DelfinGroup AS (DGR1R) Earnings Call Transcript & Summary

Good morning. Welcome to DelfinGroup Investor Webinar. We will start with the company's presentation, followed by a live Q&A session. [Operator Instructions] For your convenience, we are recording the session and a replay will be available shortly after the call. That being said, I'm handing the call over to our host, the Chairman of the Management Board of DelfinGroup, Didzis Admidins; and member of the Management Board and CFO, Andrejs Aleksandrovics. Gentlemen, please.

Thank you. Hello, everybody. I'm Didzis Admidins, CEO of DelfinGroup. And today, I'm joined by Andrejs Aleksandrovics, our CFO and Management Board member. Today, I will present you unaudited results for 12 months. And as always, I will start with key results and business highlights. And then Andrejs will join in with the business performance, financials. And after that, there will be a questions-and-answer session. So about our business results. In one sentence, I could say that business last year was quite good in business performance. As you see that our main business segments, consumer loans has grown by 15% in loan issuance levels and home loans by 9% in loan issuance levels. And basically, that means that the credit portfolio has grown by an impressive 27%. And of course, this is like main driver for our revenue. If we look on our third business line, which is retail of pre-owned goods, this business line has grown by 15% and mainly that's driven by online sales. Online sales has grown very good last year actually. And totally, if you look at our revenue, plus 25%, I count this as very impressive number. And also, like looking to our profitability, our profitability for last quarter of last year was EUR 2.6 million, actually the best result in the history of the company, and also year result is the best in the history of the company. And actually, the result of full year, EUR 9.4 million was in line with our target in guidance. So that's basically about our key results. And later on, Andrejs will walk you through those results a bit deeper. So about business highlights. First of all, I want to start with Lithuania and about consumer loans. As you know, in June last year, we got the license from the Bank of Lithuania for consumer loan issuance. And in November last year, we started those operations. And I can say that November and December were quite quiet in terms of issuance because we were testing different kinds of approaches, like different kinds of channels, different kind of pricing, and so on. But actually, in January and February, we see quite good traction there. And we see that we can successfully compete with our competitors in this market. So we will soon see the results for this entrance. Then talking about like capital markets and the funding highlights. The last quarter was, let's say, quite impressive. And year itself was very impressive because we had this bond issuance, public bond issuance in September, and we attracted EUR 15 million, and it was oversubscribed by almost 50%. And it was impressive in terms of bond investor count because we attracted 2,700 bond investors. And that's actually a very good number in Baltics in terms of count of investors in bond issuance. Also, there was good news in terms of bank financing for our company because we raised EUR 4.5 million from Citadele Bank and as like overdraft facility, and that actually allows us to decrease financing costs because we don't need so much free cash in our accounts. And actually, this bond financing and also like bank financing allowed us to a little bit decrease the P2P financing, and we decreased this from EUR 30 million to EUR 25 million. Actually, if it will be needed, we can increase this financing because we can attract from P2P marketplace additional funds if it will be needed in the near future. So about our branch network, first of all, you all know that we have like impressive branch network in Latvia, almost 90 branches and 7 branches in Vilnius, Lithuania. And actually, last year was quite full with events in branch networks because actually, we did improvements in like 16 branches of our branch network. We did like 10 smaller upgrades in our branches and 6 large upgrades in our branches. We opened 2 new XL concepts in Daugavpils in Rezekne, Latvia. And we totally rebuilt 4 another branches in Latvia and 3 branches only in the last quarter of last year. So look at the picture of all other branches. For example, you can see how the old branch looked and how the new branch looks right now. And actually, what we are doing by rebuilding those branches and relocating them, we are extending the shelf meters of those branches, and more shelf meters actually allow us to sell more items. That's actually the business case. And also, of course, we need to rebuild because that's our brand name. That's how we are looking. Actually, we will continue this also this year, and we actually have exact plan which branches we will rebuild. We will also like turn one existing branch in Liepaja to another Banknote XL branch. So in the middle of this year, we will have already 4 Banknote XL branches in Latvia. And looking forward, we actually plan also to test some different approaches in different branch styles. For example, we will test like branch concept in the shopping mall. We have now this one branch in the Domino shopping mall, but we will test another shopping mall and let's see how it will go. So another great news was that in the last quarter of last year, we improved our online store. Actually, we improved the UX for our customers and also UX for our employees because we decreased the time for listing. Because you have to understand that we have more than 60,000 items in our web shop and more or less, those are used items. Every item is quite unique, and it's very important for us to decrease time to listing. And doing that, we can like decrease the working hours for our employees, which we need to like invest to list all those items in our web shop. And we did that by using some modern solutions, which allows us to get descriptions for those items much quicker. And actually, another great news is that we introduced this web shop also now in our mobile app and mobile app itself is quite successful right now because already like a significant part of our loan issuance or consumer loan issuance goes through our mobile app. So another great news is that last year, actually, we changed our organizational structure, as I already informed our investors, and another good thing is that we changed this organizational structure, which allows us to better suit our strategy and to fulfill our targets. And in August last year, Andrejs Aleksandrovics joined us as CFO. And in December of last year was appointed by Supervisory Board in the Management Board of the company. Andrejs has a good experience in some well-known international companies. Andrejs, let's jump in and introduce yourself.

All right. Thank you, Didzis. Yes. So, my name is Andrejs Aleksandrovics. Very happy that I joined DelfinGroup, this very ambitious company and a great team. As Didzis mentioned, I joined last year's August. So I'm with the company 6 months, so time flies. But during those 6 months, I have pretty well get acquainted with all the company and all the details. So let's jump into more details -- to review more details of the business performance. The first one we talk about is consumer loans. This is by far our largest product line. It comprised approximately 2/3 of the revenues of our company. And as you can see, we've continued very strong growth. Didzis already mentioned that we've already -- in 2024, we've managed to grow our portfolio 28% year-on-year, which was following the previous year which is also impressive of 33%. So the growth is continuous throughout the years, and we see a very, very strong demand for our product here. We also see that the average loans grow -- average amount of the loan growth by 27% year-on-year as well as the average term of the loans have increased to 40.7 months, which represents 15% increase. At the same time, we've managed to keep a very healthy portfolio. And our NPLs or nonperforming loan ratio is only 2.4% at the end of 2024. So we did not -- so the growth did not impact our NPL ratio as much. All right. This is about consumer loans. Moving on to the pawn loans. This is a very stable line of business of ours. While we have achieved 18%, quite impressive growth in pawn loan portfolio, reaching EUR 4.9 million at the end of 2024, it was partly driven by 2 factors. One is we've started to issue and we worked in Lithuania, which accounted for part of the increase as well as the price appreciation of items like, for example, gold, which increased over 20% in 2024 compared to 2023. This line of business, we view as very stable. We don't expect this line of business to continue to grow like 30% year-on-year, but we still -- but at the same time, we do see this as a very stable part of our business, and we are market leaders in Latvia in this business, and continue to -- we will continue to be so. All right. And the third one, last but not least, retail segment, also fairly impressive growth, 15% year-on-year, and Q4 2024 was a record month when total sales amounted to EUR 4.6 million. The growth -- during the growth, we managed to sustain a very healthy margins, which did not change from 2023 and is around 40%, so growing but sustaining the margins. And also, as Didzis mentioned, about the online. As you can see, online grew almost 50% through our innovations and investments into this sales channel, and we see that this sales channel where we could scale the most also going forward and are planning to scale retail in the future through this channel. All right. About the products that we sell. So we sell across various items. The leading category in our sales is jewelry, representing 30% of our total sales, closely followed by smartphones. Together, they account for more than half of our total sales, but we also sell various other goods, which are computers, TVs. Under the other, we have smart watches and household appliances. We do have a workshop where all the goods are passing through, where we can improve them, we package them and really make them to feel like new items, and we do see a strong demand for pre-used goods, and we plan to kind of grow this part of our business, and we are also much more concentrating and wanting to grow the business through purchasing the items rather than pledges that have not been bought out. So purchasing, refurbishing, reselling. Yes, this is about the split of our revenues. So as I mentioned, the largest business is consumer loans, where we provide the service through 2 brands, Banknote and Vizia, Banknote being by far the largest representing 52 -- Banknote's consumer loans representing 52% of our total sales, but also pawns and retail-owned goods together accounting for more than a quarter of our revenues. As I mentioned, we do see that both consumer loans and retail is the segments that we see the most growth potential also going forward, but we also see that pawn loans are very stable business lines of ours. Also, as you can see on the bottom right side of the slide is a distribution of consumer loans by age category. We are accessible for all categories and quite evenly spread throughout the age groups. We do promote also the accessibility for senior citizens. And as you can see, it represents 15% and 12% of our clients. We tailor-made the offers and do the better offers for our seniors as well. Right. Yes, income statement. Here, I want to spend a bit more time. So as Didzis mentioned, very impressive 25% growth year-on-year, while profit before tax grew by 13%. In absolute number, it is great. What I want to emphasize is that throughout 2024, we were establishing a business in Lithuania. So we were building out the business processes, teams, investments in technology, opening branches. So we have 7 branches now operating in Lithuania, and we started also like a consumer loan in Q4 2024. Without Lithuanian investment, so Latvia on a standalone comparable basis, revenue year-on-year grew by 24% and profit before tax actually grew by 23%. So we've managed to keep the profitability of the Latvian side of the business intact, largely intact. One of the items in expense lines that grew outpaced, so to say, the revenue is credit loss expenses, while a lot of increase accounts for loan portfolio growth, but it -- still the P&L impact outpaced the growth of portfolio, which was 28%. The one factor that impacted it the most is LGD or loss given default. So it means how can we recover defaulted loans. And here, to minimize like our dependency on at what price, for example, we can sell nonperforming loans, we're also building and strengthening our capability of in-house collection of those NPLs, non-performing loans, which should allow us to kind of more control this line of the cost. Other items of interest expenses, yes, 28% year-on-year. But as you can see in last quarter, quarter-on-quarter interest expense increased by 18%, considering that portfolio increased 28% and this is where we benefited partly from Euribor decrease, but also significant impact was from this credit line facility that Didzis just mentioned from Citadele, and we were able to manage our cash much more efficiently so to keep less cash -- uninvested cash on our balance sheet. Yes, I think I covered this one. So to the balance sheet itself, well, as expected, the vast majority of the balance sheet consists of loan portfolio and on the liability side, interest-bearing debt to finance the loan portfolio increase. We do have increase in the fixed assets and intangibles with our investments into the new looks of our branches, with investment into the Lithuanian branches that we've opened and also investment into our back-end systems to be able to scale the business more easily. Inventory, yes, follows the retail largely and the cash. This is what I've mentioned just a minute ago, is we keep way smaller cash balances because we can utilize our credit line facility, thus reducing our interest expense. And we plan to continue that going forward. And the ratios, please keep in mind that -- what I mentioned with the income statement that we did spend on scaling up Lithuanian business and investing and setting it up. Our EBITDA margin fairly flat. So we've managed to cover the costs through the efficiencies, the cost of investment. Equity ratio, I need to stress this is adjusted equity ratio. It also takes into the account our subordinate loans, but increasing steadily, obviously impacted by dividend payout, but we still, with that, managing to increase equity ratio and return on equity. We -- again, also increases from quarter-to-quarter. We had a dip in Q4 2023, but that was largely because of this CIT or corporate income tax changes where we accounted for tax for the whole 2023 in Q4 '23. So other than that, steady upward trend. Cost-to-income ratio, similar to EBIT margin, stable and slightly improving, and again, emphasizing that this all meanwhile investing into the Lithuanian market development. Interest-bearing liabilities, again, fairly flat, decreased from 2023 to the end of 2024, partly driven by Euribor decrease. We do have EUR 56 million of our loans with a floating Euribor rate, but also attracting loans at a slightly lower rate, our capability to do so through the bank and through the bonds issue. And interest coverage at solid #2, way comfortably above our covenant at 1.5. And shortly about the capital structure. So we are really kind of following that our capital structure is diverse, thus ensuring like minimizing the risk. So equity representing 21%, P2P platform interest is 20%, which we decreased by EUR 5 million through 2024. And the rest is the banks and the bonds. And again, repeating what Didzis said, we've had a very successful floating of public bonds in Q3, which were oversubscribed by 50%, and also this attraction of Citadele bank credit facility of almost EUR 5 million. So currently, we have opened 5 bonds, not repaid 5 bonds, active bonds. And the last one being this public offering that we've attracted EUR 50 million for us. Dividends. Yes. So Q4 dividends, which is currently approved by the Management and Supervisory Board of the company. Historic trademark, we've exceeded EUR 1 million in dividend payouts for the quarter and our total planned dividend subject to shareholders' approvals, of course, but our planned dividend payout is EUR 1.012 million, which is, as is our policy, 50% payout ratio from our profits. If counted together all dividends and including the last ones approved, dividend yield for the year is almost 8%, just on the dividends. And share performance. Yes. So in Q2 2024, we saw a dip in share price, which was driven by discount sales by one of our shareholders who sold shares at a discounted price of 0.9. Since then, shares have slightly recovered and recently was at EUR 1.15, still slightly behind the market, but our price to earnings ratios being at 6.5, we see that we are below the market financial industry average of 7.5. At the same time, having the return on equity at very formidable 35%. So yes, I guess that would cover for the share performance. So thank you, and on to Q&A.

Thank you for the presentation. A very insightful information. [Operator Instructions] I see 4 have come in already, so please continue doing that. We'll start with the questions that have been submitted before the call. And the first one of those are, will we see the Lithuanian loan portfolio dynamics and profitability for the market?

I can cover this one. Yes, at some point, we will start to open this information. And as I previously said that most likely that will happen in 2025. And as I said that we just started our consumer loan issuance. And you have to understand that, for example, in Latvia, consumer loans corresponds more than like almost 95% of our loan portfolio, and that's the backbone of this business. And in my opinion, Lithuania will be the same. And yes, at some point in 2025, we will start opening this information.

Are you planning to expand also in Estonia?

We actually are researching like different kind of markets, and we are like monitoring as well situation in Estonia, but we don't have like exact plans at the moment.

All right. What about future plans for bonds and shares?

Yes, I'll take this one. Yes, we will need an additional financing this year. According to our guidance that is also available on our website, we plan to grow our portfolio further this year. So we will need to attract the financing and through all our channels. And also, the closest to maturity bonds are in February and likely those will be also refinanced through an additional bond issue, timing-wise, probably Q3 or Q4.

Last spring, Mr. Volskis resigned from the Supervisory Board. Then it was said that active process of recruiting new Supervisory Board member will be started. It is almost 1 year since that. Can you comment on this?

Actually, I don't know the current status of this, taking into account that this is like Board matters and shareholder will appoint the 5th Board member. But yes, we have like nomination committee for that. But I don't know current status. We can answer to this question later.

Q1 of 2025 is coming to end. Could you reveal some Lithuania loan issuance numbers for recently launched consumer loan segment?

Yes. As I said, we will start to open this information at some point in 2025. Of course, I can't open like answer to this in this question-and-answer session.

The respective ratios are well above covenant levels. Does the management plan to make additional yearly dividend recommendation for the shareholder meeting?

Yes. The actual dividend practice for us is that we have this quarterly dividends. And then we have one annual dividend. Last year, it was in July. And if everything will be all right and the covenants will be at the normal level, and it will be -- if we will see that we can pay out those dividends, we will suggest that to our shareholders. But that will be like after a shareholder voting.

Continuing with the next question. Recently in news, there was information that some lenders in Latvia, including Banknote, apply commission for earlier issuance of consumer loans, which is not completely in line with the policy of [ PTAC ] or the Consumer Rights Protection Center. Do you see this as a risk for future income? And are there any plans to change this?

Actually, that was according to Consumer Rights Protection Center policy, and this practice was approved by Consumer Rights Protection Center in our company. But yes, there is like planned changes in terms of this commission, and we have actually in like process with Consumer Rights Protection Center dealing about this matter. But it's not like -- there is not like administrative process for that or some clients about that. This practice was previously approved by Consumer Rights Protection Center.

All right. In Q4 2021, the credit expenses ratio to profit before tax was 43%. In Q4 2024, it's 156%. What's the conclusion from this?

Well, I haven't looked at 2021 numbers, to be honest. We probably need to look at the overall profitability of the company, which is solid. In 2024, I mentioned that we did investments also in Lithuania, which slightly decreased our profitability and mentioned if excluding that investment, we would be 23% year-on-year. Again, and also, probably need to look at the business kind of split, how much is -- obviously, the credit loss will grow with a significant growth of portfolio. So we need to also measure those one against the other. And lastly, I mentioned also about the LGD that have increased this year, which we are focusing on and taking actions about the in-house -- improving in-house collections as well.

Thank you, Andrejs. In Q4, cost of interest-bearing liabilities by 1 percentage point are low year-over-year, yet the net interest income grows at a slower pace than net loan portfolio. Are there any pressure on the loan yields?

No. We've kept the loan yields the same throughout the 2024. And also going forward, we don't expect particularly any decrease in that.

There is a small decrease, but actually the yields for consumer loans are quite stable for already like several years.

All right. As I don't see any more questions, we'll slowly be closing the call today. Participants, I remind that the recording of the webinar will soon be available online, thus follow DelfinGroup news. Thank you for spending this hour with us, and see you next time.