Edited Transcript of QLRO.ST earnings conference call or presentation 21-Apr-20 8:00am GMT

And when it comes to the split up of the group, we are still determined to execute on that strategy. But, of course, following the current market conditions, this process will be somewhat delayed. It is still possible that we will manage to do some of this before summer. But the entire split up will most likely not happen until summer.

If we move into the businesses, starting with Qliro, our payment business volumes grew 13%. This is positively affected by onboarding of new merchants where we now have 41 live merchants on our platform versus 33% (sic) [33] a year ago in combination with, of course, underlying growth, of our merchants. We can see and Qliro can see a positive effect from COVID-19 when it comes to offline to online migration. That is now ramping up. And we believe also that, that is a move that will continue to stay after we see the effects of COVID-19 and when that entire situation will eventually unfold to normal situation.

Our total operating income grew 12%, which is somewhat faster than our operating expenses, which is, of course, a very important direction where we want to see more scale in the business going forward.

Net interest grew with 34%, while our commission income declined with 7%. The decline in commission income is driven by merchant mix as well as in Q3, a regulatory change in Finland when it comes to fees that you’re allowed to take out in this kind of business.

Going into the depreciations, they increased with SEK 10 million in the quarter. This follows previous investments in our platform and rollout of new features in the current platform, where we, in the quarter, for example, launched a new app and new features in the app where you can buy additional auxiliary services as the consumer at Qliro.

When it comes to COVID 19 impact, the first impact is that it has impacted reservations for credit losses, and this follows a more conservative assumption about the economy long term and going forward. And the total change and the total reservations following that more conservative assumptions totaled to SEK 10 million in the quarter and should be seen as a one-off effect on — in the credit reserves.

We do not see a change in the underlying ability of our consumers to pay back outstanding debt. That is a very important message about the quality of our credit portfolio. And should be reminded as well that the majority of our loan book is built up by debts of payments for e-commerce services and the average debt is around SEK 1,000. So we don’t see a big impact on the ability going forward based on this to repay debt. It’s very important to understand that part.

Also following COVID-19, we see of course, the change from FSA, where they have changed the capital adequacy rules, that has resulted in a SEK 50 million lower capital requirement for the business, which gives a good headroom to continue to grow without further capital injections near term into Qliro.

If we go to the next slide, we can follow a little bit and — look a little bit on the loan book. The total loan book grew with 38% in the quarter. This was driven both by our e-commerce volumes as well as our digital banking services.

The payment services, which is then connected to our e-commerce business, grew at 17% in the quarter, and our personal loans grew with 92% in the quarter, giving us a loan book of just a little bit above SEK 2 billion.

Our interest costs for our loan book or to fund our loan book amounted to SEK 9 million, and our interest revenue from the loan book amounted to SEK 58 million. This gives an interest — a net interest of SEK 49 million, and that reflects a solid interest rate spread in the business.

Moving over to CDON. As I mentioned, external merchant sales for CDON in the quarter grew with 101% and part of that growth is, of course, driven by a change in behavior from consumers driven by COVID-19. But once again, we believe that this is driven by a move from offline to online. And that, that offline to online migration will stay and remain to some extent as we then are back to normal circumstances. This offline to online migration has been ongoing for years now, and we believe that this just accelerated that and that, that is in favor of e-commerce and in disfavor of traditional retail business going forward.

The merchants increase in sales also led to a commission income growth of 52% in the quarter. We can also see that our external volumes and drop shipment, which is then our business — part of the business that is not inventory driven, now account for 74% of total gross sales. And that is a strong indicator of how far we have come to transform CDON from a traditional retail/e-tail business to a pure marketplace. And we believe that this transformation will continue going forward.

That, of course, also meant that our net sales have declined as we continue to purposely reduce only inventory sales and replace that sales with external merchant sales. And on total gross sales, which is the external sales and net sales in combination, grow with 17%. That is a very, very strong number. And actually, going back a year, this number was a decline figure for CDON, but has now moved into a positive development, and we believe that we will see that growth and that number continue to grow going forward.

Our gross margins increased with 7 percentage points in the quarter and reached 24%. Gross margin in this sense is measured against net sales. It’s important to understand and remember that.

As we declined our inventories, both year-on-year as well within the quarter from last quarter, we continue to see that the business is very, very scalable and capital efficient. And on that note, we also see that we continue to leverage the investments in automation that we’ve previously done and the fact that the marketplace business model is more efficient when it comes to sales divided by resources, and that gave a 24% lowered personnel cost within the quarter compared to the same quarter last year.

Having said that, what is then driving our growth as well as efficiency is our investments in our platform. And as part of that, and as we continue to roll out new features of the platform, this resulted in a one-off write-off of old functionality in the platform of SEK 7 million. That is then going back to the system that is — have been used and that we were now able to roll out earlier than originally planned. So it’s really a good sign on the pace and the development, the speed of development of the platform within CDON.

So this is — even though it affects our EBIT in the quarter for CDON, this is actually a good momentum, and in that sense, a good sign of the pace and the development pace within Nelly — in CDON and the platform. So overall, a very, very strong quarter for CDON, very, very high growth. And also, once again, EBITDA negative SEK 0.6 million in the quarter. Remember that this is the weakest quarter of the year for CDON. They carry all their fixed costs but have the lowest volumes in this quarter. So we expect good and strong results from CDON moving forward during the year.

And finally, when it comes to our businesses, we will — let’s take a look at Nelly. So Nelly is clearly impacted by the corona or the COVID-19 outbreak and in different areas. So first of all, it is very, very pleasing to see that despite a very, very tough and challenging market for Nelly, we were able to grow the business with 6% in the Nordic region. As we entered the year, we communicated that we will transform and focus on the Nordics. This is driven by a belief that the Nordic business — and the transformation to focusing on the Nordic business will be long term, more profitable for the company. And that consequently meant that on a total level, we only grew with 1%. But that is then driven by the reduction of sales in our European business. This will then long term give positive — profitable additions going forward.

We also, in the quarter, took a number of cost reduction measures. First of all, early on in the quarter, we announced that we adjusted our organization to secure the right size and reduce cost and complexity within the organization. That will lower our annual costs by SEK 15 million going forward. But a program like that, also — the program also drove SEK 2.5 million in extra cost in the quarter when it comes to personnel costs and the reduction of the organization. That should be seen as a one-off cost. And going forward, you will see that salary costs will go down in Nelly starting with Q2.

We also took some other organizational decisions where we have reduced the number of working hours in the organization based on the support that we get from the government. So we have adjusted the time of the workforce within the office, so to say, this is not reflecting our warehouse operations, with between 20% and 40%, depending on different parts of the organization, that will also lower costs going forward. That decision has been taken to do that for the next 3 months. And we will take a decision if and when to prolong that as we go.

And on an overall level, which goes for all 3 companies, it should be said, we have made sure to reduce all unnecessary spend, and all possible consultants have been terminated within the business in order to make sure that we reduce costs as much as possible within the group.

As for COVID-19, when we see a lowered demand from our products within Nelly, we took a strategic decision to focus on customer acquisition and sales growth. We believe that that’s a sound strategic decision that will give us a long-term advantage versus the competition that has not taken the same decision as we continue to recruit new customers and that will be a good basis for our business as soon as the business comes back to more normal circumstances. This sales efforts and activities have also impacted our margins. We have then worked heavily on clearance sales and campaigns in order to sell out stock as well as to recruit new customers. And this is the main driver of the gross margin decline in the quarter.

Gross margins are also impacted by our costs in our warehouse operations. And from time to time, during the quarter, we have had 20% to 30% sick leave in the warehouse, impacting our costs to operate the warehouse significantly. This, in combination with the efforts to liquidate stock and to clearance — to drive aggressive clearance sales have given a negative impact on our EBITDA of approximately SEK 10 million in the quarter. We don’t see that, that will continue going forward. We’ll still have high campaign activities, and the market, in general, will still be tough when going into the quarters to come. But we don’t see that the gross margins will be as low going forward as it was this quarter.

When it comes to our sales in Nelly, we can also take a look at the product areas. And in general, sales are healthy within most of our product areas, except, of course, one, which is graduation. Graduation, as you know, is something that is heavily impacted by COVID-19, and it’s an important part of our business during the spring. So we will see most likely a very challenging business in that area.

Looking at all our other segments when it comes to products, we see good sales and strong sales within Nelly.

Following also the strategic decision to move the business more to a Nordic business model, we can also see a positive effect on our return ratios. This is, of course, part of the decision to move into a Nordic-focused business model, and we see that the return ratio decreased with 1 percentage point during the quarter, which is, of course, an important driver of profitable — or profitability going forward.

So all in all, very challenging market, still healthy growth. Clearly COVID-19 impact on the business, but very well managed, and margins will come back going forward significantly from these levels. That’s the kind of outlook on Nelly.

So that’s my comments on the business. So let’s hear from Mathias on the more financial side of the — part of the business.

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Mathias Pedersen, Qliro Group AB (publ) – CFO [3]

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Thank you, Marcus. So having heard from each business area now, let’s take a look at the overall group, starting with the combined income statement. And we have had a growth in all business during the quarter. But on a total level, group sales declined 9% to SEK 592 million. And that, of course, was because the growth within Qliro, Nelly and gross sales in CDON were offset by the declining net sales in CDON, where inventory-based sales continued to be phased out.

Gross margin declined 1.1 percentage point, reflecting the lower margins in Nelly, while CDON continued to have a favorable impact on this number.

And to sum up what Marcus mentioned, in each business, there were certain items in each subsidiary that had a negative impact on the results in this quarter. That is CDON wrote off intangibles of SEK 7 million as some part of the IT system were decommissioned. Nelly’s gross profit was negatively affected by approximately SEK 10 million through clearance sales and fulfillment costs linked to the COVID-19 outbreak. And also had a SEK 2.5 million extra cost related to organizational changes.

The financial company, Qliro, it increased its reserves for future credit losses with about SEK 10 million, reflected changes brought on by COVID-19. That is, remind you, without having any clear indication that customers changed their payment behavior.

Net sales were negatively affected 0.4% due to exchange rate fluctuations in the period, and this also had a negative — net negative effect on the operating margins, which were down 0.8 percentage point for the same reason. Bottom line, the net loss for the quarter before tax amounted to SEK 76 million compared to SEK 44 million last year.

Moving on to the next slide then for a look at the cash flow for the combined e-commerce operations, that is Nelly and CDON. So first quarter is a — has a seasonal pattern within e-commerce, which usually includes outflows typical for the quarter, working capital increases, mainly as invoices and VAT payments are due following the peak season rather than paid in January. Inventory levels, however, did not increase this quarter as CDON continued its transformation and offsetting the spring inventory buildup that we saw in the Nelly. And other net working capital increased in the period following the seasonal patterns.

We spent SEK 7 million on capital expenditures in Nelly and CDON, while no further capital was needed to meet capital requirements in Qliro Financial Services. And at the end of the quarter, we had used about SEK 100 million of our credit facilities.

Moving forward to the balance sheet. And once again, only the e-commerce part of the operations. So we had SEK 169 million in cash and SEK 101 million in debt, and hence, a net cash position of SEK 68 million at the end of the quarter. On inventory, once again, and as Marcus mentioned, CDON succeeded in cutting its need for inventory in half compared to a year ago. And Nelly’s inventory was also lower than last year. But as we’ve said before, we still need to work on lowering the inventory in Nelly further.

The balance sheet for the financial arm, Qliro, on the next slide then, where we can see, we had — on the asset side, net lending amounted to SEK 2 billion, SEK 1.2 billion in pay-after-delivery financing within the business area, payment solutions, and about SEK 800 million in personal loans in the business area we call digital banking.

On the financing side, the Swedish loan book was mainly funded by public deposits of SEK 1.6 billion, while the multicurrency credit facility was used to finance the loan book denominated in other Nordic currencies. Qliro also had an additional SEK 453 million in undrawn commitments.

A quick look at the regulatory capital requirements show that the risk-weighted assets amounted to SEK 2.2 billion, and the capital base or own funds amounted to SEK 360 million, of which SEK 310 million was common equity tier 1 capital, which resulted in a capital adequacy ratio of 14.1%. The equivalent ratio for the consolidated situation was 18.8%.

So with that, Qliro remains very well positioned to — for further loan book growth, supported by savings accounts, unused credit facility commitments and its parent company.

And with that, back to you, Marcus.

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [4]

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Thank you, Mathias. That concludes today’s presentation. Let’s see if we have any open questions, operator? Do we have any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Nick Fhärm of SEB Equities.

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Nicklas Fhärm, SEB, Research Division – Country Head of Sweden Research & Analyst [2]

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This is Nicklas Fhärm with SEB Equities. Can I start by asking you generally to describe customer trading in April so far? I mean you have been generous enough to give us some detailed guidance for the full year. But it will be very helpful to understand what you expect in Q2 in sort of a quarterly trend.

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [3]

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Sure, Nicklas, let’s see if I can clarify a little bit. Of course, we are early days into the quarter with some 20 trading days. But we can see that CDON continues in the same trajectory that they ended up on March. Actually, looking at Q1, CDON’s business ramped up during the quarter and ended stronger when it comes to growth than it started. And we see March continuing into April.

As for Nelly, we — of course, as I mentioned, this is a season when we typically sell products or fashion for graduation. Graduation is clearly affected by COVID-19. We don’t really know if and when there will be graduations. Some indications show that perhaps that will happen later on during the summer. So that part of the business is impacted. It is a significant part of the business, but still, it’s not absolutely a majority of the business. It’s still just one part of the business.

The other part of the business is trending very well. And we also see that we continue to take and have a momentum in the Nordics going into April. So a solid start in that sense from Nelly. We will also — we also believe, and you’ll also see, that margins will recover during the quarter, as I mentioned, as we were very aggressive selling out stock during March in Nelly.

And for Qliro, we have in plan to continue to onboard new merchants during the quarter, that has not been closed down by COVID-19. That work is still ongoing. We also see, and we will most likely be able to announce some new partnerships going forward into this quarter. Even though the kind of the sales and the work to acquire a new merchant is done mainly remote, the interest still exists in the market, more so perhaps that some of the merchants are even more interested to have a smooth e-commerce experience. So Qliro continued to see good momentum when it comes to onboarding and recruitment.

And when it comes to trading, it basically follows what we said. They continue to see a good underlying growth in the merchants. The only area which is less growth is then, of course, apparel and with very high growth in other areas.

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Nicklas Fhärm, SEB, Research Division – Country Head of Sweden Research & Analyst [4]

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That was very good. Can I — if I may continue with a few more questions, please? Let’s start with CDON. I was just wondering, to the extent it’s possible, how much remaining amortizations and write-downs of capitalized development costs sort of are still in the balance sheet. You obviously took some write-downs in this quarter, and the question is really, should we expect that to repeat as you gradually roll out new features of your new platform, making the old one exempt?

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [5]

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Well, that’s a rather easy question. No. So we don’t see a big — we don’t have a concern about amortizations going forward. This was, as we also described it in the report, a one-off depreciation. As you can see — we should see as a one-off. It was an important system in the old platform that we discontinued. We don’t have as many of those remaining in the platform. I’m not sure if Mathias would like to take a — give you a kind of an overview more of the intangible side.

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Mathias Pedersen, Qliro Group AB (publ) – CFO [6]

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Intangibles in CDON’s balance sheet amounts to SEK 60 million.

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Nicklas Fhärm, SEB, Research Division – Country Head of Sweden Research & Analyst [7]

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Excellent. My second question is also a bit of accounting and relates to Qliro. And I was just wondering, assuming that the customer’s repayment ability remains intact under IFRS 9. At what point could you eventually reverse the credit provisions you’ve now charged to the P&L?

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Mathias Pedersen, Qliro Group AB (publ) – CFO [8]

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Well, one part of the credit provisions under IFRS 9 is that you use macroeconomic indicators and use statistical models to predict future losses, right? So if those macroeconomic indicators that was lowered now are turned back into a better state, then of course, you can reverse those through that mechanics. That would not then be all the effects we have had this quarter was not due to that macroeconomic indicator effect under IFRS 9, there was also some credit portfolios that were mark-to-market where the market prices for those credit portfolios were slightly lower. And that is not something that you would reverse now.

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Nicklas Fhärm, SEB, Research Division – Country Head of Sweden Research & Analyst [9]

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No, that’s very clear. And that was actually my second question on Qliro. What is the split of IFRS 9 and…

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Mathias Pedersen, Qliro Group AB (publ) – CFO [10]

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Based on statistics and also the IFRS 9, macro indicator effect is about SEK 5 million and the change in value of credit portfolios was — fair value of credit portfolio was SEK 5 million.

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Nicklas Fhärm, SEB, Research Division – Country Head of Sweden Research & Analyst [11]

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Okay. Okay. And final question on Qliro. Obviously, a significant growth in the DBS business. And I was just wondering, do you expect this to actually be maintained throughout 2020? Or is this something specific to Q1?

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [12]

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No. We don’t see that going forward. We will, of course — when we look at our digital banking business, we will, of course, take a look at and always have and will do, of course, going forward, take a look on what levels we do credit granting. So we will be, and have always been, restrictive in this, and we will continue to take a look at that part of the decision engine to make sure that we keep the risk of our credit portfolio on a level that we want it to be. That could impact somewhat the growth going forward, but we don’t see overall that, that part of the business will not grow as much as it has going forward.

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Nicklas Fhärm, SEB, Research Division – Country Head of Sweden Research & Analyst [13]

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Okay. And final question for now. Going back to Nelly, and I just think it’s very important for us all to understand the inventory composition. As you’ve said, you made some significant clearance, charged those costs to the P&L in Q1. There may be or there will be issues in Q2 as well because of what we discussed in terms of graduation impact, et cetera, et cetera. But my question is really to what extent — what’s the composition of sort of — what’s the part of the inventory which is really still a bit outdated or where there’s risk for more clearance or write-downs even?

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [14]

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Given that there are uncertainties of how demand will look like going forward, it is really, really hard to predict. But if we look at inventories older than 18 months, that is about SEK 400,000. So — and if we look at the composition of 12 months and older, below 12 months and fresher, so the last 12 months, it is 92% of inventory. So we have a rather fresh inventory to meet the current season and next season. That, of course, could be displaced by a very, very challenging market going forward. But on a general level, we have good hopes that there would continue to be a good demand in the market.

And we also see that — in looking at the trading, both in Q1 and then this far in April, some countries performed better than others, and Norway is booming. Norway is extremely strong, and Sweden is a little bit weaker. Why? It’s very, very hard to understand, right? So our Norwegian business is extremely strong and with very, very strong growth, while the Swedish market is a little bit lower. The Swedish business being the biggest one, of course, but the Norwegian business is a significant part of the total business. So it’s hard to predict how fresh the inventory will be as we close the second quarter because that all goes down to demand in the quarter. But we start the quarter with a fresh inventory. Once again, 92% of inventory is 12-month or fresher and only SEK 400,000 of inventory still remains 18 months and older.

So operator, do we have any more questions?

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Operator [15]

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Yes. We take our next question from [Erman Kurt] of Carnegie.

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Unidentified Analyst, [16]

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I think it’s basically already been touched upon, but I’ll just follow up and see if we can get some additional color. So on the SEK 5 million, you mentioned that sort of IFRS 9 macro-related provisions, what assumptions do you actually put in there regarding the macro development? And also if I understood you correctly, you’re not really expecting any change in the payment ability of your consumers. I think you more specifically said it’s regarding payments. So is the way to read into it that it’s in personal loans you see a little bit of elevated risk going forward?

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Mathias Pedersen, Qliro Group AB (publ) – CFO [17]

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No, there was no distinction in my comment between the payments and/or the loans business. And relating to the macroeconomic indicators, I’m afraid I don’t have all the details on my fingertips, but typically, unemployment rate would be such an indicator that you would look at, right? So…

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Unidentified Analyst, [18]

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Okay. And then on the other part of the SEK 10 million, so the other SEK 5 million that are more mark-to-market on your NPLs. Could you just give us some more insight to how much of your NPLs are mark-to-market because I believe you have some forward flow agreements? And are those sort of benchmarked to market prices all the time? Or is it sort of already locked in some kind of percentage of the nominal value you’re divesting?

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Mathias Pedersen, Qliro Group AB (publ) – CFO [19]

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Yes. So it’s — most — the largest part of the portfolio is under forward flow agreements or solutions rate guarantee agreements and that then works differently. And then a small portion of the portfolio is just held in mark-to-market this way. Then correct me if I’m — I think the number is SEK 10 million only left of the portfolios that are not subject to SRG or forward flow agreements.

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [20]

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[Erman], I could just comment on the ability to repay debt and all of that, just to give a little bit more context about how we operate this. So on the consumer — on the payment services, as I mentioned, the average ticket is about SEK 1,000, right? So we don’t see that being significantly impacted by COVID-19 an ability to repay. And if we then look at our digital banking services, it’s important to understand that 95% of the borrowers have been in a previous engagement of our PAD product, so our payment product. And we use the kind of payment history in that as well as external data to understand if the consumer is able to repay debt before we grant the loan. So we have more data on our customers than you perhaps normally would have. And if you have a poor PAD payment performance, you will not pause the credit criteria for consumer growth.

And then if you take a look at the consumer loans, the average consumer loan is about SEK 75,000, and the interest rate is about, on average, 8.5%, and the contractual duration is 9 years. On average, this means that the average cash flow for a loan customer is approximately SEK 1,000 per month for both interest and amortization. And we don’t see the market today or the macro environment today being as heavily impacted. So we don’t foresee that, that will be a heavy burden to carry on a total level. So that kind of gives you a little bit more flavor on how we kind of look at this business.

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Unidentified Analyst, [21]

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That’s actually very useful. Much appreciated. Just one final question perhaps on the financial services. Have you seen any sort of change in the preference of the payment method used among consumers, both on your own sort of CDON and Nelly, but also on the external merchants?

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [22]

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No. Overall, a very stable development, and we don’t see any changes in trends in regards to the choice of payment method or in terms, as I mentioned in late payments, et cetera. What we did see at the beginning of the outbreak, so to say, in March, was an increased interest from customers for payment-free months, which is something that we offer our customers. And this is something that you have seen in the banking sector in general at the start of the outbreak. And this was seen at the middle or end of March. But going into April, the requests from customers have significantly slowed down on payment-free months. So no change in behavior, and we had that kind of movement at the end of March payment-free, but that has significantly declined going into April.

Do we have any more questions, operator?

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Operator [23]

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We have no further questions at this time.

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [24]

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Okay. I believe that the — sorry, was there any questions?

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Operator [25]

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No, sir. We have no questions.

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Marcus Lindqvist, Qliro Group AB (publ) – CEO & President [26]

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Okay. Thank you. So I believe that concludes today’s call. Thank you all for participating. And we look forward to meet you again in this sense when we release our next interim report, which is then released on July 15. Thank you very much, and thank you for your interest in Qliro Group. Bye-bye.

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Operator [27]

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Thank you. Ladies and gentlemen, that does conclude today’s conference call. Thank you for your participation. You may now disconnect.