Aprila Bank ASA (APRILA) Earnings Call Transcript & Summary

Hello, everybody. I'm Halvor Lande, CEO of Aprila Bank.

And I'm Kjetil Barli, CFO of Aprila Bank.

Welcome to Aprila Bank's Q2 presentation. We will present some forward-looking statements today based on what we have seen so far and what we are aware of as of today. We continue to be very bullish about our business going forward. I'll start by giving the highlights of the quarter. Kjetil will go into the financials in more detail. Then I'll present our priorities and guiding for the rest of the year. And then we will have a Q&A session at the end. This presentation is live. So if you have any questions during the presentation, please send them to the e-mail address on the screen and we'll address them towards the end. First, a quick recap of Aprila. We're a digital business bank providing loans and credit to a large and underserved market of small- and medium-sized businesses. What makes us distinctive is our use of technology and we use technology in 2 ways: aggressive investments in automation to continuously decrease cost to serve and increase scalability; and secondly, ever-improving machine learning algorithms or AI models, as they're called today. The difference between our models and large language models such as ChatGPT is that they predict the next word in a sentence. Our models predict whether or not the business will default during the next 12 months. And this allows us to offer loans in real-time to our customers, which provides for an exceptional customer experience. At the end of Q2, we had 6,621 business lending customers. Our total income run rate was NOK 165 million. Our cost income ratio over the last 12 months was 65%, which is down 4 percentage points from the end of Q1. And last, but not least, according to our customers, Aprila Bank has so far contributed to creating or preserving over 3,700 jobs by providing working capital to underserved small businesses. Another thing that makes us distinctive is that we are integrated into the major ERP systems in Norway. This gives us real-time insight into the accounting data of our customers. Our almost 7,000 customers are a proportional representation of all small- and medium-sized businesses in Norway across geographies and industries. And what we see from these data is that the business environment is still challenging. The average SME grew their revenue over the last 12 months by 1%, which is equivalent to a 5% contraction in real terms. The only industry that is growing in line with inflation is construction. Retail, real estate, services, hotels, restaurants, transportation are all contracting even in nominal terms. But again, we are seeing how incredibly resilient these small businesses are. Despite increasing prices and contracting revenues, they have actually managed to improve their margins on average over the last 12 months. For the last 3 quarters, we have been in a small business recession in Norway. But due to IFRS 9, we have already taken the loan loss provisions for these on our books, and we don't expect our losses to increase going forward. So how did Aprila Bank do in this challenging business environment? Q2 was the best quarter of Aprila ever with a net profit of NOK 7.8 million. In Q1, we had a net loss of NOK 2 million. So how did we manage to improve our profit with almost NOK 10 million in 1 quarter? There is 2 reasons. We -- our costs were NOK 8 million lower, and our total income is still growing at 10% per quarter. So our total income after losses was NOK 1.8 million higher in the quarter than in Q1. The reason why our losses -- why our costs were NOK 8 million lower was that we only spent NOK 2 million in marketing. Over the last -- over the previous 2 quarters, we have invested heavily in brand building with a peak in Q1 of NOK 6 million. This quarter, we have continued to do brand building, but we do it for free on TikTok, where we now have 10,000 followers, over 100,000 views -- over 100,000 likes and over 1 million views of our videos. The NOK 2 million that we have spent on paid advertising has resulted in almost the same number of new credit line customers as in previous quarters. The second reason why costs were lower is that Q2 includes June where we have a holiday pay. So we had NOK 4 million lower personnel expenses in Q2, like we always do. Our gross lending has grown by almost 60% over the last 12 months, and our total income has grown by more than 68% over the last 12 months. And we are still well capitalized for further growth with a CET1 ratio of 32.4% compared to the requirement of 20%. On the last quarterly explanation -- quarterly presentation, I explained that the massive investments that we were doing in brand building at that time were in order to increase brand recognition, which would result in lower customer acquisition costs going forward. And this is exactly what has happened. Our brand -- the recognition of the Aprila Bank brand has increased from 4% to 13% over the last year and our customer acquisition cost is now under NOK 6,000, which is less than 8% of the customer lifetime value. So our return on marketing investments are now extremely attractive. This chart shows onboarded credit line customers coming both through our partners such as Visma and through aprila.no as a result of our own marketing efforts. It actually obscures the amazing growth that we had as a result of our own marketing efforts. For example, in Q2 2021, we spent NOK 2 million in marketing, which resulted in 81 new aprila.no credit line customers. Last year, in Q2, we spent NOK 1.9 million in marketing, which resulted in 210 aprila.no customers. And this year, we again spent NOK 2 million in marketing, the same as in Q2 '21, and this resulted in 347 aprila.no customers, which is more than 4x the amount of customers that we got in Q2 2021. So our customer acquisition cost is now more than 4x lower than it was in the same period 2 years ago. Our total income grew by 63% over the last 12 months. Spot factoring has been a run off product ever since the original Visma announcement that they were going to take it over themselves. We are still providing spot factoring for existing customers in Visma, and we continue to onboard new customers in Fiken. We might open up to new spot factoring customers in Visma in the future, but we've not made that decision yet because our full focus continues to be credit line. Total income from credit line grew 83% over the last 4 quarters and now represents almost 90% of our total income. And the growth in credit line is primarily driven by number of customers, which has grown by more than 50% over the last year. Continued strong growth in income combined with big drop in costs, which I explained earlier, resulted in a drop in quarterly cost income from 77% in Q1 to 47% in Q2. But due to the holiday pay effect, the more relevant comparison is between Q2 this year and Q2 last year. This period shows a drop in cost income from 56% to 47% for the quarter, and this is a result of income growing by 63% over the period, whereas costs only grew by 38%. Going forward, we aim to continue growing income around 20 percentage points faster than cost, which will lead to outstanding profitability over time. As a result of income growing faster than costs, our trailing 12 months cost income continues to decline steadily, and we're on track towards the cost income of 60% or less for 2023. In Q2, we had a total of NOK 1.2 million in realized losses. In addition, we booked another NOK 10.6 million in loan loss provisions. This resulted in NOK 11.8 million in reported losses, which corresponds to 26% of gross income from lending in the quarter. This is a bit above our long-term target of under 25%, but the long-term trend due to the intricacies of IFRS 9 is that losses as share of income is declining. We can even see this trend in the second chart on this page. Losses as share of income so far this year is 25%, down from 31% in 2022. Our net interest margin after losses was 14.4%, which is close to the long-term target of 15%. So to summarize Q2. Strong profitability improvements driven by continued growth, improved marketing and efficiency, moderate and stabilizing loss ratios and strong margins, and we're still well capitalized for future growth. Do you want to elaborate on our capitalization situation, Kjetil?

Of course. So at the end of the second quarter, Aprila CET1 ratio was 32.4%, which is well above the current overall capital requirement of 20%. We still expect the Norwegian FSA to determine a revised Pillar 2 requirement during 2023, so during the fall. We have continued to use retail classification, and we look forward to see FSA's revised circular letter on the topic, which we believe will be finalized during the fall. Without retail classification, our capital ratio would have been 26.4% at the end of Q2. And now let's move on to the key figures for the quarter. Starting with the upper left chart, we had 6,637 unique customers at the end of Q2. The soft development from Q1 is primarily due to a large number of boarded spot factoring customers following from the discontinued partnership with Two online B2B payments. In the chart in the middle of the top row, we see that gross lending reached NOK 811 million, up from NOK 749 million at the end of the last quarter. In the upper right chart, we see that total income amounted to NOK 37.4 million in the quarter, which implies a year-on-year growth of 63%. Cost/income in the lower left chart came in at 47%. And cost/income was low in the quarter due to modest marketing spend and low personnel expenses, as Halvor has explained. Next chart, loan losses came in as expected at an annualized 6% of gross loans. And finally, profit after tax came in at NOK 7.8 million. Looking closer at the credit line product. We ended the quarter with 4,380 credit line accounts, adding net 325 new accounts in the quarter and close to 1,500 accounts over the last 12 months. 87% of the customer accounts had a drawdown at the end of the quarter. The average balance per account reached NOK 172,000, and the average drawdown reached NOK 199,000. Moving on to spot factoring. We saw a rather sharp decline in the number of customer accounts and purchase amount in the quarter. The main reason is the discontinued partnership with Two. We purchased invoices with a total nominal value of NOK 129 million in the quarter compared to NOK 140 million in the last quarter. Spot factoring accounted for 11% of gross income. And at the end of the quarter, we had 2,875 open spot factoring accounts. Some more details on loan losses. We booked loan losses of NOK 11.8 million in the quarter, of which NOK 10.6 million in loan loss provisions and NOK 1.2 million in net realized losses. Looking at the upper right chart, the days past due numbers weakened in the quarter. The ratio overdue claims, the total claims, increased from 12.1% to 13.5%. Once the NPL divestment is finalized, the [ booked loans ] claims more than 90 days past due will decrease. And if we only look at loans that are 90 days or less overdue, the numbers are actually better than they were at the end of Q2 last year. Speaking of the NPL divestment process. The process has taken much longer than anticipated. The agreement is signed, and we are waiting for the transaction to close. Our collection vendor is struggling to deliver the information in a format which the buyer requires. The issue is being worked on, and we will issue a notification on NLTC as soon as the transaction is closed. In the lower left chart, we see that loan losses in percent of gross income amounted to 26% in the quarter. And in the lower right chart, we see that loan losses measured in percent of gross lending came in at 6%. And both numbers are in line with expectations. So that concludes the presentation of the key figures from the second quarter. So Halvor, over to you now for the rest of the presentation.

Thank you, Kjetil. So our focus for the rest part of 2023 remains unchanged. It's, first and foremost, widening our competitive advantage. And we do that through full focus on automation, streamlining and simplification and continued improvements of our machine learning or AI models. This will also improve our scalabilities. We are ready to take on more growth. On the growth side, we are now ramping up sales to accelerate the growth of larger credit line customers. Our long-term sales ambition is that sales will be an as important contributor to growth as marketing. And we are building our sales team in a self-financing way so that we can continue to improve profitability going forward. We're keeping our guidance of more than NOK 170 million in total income run rate and 60% cost income by the end of the year. The guiding for Q3 might seem a bit conservative. There's 2 reasons for this. Q3 is normally a subdued quarter in terms of growth because it includes the summer vacation. And as Kjetil mentioned, we are still in the process of divesting our NPL portfolio. This represents a few million in run rate income, which will disappear when we finalize this transaction. That impacts both the run rate total income number and the cost income ratio, and the NPL portfolio consists of about 200 accounts, which also will be removed from our books, hence impacting the credit line accounts' growth. Our underlying income growth is still strong at around 10% per quarter. This concludes our presentation. We are still live. So if you have any questions, send them to the e-mail address on the screen, and Kjetil and I will move to Per Christian in the lounge area to address your questions.

Congratulations on the excellent results.

Thank you. Congratulations to you, too, Per Christian.

We're in the right direction. We have received quite a few questions from Vegard Toverud in Pareto. What's the expected marketing spend going forward with your current TikTok following?

So we are spending 0 kroner on TikTok. It's completely organic free marketing, which is amazing. I think Israr is doing such an amazing job on our TikTok channel. That being said, we are going to continue to advertise in traditional channels as well. Not everybody in Norway uses TikTok. So -- and we still -- even though we increased our brand recognition from 4% to 13%, I want to make sure that we have a defendable #1 position in the Norwegian market in terms of lending to small businesses. And that probably requires a brand recognition of over 30%. And that again implies that we are going to continue to invest in marketing and brand building, also in paid channels. The growth will be moderate. We will spend -- but we will probably spend more in marketing in 2023 than we spent in 2022, and we'll probably spend more in 2024 than in 2023. But if you look at marketing as a share of our total income, that is declining. And then we typically spend more on marketing in Q3 -- sorry, Q4 and Q1 and less in Q2 and Q3.

Yes. It sounds very sensible. Kjetil, how many full-time employees do you currently have and what do you expect at year-end?

We are 35 today. We expect to be 36 at year-end. Yes, and we will probably hire 2 to 4 new FTEs during the first half of 2024. And new hires after that will depend on our growth, our performance and our level of automation.

Good. And again, from Vegard. Although tax is likely not payable, shouldn't you report a tax charge? And correspondingly, should you put almost NOK 40 million of tax shield? I expect he means deferred tax assets on your balance sheet.

Well, that's the discussion that we have with our auditor on a regular basis. Currently, we have not booked deferred tax asset, and we use the expected tax rate for actual payable tax for 2023, which is 0. So -- but we will discuss further with our auditor through the year. And we will book deferred tax assets when it's considered probable that we will -- in formal terms, that we will continue to deliver profit going forward. So I expect that we will start booking deferred tax assets during the year, but when, we don't know.

Okay. Do you expect the feedback from the financial supervisory authority on your use of retail classification? Or do you expect a general market update from them during the fall?

We expect the latter, a general update, a new circular letter. That's our understanding based on the information request that we got from FSA this spring, which we will respond to now at the end of August along with the other banks. Yes, so a revised circular letter is what we expect.

Good. And amortization is low in the quarter. Is this the new level going forward?

In terms of amortization, I guess he means depreciation?

Probably.

Yes. And yes, it's -- we don't invest that much in -- we don't book as to much intangible assets now. So I think we can say that this level is what it will be going forward as well.

And final question from Vegard. Have you agreed on the price for the nonperforming loan portfolio sale? And could you give any indication of impact to capital, P&L or similar?

Well, yes, we have agreed on price. But no, we will not issue any more information on that, on the result of the sale. We will issue that when -- once the transaction closes.

Yes. A question from [ Ulf Lumbe ]. What are the main risks that can hinder growth and/or increase profitability? Broad question.

Yes. So I think in the short term, the only real risk that I can see is that we get massive and abrupt further deterioration of the business environment with a big wave of bankruptcies, maybe similar to the situation in Norway in the early '90s. If something like that happens, that will impact our loan loss provisions and our profitability. I would say in the medium term -- medium to long term, the biggest risk is that level of competition increases much faster than what we're currently seeing and that we have new lenders coming into the market then investing very, very aggressively in marketing to buy market share. So that would be my #1 medium- to long-term risk.

But Aprila is the market leader and are in a good -- building a defendable position, right?

Yes.

Yes. Last question, Kjetil, Aprila has been a participant in the recent Euronext IPOready program? Any plans for listing?

Well, a public listing is a natural consideration for Aprila. We're in a capital-intensive business and the NOTC is not an optimal solution for us, but no formal decisions on potential IPO track have been made yet.

Very good. That was the last question.

Thank you.

We're all good?

We're all good.

Thank you very much. Thank you for watching.