your lending book in the personal loans per quarter. Is that what we should expect the coming quarters as well? Or how should we think? Yes. So I think there was a few questions in those. But if I start in terms of the dampening demand and kind of the our own action, so to speak, I would say that roughly half of what we've seen is derived from the demand and half in terms of from the changes that we have done. And when it comes to seeing an increased demand at the moment, I think it's too little data to really say that, but we see kind of weak positive signs. But I wouldn't draw too big of a conclusion for it because I still think it is a little bit volatile. So I hope that answers your questions. Yes, absolutely. Then moving on over to the Payment Solutions instead. You mentioned that your merchants have also experienced strong growth. Have you said anything about how much of the pad volume increase is organic and how much is from merchant acquisition? No, no. We haven't done that. We haven't specified in that way. But what we do see so I guess we can draw some conclusions around it is that we see an increase in what we previously used to call external volumes that was internal volumes higher than 50 before around 50 and now kind of external volume is on 56. Okay. And could you update on how many signed but not onboarded merchants you currently have? So in terms of signed but not onboarded merchants, let's see, we have 10 merchants that are still waiting to be onboarded. And I think that when we look at those, they are smaller merchants that we can expect the totality around SEK 300,000,000 from when they are up and running on an annual level. Okay. That's very clear. Then moving on to your asset quality. I know you said you haven't seen any real impact in the ability to pay. But I'm just wondering, given the short duration in your payment solutions, how come you still feel the need to do extra COVID provisions in Q3 as you did in Q1? I would think part of what you provisioned for in Q1 has already sort of rolled through the books, if you get what I mean. Yes. Totally understand what you're saying, but what we have done is that we look at kind of it from an overall IFRS nine perspective where we look at our forecast or other forecasts of the economy and looking at a number of factors. And based on the outlook we see of that, we put a factor on all our probability of defaults, so regardless of the portfolio. Because even if it is a high churn, the portfolio that we have will be impacted in case there will be a hit of the macro economy in terms of how the modeling is working. So we don't distinct between those. But of course, you would, as you say, in reality, expect a quicker churn if there was for something to go south. Okay. Well, understood. Then more in terms of seasonality in Q4. I think you were very clear on that we should expect costs coming up somewhat in Q4 due to seasonality. And you also pointed out quite clearly that you typically see a lag in the income generation from sort of the additional volume in PAT. So should we expect you to still see income growth exceeding cost growth in Q4 despite that? Yes. Very clear. Thank you. Then one final question for me, more of a holistic one maybe. We've seen that several of your, if you even want to consider them, peers. But the large cap banks, for instance, Handelsbanken this morning is, I would say, and they're considering to sell Ekster, which is their payment solution or the personal finance solution that they've branded under a different name. And Swedbank is looking at divesting PayEx event potentially. Do you see any larger movements in the payments landscape in the Nordics that could affect Claro? I think those 2 that you're mentioning, both have a heritage coming from the in store financing. So I think that's probably a reason why they don't see those as being attractive or as attractive anymore. And I think that we, of course, expect there to be movements in the marketplace because it is a rapidly changing market and it is a very attractive market. But I wouldn't speculate any further on that one, what it would actually mean for us with those sales happening. Understood. Thank you very much. That's all for me. Thank you, Erik. Thank And there are currently no further questions. Okay. Our next question comes from the line of Nicholas Flom of SEB Equities. Please go ahead. Your line is now open. Thanks, operator, and good morning, everybody. I just wanted to start by asking you one question on your financial targets. You previously targeted a 20% to 25% growth cost income ratio of 50% and a capital buffer of 1.5%. These are the regulatory requirements. And that was obviously removed in hello? We do appear to have lost Nicholas over the teleconference. The participant has hung up. Hopefully, he can dial back in again. In the meantime, I will hand back to the speakers to go through any questions from the webcast platform. No, we don't have any questions here at the moment. So if Niklas doesn't call in soon, we I think we are ready to end this call. Okay. And it doesn't appear that we have Nicholas back on the line yet. Then I want to thank you all for dialing into this first quarterly report for Kiro and have a very good day.