Grenke AG (0R97.IL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. We will now start with the Grenke AG Conference Call. [Operator Instructions]. I would now like to turn the conference over to Anke Linnartz.

Welcome, ladies and gentlemen, and thank you for joining our today's conference call regarding the publication of the full year results 2023. My name is Anke Linnartz. I'm Head of IR, and I'm here together with our CEO, Dr. Sebastian Hirsch and our designated CFO, Dr. Martin Paal. We'll get started right away, and it will be, as always, we will have the presentations first, followed by a Q&A session. And with that, I would like to hand the call over to Dr. Sebastian Hirsch.

Thank you, Anke and a warm welcome from my side as well. Thank you for joining us today for our annual conference call with analysts and investors. It's my pleasure to introduce my colleague, Dr. Martin Paal to you today, he's designated as CFO of Grenke AG and I'm sure that you read our press release from Tuesday, that week. Martin Paal will start as CFO with beginning of July 2024, and he is with us roughly 2 years. And again, it's a pleasure to have you here, Martin, welcome and the team.

Thank you, Sebastian. My pleasure to be here.

So -- and now let's get started with annual figures of 2023. Ladies and gentlemen, 2023 was again a very challenging year but also a successful one for us. Together with my colleagues, Isabel Rosler, Gilles Christ and Martin Paal as well as the entire Grenke team, we have accomplished a turnaround after the COVID years and have continued on our strong growth path. We are back on the level of 2019. I would like to express my sincere thanks to our global team of their great efforts in making 2023 a success. With that, we have put ourselves in an excellent position to pursue a new chapter in the history of Grenke by surpassing EUR 3 billion new leasing business threshold for the first time. '23 was shaped by significant macroeconomic challenges. The war in the Ukraine and the Middle East continued without an end in sight. And why the economies in which we operate are adjusting to a new macroeconomic landscape, inflation remained high. Interest rates kept rising until September, reaching new peaks and the fears of a recession started to materialize. In this environment of uncertainty and exploding cost for liquidity and funding, we have shown that our leasing products provide an essential service to our customers. The small medium enterprises, which are the backbone of each economy. With our leasing solutions, we offered thousands of companies reliability and confidence to size the opportunity to invest into their future. And as our new leasing business figures show, there is a great demand for this. I would like to comment on some highlights of our business and the status quo of Grenke. As you know, in Q3, we saw the first issuance of a Green Bond in Grenke history, which was met by a high demand in the capital market. It serves to our strong green economy object portfolio, which was a driver of our growth in the past quarters. And with EUR 500 million, it was also our first benchmark bond, which opens an important new chapter in our refinancing. More recently, after a deep analysis in 2023, we have decided to focus our resources, energy and attention on our core business. Following a pure-play approach, we decided to divest our factoring business and are already in good talks with interested parties. And last but not least, we received the approval by BaFin to launch a share buyback program we announced it in December, which we started a few weeks ago. The program has a volume of up to EUR 70 million and is expected to continue into next year. So let's turn to our business performance. Firstly, we generated new leasing business of EUR 2.6 billion. This is within our target, even if only narrowly. Q4 with EUR 730 million is a strong reference point for our growth and business for '24. And we are counting now 6 countries with a new leasing business of more than EUR 100 million per year. The group of Germany, France, Italy, U.K. and Spain was supplemented by Finland. Secondly, year-on-year, we have improved our CM2 margin from 16.1% to 16.5% and achieved this in a high and rising interest environment. We are very satisfied with this result because it shows impressively how we passed on the rising interest rates while maintaining a strong growth path. And we're stabilizing interest rates and the perspective of potential decrease in 2024, we will continue to strengthen our margin. And again, we have generated double-digit growth at a solid margin. In terms of funding, we are well equipped for our ambitious goals. Our funding mix of bonds, deposits and ABCP provides us with a well-balanced structure to refinance our activities and to react quickly to changing market conditions. For Finland, we started a new ABCP program to support the volume and growth directly with matched funding. The successful issuance of our green benchmark bond last year was an important step back into the capital market. Given our ambitious growth trajectory, this size will become the new normal for us. And this -- our funding is supported by our solid investment grade ratings by Standard & Poor's and Fitch of BBB at stable outlook. And with our equity ratio, of well above 16%, we are set to maintain this rating grade. So let's talk about some KPIs. Last year, we saw an increase in net profit of 3% to EUR 86.7 million, and it's the upper range of our initial guidance for '23. Our loss rate went down to just 1.0% because of the strong new business we settled the last 3 years and thanks to the continuously reliable payment behavior of our SME customers. And we are still reasonably cautious because of the macroeconomic environment. While our low loss rate results in a high profitability of our leasing portfolio, it leaves space for taking on additional volume with an even better risk benefit profile, especially if interest rates are more or less stable now. Driven by our increasing leasing business, our equity ratio developed towards our target level of above 16% as it decreased by 170 basis points. Our ongoing share buyback program will contribute to a further normalization of our equity ratio. But the planned decrease in '23 was driven by growth, by growth in leasing new business as well as rising balance sheet because of rising leasing receivables. Our cost income ratio reached 59.2%. To be honest, I'm not happy with 59% cost/income ratio. But we have to take into account the circumstances. The cost/income ratio is, of course, higher than we have guided. It was mainly driven by the steep increase in refinancing costs due to the rising interest environment. And for the propose of this KPI, the pressure is from the denominator side in '23. Martin will comment on that later on in more detail. And lastly, we achieved earnings per share by EUR 1.79 and based on this, we are proposing a dividend of EUR 0.47 to this year's Annual General Meeting. Revisiting our guidance shows that we have delivered. It was not a year of outstanding performance, that's true, but we delivered. We simply fulfilled our mission 2023, despite adverse circumstances and we can be proud of that. But at the same time, we must and want to build on it. Let's take a look at the facts to see the solid basis for future success. We delivered on our guidance with EUR 2.6 billion in new business leasing at a very profitable CM2 margin of 16.5%, as I mentioned some minutes ago. In other words, we have passed on the steep interest increase by maintaining a double-digit volume growth. We have successfully negotiated the enormous macroeconomic changes of the past 2 years and generated a strong and highly profitable portfolio. And with that, we will generate profitable cash flows that are the foundation for our future growth. We have a firm eye on our target of breaking this EUR 3 billion barrier. I will give you further details on this later. And before I'm handing over to Martin, I would like to update you on our digital excellence program because it is an essential component of our growth strategy. After the first year of the program, I'm very happy to state that we are well on track and on budget. The cloud migration of our digital environment is progressing according to plan. Key milestone we reached a better automation of our KYC process in major countries as well as the first cloud-based solutions. In '24, we will focus on further automation of core processes and further lowering our customer response time, closer to a real-time process. The digital excellence will result in more efficient sales channel penetration especially for online and direct sales solutions. And it will support our operational excellence to handle that today more than 1 million running contracts, more efficient and scalable and the number of contracts and the number of clients will rise. This year, we expect to see the first efficiency gains, which will increase significantly from 2025 onwards as some double charges in infrastructure costs will then finally be eliminated. Ladies and gentlemen, we have embarked on this program because it is essential for the future and competitiveness of Grenke. We are now in the middle of implementing it while at the same time, our business is growing strongly. This is extraordinary. And we are aware that we will only see the positive effects on our financial KPIs in the future. And this is not just a question of patients, but above all, the result of consistent strategic implementation. And with that, I hand over to Martin.

Yes, again, a warm welcome to all of you. Allow me to introduce myself a bit further. My name is Martin Paal, and my background is and has always been financed. I've worked in several leading positions in the German banking sector. And over the past 1.5 years, I've already worked very closely together with Sebastian. I'm very pleased that the Supervisory Board has appointed me as CFO as of July 1 this year. And it's my pleasure that I can already enter into dialogue with you today and I will establish personal contact with you at our upcoming road shows and conferences. And today, I lead you through our 2023 figures and how they developed over the past year. So let's start with a look at our contribution margins. The interest rate landscape has undergone several significant increases since mid-2022. And this trend has continued throughout 2023, but began to stabilize towards the end of the year. And thanks to our steering mechanism, we were able to pass our own higher refinancing costs onto our lease contracts. And the results of our steering mechanism is shown in the development of our contribution margin 2. At the end of 2023, we were able to raise our CM2 margin to 16.5% on average, which corresponds to an increase of 40 basis points, as already mentioned. It is not only the margin that is crucial, but also the absolute volume that we realized. And here, it is important to note that tickets above EUR 25,000 are just as equally important for their contribution to the absolute contribution margin. While over 90% of new lease contracts are small tickets, roughly 40% or EUR 168 million of the CM2 volume is contributed by contracts above EUR 25,000. And what you can also see on this chart is our success in passing on higher interest rate, especially in our small ticket segment. These tickets contribute to a CM2 margin as high as 17.5%, which underlines our focus on this segment. So now let's move on to the next slide to see how the CM2 margin translated into our P&L. And here on this slide, you can see the additions in interest income in the blue columns over the additional refinancing cost in the red columns in comparison to the same quarter of the previous year, quarter 4 2023. Already in Q3, 2023, we were able to fully compensate our higher refinancing costs by our increasing interest income. And as you can see, this positive trend continued in quarter 4 '23, where the interest -- increase in interest income by EUR 20.5 million, so past the growth of refinancing costs of additional EUR 19.9 million. And this is a development that we are certainly proud of and which reflects perfectly the achievements and the positive development of our CM2 margin and that I just showed you beforehand. The development of our net interest income is equally important for our cost/income ratio since higher earnings lead eventually to an improvement in the cost/income ratio with the same level of cost structure. And that's we're going to look at not right now. What we have here is the structure of our cost/income ratio. At the end of 2023, we recorded a cost-income ratio of 59.2%. And there are 2 things I would like to draw your attention to in the numerator as well as in the denominator. First of all, the numerator represents the costs. And part of these costs is our digital excellence program, which accounted for roughly EUR 10 million 2023. And just to remind you, expense for the program are scheduled until 2026. So costs attributed to the program will fade out over time. And secondly, regarding the denominator that represents our income. While there are many items contributing to our income, refinancing costs need to be deducted. And last year's funding costs came in about EUR 20 million higher than we initially had planned for due to the very dynamic interest rate environment. Without these effects, the cost/income ratio would have turned out to be slightly above 55%, as you can see here on the slide. And in a nutshell, the numerator will decrease as the cost pressure driven by the Digital Excellence program is temporary, and the denominator will increase as we successfully passed on higher refinancing costs in our new leasing contract. And my personal focus in order to improve our overall cost income ratio is based on 3 Cs: cost discipline, consolidation and controlling of KPIs. An important part, especially for the controlling of key figures, place our digital excellence program, through which we aspire to benefit from increasing efficiencies and this will evidently also be reflected in our cost structure going forward. And as our P&L shows, 2023 was a very profitable year for us. We saw net interest income come in on par with the previous year at around EUR 339 million, which was a development we expected given the interest rate environment and the resulting significant increase in refinancing costs. Profit from new and service business increased by some 14% to roughly EUR 184 million. And costs, as just lined out, increased by around 11% to about EUR 310 million. And due to the solid payment behavior of our customers, settlements of claims and risk provisions came down 25% to about EUR 91 million, while other operating costs came in at around EUR 10 million. So consequently, we increased our operating result by as much as 15% to roughly EUR 113 million, leading to a net profit of EUR 86 million, which is well within our guidance. These figures show that we have operated very profitably in a fast-changing interest rate and macroeconomic environment. And this makes us confident for the ongoing financial year, aiming at EUR 95 million to EUR 115 million net profit. Let's have a look at our cash flow statement. We see that we increased our cash by some EUR 240 million compared to the end of last year. The increase was driven by the strong cash inflow from lessees of EUR 2.4 billion and the addition of new refinancing, which exceeded repayments. And our benchmark green bond in Q3 of EUR 500 million as well as our strong deposit business at Grenke Bank are most noteworthy in this regard. With EUR 697 million in cash and cash equivalents at the end of 2023, we set up a strong foundation for our ambitious goal of more than EUR 3 billion new leasing business in 2024. And our funding mix traditionally relies on diversification along our 3 debt funding pillars: senior unsecured, deposit business and asset-based refinancing. So please note that we continue to rely on our proven matched maturities approach. By the end of 2023, our senior unsecured pillar contributed 40% to our funding mix being the biggest of the 3 pillars. And our deposit business through Grenke Bank as well as our ABCP programs remained widely stable in the past 3 months at EUR 1.6 billion and EUR 1.2 billion, respectively. So our proven funding structure provides us with a perfect means to tackle the challenges of changing interest rate environment and to fund our continued strong growth path. And with that, I hand back over to Sebastian.

Thank you, Martin. Ladies and gentlemen, this year, we aim to set a new record of EUR 3 billion leasing new business. As we look ahead to realizing our ambitions for 2024, we are committed to leveraging the investment opportunities presented by our customers, the small and medium-sized companies. We will capitalize on mega trends such as screen economy, e-mobility, medical and health care as well as robotics. Above all, the digital transformation is not already done especially not in the SME sector because the challenges of the recent years have demanded as the priorities. So the key objects will be important as well. Internally, our focus will be on strengthening our position in leasing. And this means a strong focus on clients who want to invest. More than that, we will expand our market share as we want to be a key player in all our markets. In the long term, we will provide a minimum of 10% of the small medium enterprises in a market with our solutions. We will be pursuing international growth opportunities along global and local trends and investment needs. And finally, we want to enhance our presence in several sales channels direct and online to develop ourselves into a plug and lease player for both our resellers and our customers [indiscernible] and by diversifying our leasing object portfolio, we will offer an even broader base for our reseller network. I would like to share with you our guidance for the current financial year '24 and our midterm outlook. This is nothing new, but clear in our scope, and I am happy to underline. We expect an increase of our leasing new business to at least EUR 3 billion up to EUR 3.2 billion in 2024. Beyond 2024, we aim to maintain a midterm growth level of around 12% per year. In the current year, we are aiming for a slight increase in our contribution margin too compared to the previous year. Medium-term goal is to achieve a CM2 margin of around 17%. And refinancing costs and our terms and conditions for newly concluded leases are just as decisive here as average ticket size as Martin have explained us. The expectation for the CM2 and our profit corridor for 2024 is based on the assumption that the loss ratio will remain below 1.5%. The solid payment behavior of our customers in recent quarters and appropriate and conservative risk provisions that have already been set up are crucial factors in this regard. While continuing to invest in our digitalization program as planned, we are aiming for a cost income ratio of less than 58% in 2024. In the following years, the cost/income ratio is expected to improve through efficiency gains and increasing degree of digitalization and rising income to a level of less than 55%. And in the long term, we aim to achieve a cost/income ratio in the area of 50%, thanks to our new business profitability and overall sustainable growth as well as due to our digitalization program and strict cost discipline. For 2024, we expect our group earnings to reach EUR 95 million to EUR 115 million. This already accounts for ongoing investments in our digital excellence program as mentioned. And we expect further growth in profit on a mid- and long-term run because of our new business, stable margin and ongoing digitalization chains. We have a long-term standing guidance on our equity ratio, which continues to remain at above 16%. This ensures good lending possibilities in the financial market. And of course, it takes an account payout ratio of 25%, which has been stable for years. Our mission for 2024 keep going with a strong focus on the EUR 3 billion and further digitalization. Ladies and gentlemen, we are on the right track. Our team is full of passion to empower the success overall at and with Grenke. And that means double-digit growth, strong margin but also scaling and efficiency. Thank you for your attention, and back to you, Anke, for our Q&A session.

Thank you for your presentations, we are ready to enter our Q&A session. [Operator Instructions] So the first question comes from Mr. Thormann from HSBC.

Three questions, please. First of all on the sale of factoring. Could you give us, first of all, a time line and also a bit more about the P&L implications or will the loss just be deducted from equity or is there no loss or whatever. Secondly, on your funding situation for new business, you said you want to do benchmark issues now. So will this be 2 benchmark issues and then can you also update us on your deposit funding, how it has developed during the first month of the year. And then last but not least, probably on the risk cost, we've sold 1% roughly this year, less than 1% last year. Now we are getting to 1.5% closer to that. What is driving the jump in your expected risk cost?

Yes. Thank you, Mr. Thormann. I will take the first and the third one, and Martin will go for the second question. In terms of funding, first factoring, we are in progress, as mentioned. Now it was important to finalize our annual report and will now accelerate the progress of going for selling the factoring business at all in the best case, and we assume that we were making progress over the next couple of months, our -- which time plan is to finish that for that year, that's for sure. And I think that will be possible but let's see what the next month will happen. There is no loss in terms of the sale expected. There's overall a positive impact. You can see it in the segment report, factoring segment is loss-making. And over the last couple of years, also for the last year, '23 that's shown in the segment report and you can expect if factoring business is done, and we sold that and then that loss is never not longer part of Grenke P&L so that is a positive -- a small positive impact. For that year, we assume that we will stick to factoring from a P&L perspective. And the last question is the risk cost. Of course, the risk cost was 1.0%, pretty down. The rising in risk costs and maximum to 1.5%, we expect lower than 1.5% for that year is especially driven by new business volume. And you know because of IFRS 9, you have to take care for expected loss accounting for new contracts, and that's why we will see a rise in the loss rate and the strong portfolio volume of 2018, 2019 is now done. So there's no further impact of former risk provisioning, which goes in the other direction that was in '23 and '22, the case. So the volume growth, it's the most important driver for a bit higher risk provisioning for that year we expect.

Yes. Thank you, Mr. Thormann. Just coming back to your second question on the funding side. I'll start with the situation of Grenke Bank. We have a very stable deposit business with Grenke Bank. Maybe you have seen it Grenke Bank has increased its deposits to EUR 1.6 billion as of year-end 2023. They did a very good job in creating deposit business, especially in the last quarter. And so we will use, as always, Grenke Bank together with the other 2 pillars as needed and dynamically in our funding mix. Regarding your question on the benchmark bond. Yes, that's right. We have proven that we can do benchmark size with our green bond last year. And given our at least EUR 3 billion new business volume. And this year, we will go back, we'll come back to the capital markets and we'll see issues in that size. If it's always a benchmark, we will see, but at least benchmark is the new normal for us in the necessity to create funding with our senior unsecured programs.

So we move on to a question from Mr. Fuhrberg with [indiscernible].

First of all, just to clarify on the sale of the factoring business, you mentioned that you will get rid of the losses that you reported over the past years. So should we expect all of those to diminish? Or do you expect some residual to remain for, let's say, like many functions that were also used for the leading business, for example. And the second question is on the development of the net interest income and especially interest expenses. Also in Q4, we saw a rather sharp increase again for interest expenses quarter-over-quarter. So that the net interest income was fairly stable. You mentioned that you are successfully passing on higher interest rates to your customers. So should we, for 2024 generally expect the interest income to -- yes, rise stronger again over interest expenses? Or should we expect this dynamic at least to continue that we saw in Q4 or Q3?

Yes, I will go for the question. The first factoring business. It was important to having a successful sale of the business and to having no further loss on our P&L looking into the future. And at the end, it depends on the purchase price, what with the losses of the past, but that will not be part of the P&L, I guess, it's more or less an equity transaction at the end of the day, but we will see if we go for a sale, the factoring business, the most important thing is to stop the loss-making business from our perspective and being clear and clean for the future and the rest is part of the negotiation at the end of the day. And I'll make some comments on the interest income. You should expect a rising net interest income for that year because of the volume, because of we are passing through in our contribution margin, our conditions, the higher interest rates. And it depends a bit on interest rate environment, as Martin mentioned in the presentation, if the interest are stable, we will see better margins on the one hand and then also a better ratio of net interest income. If you think in growth rates, it's very important to be clear that in growth rates, the interest expense will be growing stronger as the interest income but more or less a base impact based on the interest rates we are dealing with and that was also shown in the presentation that the absolute numbers are crucial for that and in absolute numbers, we will see an increase of net interest income as expected because of the strong margin of the past.

If you have a follow-up, please go ahead.

Yes. Just to clarify here, of course, we are seeing or we will see a volume effect. But you -- when I interpret it right that you expect also a slight expansion, at least of the net interest margin, right?

Yes.

Okay. So then we'd like to move on to Mr. Pfänder with ODDO.

Two questions from my side. The first one on the CM2 margin, it declined by 40 basis points in the fourth quarter, while refinancing rate from the ECB moved sideways. So what was triggering the lower margin there? And what would you need to change to bring this margin up to, let's say, close to 17% where you want to land in future years? Secondly, touching on operating costs. I think you increased your head count by 10% last year. Could you split this into front office, back office functions? And I would be also interested this number is heading into '24. Thank you.

So let me start with your first questions regarding the decline in our contribution margin in the fourth quarter. Well, that's -- obviously, that's normal for the fourth quarter. If you compare it on a quarter-by-quarter, then we saw an increase in our CM2 margin. Over the year, the fourth quarter is always the decisive quarter for the new business volume every other competitor of us goes out. So what we saw in the fourth quarter is really pretty normal to us. Also ECB interest rates remain stable towards the end of the year. So there is no special task we have to do to bring it up when we have a look at our fourth quarter. Regarding the first quarter of this year, there's yes, nothing special, so to say. Yes. And maybe I can say something about the head count last year to split it up in sales and in non-sale overhead, especially the governance structure, which was change that was also important in the last year because of some regulatory requests was ongoing, it's roughly 50-50. So you can say that also we have -- we had 10% growth in the locals and the head count of sales but also roughly 10% in head count in the headquarter and also in the local staff for governance perspective, for compliance perspective, something like that. For that year, we expect a bit lower head count because of the strong growth. We would like to achieve a double-digit growth as well on a huge volume in several countries. I mentioned that it was EUR 100 million. We have now 6 countries in place, but the growth in head count will be less than 10% is expected by us between 5% and 6% and more or less in the locals and the sales forces because we are very prepared with the head count in the headquarter and also in all the governance function we need.

And if you allow me to add to that point, yes, maybe you saw that Personnel costs increased by some 18% over the last year. And as Sebastian just mentioned, our increase in head count, we're not that large as last year. So we clearly aim to come down a little bit with this growth rate in Personnel costs. But what you always have to take into account, we are double-digit growing in other new business volume. So there's always also some growth in Personnel costs as well.

Maybe one follow-up question. As you mentioned, you are targeting CM2 margin of around 17%, let's say, in 2 years. What would you need to change to get there from today's perspective of the -- yes.

I'm going to start with that question. Clearly, we need really to stick to our goals. What we have already initiated in terms of steering mechanisms in terms of controlling of KPIs, which I mentioned in my presentation, it's really that we see the holistic approach between everything of CM2 margin of volume together with costs and also very strongly looking at the refinancing side, looking at ECB interest rates because that's the crucial point here in our contribution margin. And yes, as already lined out in the course of this year, we expect interest rates to really stabilize and so will from our opinion, also the CM2 margin.

Yes. And again, sorry, again, we have shown a huge development in the last year. Q4 was 15.2% as CM2. So we have shown that we are able to increase our CM2. And the short answer is, what should we do a bit keep cool, keep going and forward. And we are on the right track. As we mentioned, our conditions are now on the right level being aware of the competitive environment is also very important. But again, we are on a very good track to achieving the 17% area in contribution margin.

The business mix will be the same in terms of large ticket -- small ticket.

Yes.

Okay. So then we have a question from one of our participants on the chat, which is [indiscernible] and he has 3 questions. And the first one is regarding our progress in terms of leasing in the U.S. And the second question is about our progress in becoming a strong player in digital channels. And the last one is about status regarding further acquisitions of the remaining franchise companies.

Yes. I will start and first to the U.S. We are in the opening of Chicago, Illinois. So the opening is done and we are now preparing the start for the first half year of '24 will be the start in Chicago. We are on the business track in Arizona as planned. It was a good year last year with new contracts with new business relationships with dealers and resellers because it's a very first [Audio Gap] creating a reseller and dealer [Audio Gap] on a growth path on a starting [indiscernible] point starting business in Chicago. And as always mentioned, it will take [Audio Gap] some times in our way to [Audio Gap] starting business and to making business. And U.S. will become a significant part [Audio Gap] satisfied with the development of today and over the next 3 to 5 years, the U.S. will become more and more relevant in terms of business volume and then we will talk about a double-digit million business volume. The progress becoming a digital player there, we have 2 things, which are important. On the one hand, let's say, more or less standalone digital solutions direct to clients and customers. There, we are in progress with [indiscernible] '24. We took shares there. Our first project starting first contracts are also settled and there we will see some acceleration over that year. And on the other hand, also our reseller network is very important in being a digital player to implement digital solutions in our reseller network, in the online shop of a reseller, for example, with white label solutions, something like that. And there, we had a good progress over the last year. And also for that year in several countries. For example, in Italy, we will start some things there, white label and implemented shop solutions in Spain that and also for other countries that's planned. So it's like a moving target. And there, we are in a development within the needs of our customers and within the needs of the market.

And regarding the status of the remaining franchises, I think I can keep it really short. We are in good talks with the sell side of the remaining franchises and we are confident to finalize that over the year. And yes, we have done a good track record in buying all the franchises in the last years or many of them. And as I said, we are in good talks regarding the remaining ones.

So we move back to the call and have a question upcoming or more of them from Mr. Häßler with Pareto.

I have 2 questions. Firstly, on new business or more specific on new countries you may target? Is there anything in the pipeline where you think you want to start operations in 2024 or maybe 2025. And then on the outlook for the current year, the lower end of the range, the 95% looks quite cautious to me, taking into account your strong new business aspirations and also lower costs for the digital program. So maybe you can explain, which risks do you see that you have the lower end of your range at only 95% for net profit.

Yes. I will take the questions. First, there is no new country on our list to open '24 or '25 says enough room and space in our current markets in Europe. We see a potential to expand our business, but also outside of Europe, in Canada, Australia and in the U.S., we see a lot of potential and we would like to get a higher penetration, as I mentioned, in the presentation in our existing markets to becoming more relevant to becoming a key player and we would like to provide 10% of small medium enterprises with our solution. And at the end in Europe, stand-alone in Europe, more than 1 million clients. And today, we're talking about 650,000 clients at Grenke. And the lower end of 95%, it's always the same and especially after the last 2, 3 years, we saw a lot of macroeconomic changes and very volatile macroeconomic environment. And what could happen to reach only the target of EUR 95 million. On the one hand, it's a bit a question of the loss ratio and the development in risk provisioning. On the other hand, it's also a question of refinancing costs and interest rate development, only looking to the interest rate curves today, the interest rate should come down over the year. But we don't know at the end and there's a bit scenario technic behind, but that are the most important things for the P&L and the wide range is a loss rate on the one hand and the interest rate scenarios and you mentioned the digital excellence program for that year a bit in the same situation like last year because we have some cost in parallel for the former infrastructure, which is quite running and the parallel costs, and that will be over in '24, so after '24, and that impact we will see in 2025.

So just so you know, there are no further questions at this time. [Operator Instructions]. So we have a follow-up question from Mr. Pfander, please from the call.

Yes. Just some housekeeping questions. What is the expected tax ratio for the current year? Regarding the share buybacks, are you planning to scrap the shares or do you keep them? Regarding your midterm plan, what is the implicit return on equity you're targeting, let's say, in 3, 4 years with your term aspirations, so to say?

Yes. Thanks for -- especially for the first question, otherwise, it would be the first call of annual analyst conference without the tax ratio question. And it's always the same. It's not that easy to giving there a clear guidance for the tax ratio. Last year it was a bit down and I expect the tax ratio a bit less than 25%, so 23% to 25% from the mixture of the business, the mixture of the countries where we operate. So it is a fair assumption of a tax ratio from an overall perspective for the whole fiscal year, from quarter-to-quarter, there could also be a bit migration because of some deferred tax or something like that. The share buyback program is running. At the end of the day, we are now, let's say, collecting our shares and we were doing the program and per end of that year, we're starting next year, we will decide what will happen with the shares. It depends a bit on our growth opportunities. It depends a bit on the equity needs, we have then and there are several options then depending on gross pace for the next years could be that we will give back the shares to the market when the time is good and right for that, depending on growth base, it could also be that we say, okay, we don't need that shares anymore. And because of the strong profitability and returned earnings, the equity base is strong enough and we will not need to sort of depends on and the return on equity, the next step is to bringing the return on equity on a double digit range that's the next move you would like to do. And it's because of growing means a more efficient equity ratio on the one hand and growing means also scalable growth, more efficient and more income. So that's the next step and from short to midterm guidance, very important for us to being there stable in a double-digit range and then we can talk about how fast we move into a 15% equity ratio range before tax, but the next step is to becoming double digits there.

Okay. So we have follow-up from [indiscernible] Regarding our cost income ratio, and I'm going to read that to you. So how do you think that becoming a stronger player in digital channels will affect the mid- and long-term growth rate and the cost income ratio of the business. And a follow-up would be then, do you expect structural improvements or will it remain similar like the past trends?

Yes. So currently, we have in our cost income ratio, so to say, both sides, namely the steel costs, which do not relate to digitalization. So we need all the manpower, we need all the guys, all our people to do the business. And we have the cost for our digitalization program also in our P&L in this year, last year and also going forward. So we have currently, so to say, a double counting of costs in our P&L and therefore, also in the cost income ratio. And as you pointed out, with our digitalization program, we expect that we -- especially from the beginning of next year on that there will be efficiencies but there will be scalable effects towards our leasing process towards digitalization that our people can concentrate on really value-creating topics. So that's regarding the digitalization over the next years from my side as well.

Yes, and I think Martin showed it in the presentation, when we would like to compare today's cost income ratio with previous years and with the future, it's just fair to split out the 2 impacts of the digitalization program. There is 190 basis points of [indiscernible] and also the 210 basis points because of funding because it both is temporary. And then we have a fair starting point of 55% and the digitalization program, digital excellence, the further growth with a strong margin will give further improvement. But it's a long-term run. Of course, we need to go forward with the digital excellence program. It's an investment. It's pressure on the cost-to-income ratio. That's right. We've shown that today, but that's the way we would like to go.

Okay. Thank you so far. There are no further questions at this time. So I think this concludes our call. Ladies and gentlemen, thank you very much for joining. And if questions spring to your mind right afterwards, please do not hesitate to get in touch with the IR team. And please be aware that on April 4, we are going to release new leasing business figures for the first quarter 2024. It was our pleasure to have you. Take care, and have a nice day, and you may disconnect now. Thank you very much. Goodbye.

Thank you. Bye-bye.