Multitude AG (0R4W) Earnings Call Transcript

Good morning and welcome to the Ferratum webcast. [Operator Instructions] I would now like to hand over to Jorma Jokela, CEO; and Bernd Egger, CFO. Please begin your meeting.

Okay. Hello, everybody. My name is Jorma Jokela. I'm the CEO and the founder of Ferratum Group. And I want to welcome everybody, our preliminary result publication in 2019, and I'm so happy to see so many people on our call today. My colleague, Mr. Bernd Egger, he is next to me here. And I will be first presentation our highlights. And after that one, Bernd will be -- take care of the more deeper of the financial part. And after that one, we are happy to give a few information about the current situation -- current economical situation.

Good morning, everybody.

Great. So let's go to first slide. So first of all, we have now almost 15 years successful profitability growth track record. We operate today in the 23 countries. Our business model base in the pure digital, easy, far simple financial solution for the customers. Your customer can -- anyone, anywhere, anytime they can, the opportunity to get the financial service. Our main business unit are consumer lending, what is 89% our total revenues; the SME lending or business loans are around 10% our revenues; and mobile banking business is around 1%. We are founded in 2005 in Helsinki Finland. We have full EU Banking license. And 2015, we are listed in the Frankfurt Prime Standard. About 2019, we very -- we are very happy to announce that we achieved our guidance, so we delivered more than EUR 45 million EBIT. What this means, a gross ratio more than 20%. The addition of that one, we delivered a strong operational leverage and scaling from the -- our SME and credit limit business. We have a very solid capital structure on the way that our net debt-to-equity ratio is stable in 2.57 end of the year. So total year revenue was EUR 293.1 million, what's the 11.8% up to year-to-year numbers. And EBIT, earnings before interest and tax, we delivered a EUR 45.5 million, what is around 20% from the previous year. So let's go the next slide. So in Ferratum management team, we have several key priorities on the last year: focus on profitability was very important things; the operational leverage; and of course, driving the SME and credit limit business onto further. And those all 3 things, we managed super well on the last year. And here, you can see the evidence from that one. Top of that one, we was focused to scaling the more lending business -- lending countries under the banking license, under the banking entity, to utilize more efficient our retail deposit funding. And 2019, we managed to transfer to Denmark and Finland under the banking business -- under the banking entity and utilized the deposit funding behind there. And in the same time, we managed well to protect us and build the new customer base after the new legislation change in the autumn, on the Finnish market. Top of that one, our mobile wallet business. We launched into new applications there. And we are currently positioned for the look into new countries to scaling that one. So we managed to keep this on the time line, and the customer feedback was been super supporting for there as well. Let's go to the next slide, Slide #6. So this is one of my favorite slides. This is the good description of our product distribution. So Microloan, it's a small loan, around EUR 220, 30 days. This bring around 12.6% our total revenue. It's decreased 11% each year. And this is the part of our strategy, so we have a bigger strategy to scale down our Microloan business. And last year, we discontinued this product in the Australia, Czech and U.K. and operating today the 10 countries. Plusloan, it's around EUR 800, 1-year maturity installment loans. This business brings 22% our total revenue. It was pretty stable in the last year. We're launched into 1 new country, to Bangladesh behind there. Of course, some countries was a little bit reduced, the volume behind there. And some countries, we're growing. So in general, we are very happy from the last year in this development. The Credit Limit, what is one of our flagship product, its average loan amount is EUR 1,300. It's a credit line on the way that people have opportunity to apply up to EUR 4,000 digital financial revolving credit line. This product was growing at 20% year-to-year that delivered 54% our total revenue in the last year. SME business, the business lending, where average loan amount is EUR 14,000. We keep the loans up to EUR 250,000, fixed between 24 months maturity. Average terms is around 1.5 years. This brings the 9.5% total revenue. It's growing to 33%. And then we practically discontinued this product on Australia and Poland of the last year. But we see the very strong demand there on the last year and performance in general. Prime lending, our newest product, it's a prime segment consumer loan. EUR 6,600 average loan amount, a little bit over 5 years' terms, brings the 1.1 -- 1.2% our total revenue. And this product was increasing to more than 200% on the last year. So it's a really, really fast-growing product. And this slide is sort of very well how we have a strategy point of view, evolve our business from the small, short-term loans and high-yield loans, the longer and the bigger consumer loans due to higher customer lifetime value reasons. So we see that this segment, we have a higher customer lifetime value. Let's go to next slide, Slide #7. And just a few words in our SME business, we have had a strategy initiative to scaling in our SME business up. And this is something what we have done really, really well, our team had performed super well. We can say that we have -- the last 4, 5 years, we have seen the more than 50% the average growth rates. And of course, we have taken very good market position on each our countries. So next slide. We have had a few change in our leadership team. So our bank CEO, Pieter van Groos, he stepped down on the -- his role in the last year. And our Deputy Bank CEO, Mr. Antti Kumpulainen, he takes care of the daily operation, supported by Chairman of the Bank -- Chairman of the Bank Board, Mr. Charles Borg, until we appoint the new CEO. We have had been in the process to looking the new CEO already awhile, and we have some candidates. And we hope that in the near future, we are capable to, ready to announcement this more later, in detail. Marius Solescu, our former Head of the Human Resource, he stepped down the leadership team role and he have a new role in our SME lending business, our business lending unit. Emmi Kyykkä, our Head of the Communication and Investor Relations team, left on maternity leave and stepped at the same time from -- down from the leadership team. Good. I think my highlight slide is ready, and I'm happy to give to Bernd Egger the opportunity go through with you in our financial position.

Yes, happy to do so. I'll guide you through the financial results, preliminary financial results for 2019, starting with a look at the development of profitability over 2019. Just a quick reminder, and following up to what Jorma Jokela had said already. 2019 focus in terms of financial targets was on profitability, so profitability over revenue. However, nevertheless, we actually managed to achieve a fairly strong growth rate in terms of revenue as well in 2019. So revenues have developed up to EUR 293.1 million, which is a solid 2-digit growth of 11.8% or in absolute terms EUR 31 million in the business in 2019. How does that translate into profitability? On an EBIT level, we had a very strong growth of 20.5%, which is actually also stronger growth than in previous years. In absolute terms, almost plus EUR 8 million to EUR 45.5 million EBIT. I would also like to highlight the EBIT margin at 15.5% for the full year as this is also above 2018 level, and in fact, the strongest EBIT margin in the last 6 years. On earning before tax level, EUR 27.5 million, again, an uptick of 23.3%, a little bit more than EUR 5 million increase. EBIT margin also increased to a solid 9.5%. Profit after tax, EUR 23.6 million. Similar picture here, is an increase of more than EUR 4 million and a relative increase of almost 23%. That translates into return on equity to a level of 18.3%, which is roughly in line with the previous years as apparently both profitability level and also equity has increased substantially. I think with a fairly strong equity base now, with EUR 130 million on a consolidated basis. On the next slide, I would like to give you a quick overview on the operating performance since this is essentially reflective of the strategy that we pursued over 2019. If we take the revenue of EUR 293 million and operational expenses of a little bit more than EUR 130 million, this translates to an operating -- operational profit, operational performance of EUR 162 million, which is an increase of EUR 30 million over 2018. What does that tell us essentially? It's important since, essentially, what that means is that the revenue generated -- profitability generated in relation to the operating resources applied has gone up substantially. Or in other words, with the same constant level of resources, potentially cost base, we managed to generate substantial higher level of revenues and a higher level of profitability. Just very briefly to align you with the overall strategy for 2019, how did we achieve this? How did we get that? This is essentially -- this improvement is essentially driven by 3 factors, which is higher operational efficiency, a streamlining process throughout the organization that we started in 2019 in a very clear and concise KPI structure and performance measurement throughout the year. On the next page, I'll give you a little bit more insight on the stable cost base. Message #1 is essentially that we maintained our operating expenditures stable. At the same time, in terms of development in -- with regard to impairment of credit losses, we had a dominantly stable development in the quarters 2, 3 and 4. How do we measure impairment of -- for loan losses? One of the key KPIs here is impairment over net sales. You might be familiar with that already. Here, we are currently at the level of 36%, which is slightly above the level of 2018. A little bit close to 34%. Essentially, the difference is driven by Q1 2019, where we had a slightly higher -- somewhat higher level of 39%. For the remainder of the year, impairment levels over net sales were in the region between 34% and a little bit less than 36%, ending up at 36% for the full year. In terms of percentage of gross loans, also stable picture. Impairments of gross loans, 19% in 2019, exactly the same level as 2018. And also, impairments as percentage of net loans, stable in 2019, 27.4%; in 2018, a little bit higher, 27.6%. So from an operational perspective, 2 key messages. One is impairments, pretty much on track. Of course, there's room for improvement. We are aware of that and are working on that. So the leverage going forward is going to be improvement in data science, in data quality, further improvement in underwriting and in collection performance, but overall, pretty well on track during 2019. And second key message, the operating model gained substantial efficiency during 2019. A little bit more on the next slide, on Page 11, a little bit more information on the cost structure. We actually managed also to maintain a key cost component of -- of course, also performance component. Personnel expenses, stable, which is a substantial difference to the previous years. As for instance, from 2017 to 2018, we build up quite some resources also in terms of staff. That has changed during 2019. We actually stabilized the intake of additional employees, translating into stable personnel expenses at the level of EUR 43.9 million for 2019, which is exactly the same level as in 2018. In percentage of revenues, we have a substantial improvement here to 15% compared to close to 17% in 2018, so a substantial improvement in terms of operational leverage related to personnel expenses. Selling and marketing expenses were reduced. Also, a clear focus on market-related initiatives, limited spendings on search engine optimization, limited spendings on general brand awareness, clear focus on market-related activities, which led to a reduction in selling and marketing expenditures of EUR 2.5 million. Other operational expenses, pretty much flat, where we have an increase in operational expenses compared to 2018. All these growth rates were considerably below the growth rates of revenues and profitability. So a very strong signal that we manage very well to increase efficiency throughout the organization. Just very briefly on next page, and I will be brief on this segment as Jorma Jokela has reported on that already. The key messages can be summarized fairly in a simple way. One, growth development reflects our strategy. What does it mean? We, in absolute terms, reduced revenues in the micro lending segment as we withdrew from some segments. At the same time, this led to an increase in profitability as we cut down on expenses, on marketing expenses and also sort of significant reduction in impairment in this segment. Plusloan pretty stable, so flat revenue development. In the first half of 2019, some issues with credit loss impairments in a number of markets. Actions taken, withdrawal and adjustment from some markets and adjustment of products in other markets. So that's well on track in the second half of 2019. The other 3 segments are characterized by substantial growth. Credit Limit up to EUR 159 million in revenues, accounting for more than 50% of overall revenues. SME business, substantial increase from EUR 21 million in revenues to close to EUR 28 million. And I really need to highlight that the SME segment not only managed to grow substantially, but after only 4 to 5 years and a very strong market position, with an excellent strategic position for further growth in Europe and is also profitable, which is, I think, a rare case in fairly nascent product offerings in an online business. Mobile Bank, just to briefly touch base on that, growing strongly in an early phase. In terms of profitability, that means that the new products, Mobile Bank and Primeloan, not yet profit-accretive. All 4 other segments are profitable and hence profit-accretive throughout 2019. On the next page, I'll give you a quick look at the balance sheet structure. Naturally, we saw an increase in assets, driven essentially by 2 factors. One is increase in lending activities. So the net loan book actually grew by roughly 20%, which is an increase of EUR 65 million. Cash went up significantly over 2019 to EUR 156 million at year-end. In terms of equity and liability structure, I would like to add, and I briefly touched upon that already, we developed a very strong and solid equity base, both in absolute numbers with EUR 100 million equity on a consolidated level, which is an equity ratio of a fairly strong 21%. And also, I would like to highlight that over 2019, we also significantly increased the intake of deposits, standing at more than EUR 240 million at year-end. Finally, I would like to highlight with regard to leverage as we apparently have done some initiatives during the second half of 2019 to align the covenants of our mid- and long-term bonds, which are an important funding source apparently. You might recall that we actually asked for approval to increase net debt equity covenant of -- for the 2022 bond to 3.5. In autumn, we are at exactly the same level in terms of net debt equity as 2018, driven by strong equity increase, which is below 2.6, which gives us quite some room to move in the forthcoming years before we get close to 3.5 covenant level. The last slide, a quick look at our debt capital structure, cost of debt funding. Cost of debt funding is currently, again, stable at slightly above 3%. The funding mix is essentially long-term bonds, EUR 180 million, expiring in more than 2 and more than 3 years from now. We had EUR 40 million bank bonds, which filed to you in Q1 2020. And we've announced earlier this week, essentially on Monday, that we have repaid the bank bonds this week. And we substantially increased deposits to more than EUR 240 million for 2019. So this concludes my summary of the net result, the profitability development, the revenue development and our strategic and operational performance for 2019.

Okay. Thanks, Bernd. And I cannot avoid to leave to everybody the message and one of the key takeaway from this call. At Ferratum, we managed to deliver our guidance in 2019, and we -- was very, very strong profit growth on the last year. But let's jump to next slide. And I think this Slide #17 is -- might be one of the most interesting slides, unfortunately, today, for the -- all people who are on the call. And I have to say that we -- everybody understand what's happened around the world and what's happening around -- on the outside today. Ferratum management team, we have -- in the last week, we have an evaluation how this corona or COVID-19 pandemic impact on the Ferratum. We can see like 2 very main things there, where the first one is that it's impacting our credit loss reservation due to the reason that our reservation model are predictive on the future unemployment ratio as well. And when we are at the economical situation like that one, our -- where the -- all economists expect that unemployment ratio will be increased on the future, that will have a negative impact in our reservation model. Doesn't matter. Did we see the burst there? Or did we see the impact in our payment behavior? Because that's the way how the model are working there. Of course, it might impact our payment behavior as well, if this situation is continuing to longer term like that one. And then, of course, FX rates are quite volatile currently on the market. What's mean that when we have lending in non-euro currency, that might be very volatile, and we can see there's some impact from there as well. So those are like the 2 main impact, what we can see on the Ferratum business today. Of course, operational point of view, the Ferratum are really strong. I mean, as quite many companies, this situation is -- [Audio Gap] over the whole organization as to ones in the work in the remote or the home office and things like that one. But Ferratum, this is our daily life. We have been used to the work in the last 15 years like a remote way. So we have -- in our case, this was not so big things. And our operational capability and movement has been quite strong, quite smoothly there. But those are the 3 things -- or the 2 main things, what can impact. If I look to Ferratum today, where we are in this challenge, we can see that we have very strong liquidity position. We have very strong equity position. We've already start last year the action to increase our operational efficient, operational leverage, what's actually keep us into lots of help for this year and this economical situation; our technology, our agile technology, where we can very quickly move to different position; and our pure digital business model is help us in this situation strongly. So we don't have to meet the customer in the face-to-face. What's mean that our business are not suffering this point of view so much what traditional business might do in. So -- and personally, I believe that everything was happened at this coming weeks will be impacting the rest of our life, our behavior, how we do in the business on the future. What's mean -- that I am personally even a little bit optimistic on the longer term because the digital lending and digital SME lending, there will be coming the huge demand on the future and the people useful to use this one on the future as well. Of course, for the management team, we have to make several actions. We have evaluation and identified all potential risk and implement the action plans to protect against this. So we have reviewed the -- several potential risk and how we protect us, that one, and we have reduced this in the crew board and the bank board. We have a -- management have actively tightened our scoring and underwriting criteria for all new loans to account for increased uncertainty. And Ferratum has reached our contingency plan in place in which business and operation are handled remotely by employees. And this mean that practically that we managed the last week -- we're driving in the beginning of the week, 1 day, the test that is every VPN connection is -- everything is working. And then overnight, we, approximately all our 900 people, we give them opportunity. We didn't say mandatory, but we give them opportunity working from the home and remote. And it was going super smoothly. We don't have any mentionable hiccup on the process there. And like I say, one of the reasons -- because we have been used to work in that way already. So on the way that even today, all our customer service people, all our collection people, they're working from their home. Not all, but main part, without any decrease in the performance level. And this is something that I'm super proud from the -- our team. And this is just saying so how strong our organization are, especially in this type of situation. Of course, we have take a tighter monitoring and analyzing for the cash flow process, and this is something what we have implemented on the place as well, the both outflow and inflow cash flow and payment behavior and applications. We can see that a little bit application numbers have increased with some case. But in the same time, we have been tighter our scoring and our approval rates have coming a little bit down due to reason that we are more selective with the customers. We have, practically, in the last week, already implementing SE business to [ pan ] the short-time sectors segments. Like example, the travel industry, we [ pan ] it last week on the way that we don't keep the new launch on the tourist industry and then some other industry as well. However, if I jump to next slide, Slide #18, we can see that this situation will be -- impact Ferratum revenue and EBIT on the material and decrease in those compared to 2019. How much? I don't want to start the speculation today, not yet. I really don't want to do in that one. But of course, we see that there is a material impact for that one due to those reasons, what I explanation. However, I cannot -- I really want to raise this situation that in Ferratum group we are extremely strong position on this situation. And I don't want to say this only for the listed investors. I just want to say what I think and what our management thinks today. We have -- our people and our organization have usual from this type of -- the work in this talent, this type of the situation. So we don't have an even problem to working into several years on this type of economical situation. What is coming our financial position, we can easily survival in the few years in this type of the environment. Of course, to take assumption, the situation is not going to much, much worst, but we talk about this type of the situation, we don't have and we don't see any problem to survival into several years there. And what is the most important that, when this situation turn back to normal, is let's take 6 months, 1 year, 2 years, 3 years, doesn't matter. We have lots of opportunities on the table, what -- we can be the harvest, the benefits from the Ferratum. And that's our management situation, that's our management statement, and that's the way how we see this situation. But naturally, in 2019, it's -- we will see the impact over there. But I -- yes. Good. That's the more and less what I want to share from the current market situation and corona. But maybe we are ready for the -- open to all questions.

[Operator Instructions] And we currently have no audio questions registered. So I hand back to our speakers for any more questions.

Okay. Great. So no any audio questions. So we have several questions on our Q&A books. So maybe we can start here for the -- there is a first question from Catharina Claes from Hauck & Aufhäuser. What are the default rates under each product, specific Credit Limit? Bernd, do you want to take that one? Or do you want -- I will be taking that one?

I was on mute, sorry. I can take that, yes. So the -- as I said, the overall impairment of our net sales is 36%, which stabilized over last 3 quarters. Now in terms of split into segments, we were not entirely happy with Plusloans, where we observed an increase. But that's not an issue today as this increase was predominantly driven by Australia and Poland, and we discontinued the product there. So this should normalize. In Microloans, with a substantial reduction of 10 percentage points in impairments of our net sales, predominantly driven by the fact that we focused on lower-risk markets, withdrew from some, as for instance, discontinued micro lending in the U.K. In Credit Limit, stable. So actually, it reduced a little bit, started off at 32%. It's now at 31%. So essentially flat and well under control, which apparently is very important as Credit Limit is growing substantially more than 20% and accounts for 50 -- in fact, 54% of total revenue. So that's also well under control. In SME, a slight uptick to 31% but also pretty much okay. In relative terms, fairly high impairments in prime lending, but that is rather technical issue as this reflects the initial impairment for granting a loan, first of all. And secondly, it's not reflective of the economic credit risk. And thirdly, it's not really material yet from an overall impact.

Okay. Thanks, Bernd. And then Catharina have an additional question. What is the status of the Mobile Wallet? How was the pilot phase so far? Any further plans regarding timing? And so on. We have currently piloting in our Mobile Wallet in Latvia. The result on the way that the customer feedback and rating was been super positive. We have implemented our lending product in the middle of the -- we have implemented the wallet in the middle of our lending process. So in this point of view, it looks great. What is coming, the further plans now related to rollout? We have an internal rollout plan. And we did not have a public that yet. We still want to be sure that all box and all the elements, what we want to be on place before we start to roll out that one. But I hope you will be -- see this soon. There is a next question from Philipp Häßler, Pareto Securities, about the dividend. Any comments from that one? Bernd? You or me?

Please go ahead.

Okay. Go. So approximately, the dividend point for Ferratum Group, we have the last 15 years -- we have every single years, we have delivered 20 -- between 25% dividend from our net profit. And practically, this year, I want to see the similar future as well. However, to take -- considering the current economical situation where we are, management and the Board, we have yesterday our call to come out of the proposal that we will proposal, to postpone our AGM from April to June. And this means that the dividend decision we want to postpone on the June as well, to be sure that we have a much, much better understanding on the 2020 year, the full year, how it will be looks. But that's a practical management and the Board opinion, that situation. Bernd, do you want to add something on that one, or?

No. No, I think this makes sense. I mean, on the one hand side, we understand the history of the other and so the number of activities that we're currently reevaluating, and that's one of those. So I think it definitely makes sense to a final decision after a couple of weeks.

Yes, exactly. And there was actually -- earlier, there was a few questions from Philipp Häßler as well the earlier -- this is actually 3 questions, but maybe a fourth question. Maybe I can read that one and we have to think about how we can answer that onto this timetable. So the first one is deposit volume as today and how much of those are turned deposit? Please provide a split by maturity. The second question, loan pool. Can you please provide a split by product category and give us some detail on loan repayments in short term? The third question, tightening of credit scoring. Can you please provide some additional details? Example, what customer crews will be focused in the next week and so on? Asset quality, that's the fourth question. For which loan category are you most concerned? Example, SME or retailer? So it's so many questions. And my recommendation, I don't know, Bernd. Maybe I can start those 2 later question, the credit scoring and the asset quality. And then if you can take deposit volume and portfolio, the lending portfolio. Is that okay?

Yes. Absolutely. I mean on the deposit development, you might recall from the 2019 presentation that we started off the year 2019 at some EUR 180 million deposits, ended the year 2019 at some EUR 240 million deposits. And actually, over the last couple of weeks, we increased the deposit level further. So we are currently -- yes, roughly EUR 50 million on a higher level than we were at year-end. So we build up deposits significantly over the last couple of months. In terms of mix, I think we have a well-balanced mix between overnight money, 3-month, 6-month and 12-month deposits. We naturally observe that on a daily basis. So our deposit development for all those segments and whether we think we would need to react, to withdraw, also increase interest rates, so that's something we're doing naturally, ongoing. Currently, the deposit level development, just to add that, not precisely the question, but just would like to add that, is fairly stable. So the net out and inflows are pretty stable currently. So there's this -- up until now, no substantial reaction to that. So in terms to the question on the -- and by the way, there's still, of course, the option to react to that. So we are -- we have been and we are still considering to issue new products to cover also longer terms than the current 12-month deposit. In terms of the other question around loan book, just a second. In Microloans, we're actually reducing, obviously, the loan book. This is currently in the region of EUR 25 million. The Plusloan book is in the region of a little bit more than EUR 80 million. So Plusloan, Microloan, accounting for essentially less than -- roughly 1/3 of the net portfolio. The Credit Limit product currently stands at -- or at year-end roughly stands at EUR 180 million, SME roughly at EUR 75 million; and close to EUR 20 million at the Primeloan portfolio.