Grenke AG (GLJ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, from Baden-Baden, and welcome to our earnings call regarding our quarterly statement for Q3 and the first 9 months of 2025. My name is Franziska Randt. I'm Head of the IR Department. And today here with me is, again, as just before for Q1, our CFO, Dr. Martin Paal. We will start with the presentations. And afterwards, we will enter into our Q&A session. So with having said that, I would now hand the floor over to our CFO, Dr. Martin Paal. Martin, please go ahead.

Yes. Thank you, Franziska. And ladies and gentlemen, a very warm welcome to our earnings presentation for the third quarter and the first 9 months of 2025 from my side. Today, I'd like to start my presentation with an update on the 3 strategic levers, operating income, cost and risk. On the operating income side, we saw our new business improving steadily in the first 9 months. Our leasing new business volume grew by over EUR 200 million or 9.3% to EUR 2.4 billion. At the same time, our CM2 margin, which measures the profitability of our new business, also came in stronger at 17.1%. And with both factors continuously improving, we are laying the foundation for our future earnings growth. On the cost side, we achieved a solid improvement across the year through consequent cost discipline and efficiency measures. With a cost/income ratio of now 55.4%, we are not only 2 percentage points below last year, but also well within our target of below 60% for the whole year 2025. The risk side, however, remains challenging. We see continued elevated losses in our portfolio, reflecting the currently difficult macroeconomic environment. With a loss rate of roughly 1.8% in the first 3 quarters, we are above our predictions. But our figures indicate that we have left the peak of losses behind us, and we continue to strengthen and grow our operating income. Accordingly, we achieved the compensation of the higher loss rate in Q3 and with group earnings at EUR 48.6 million, we are right on track for our annual targets. Let's now take a brief look at our top line figures with our new leasing business performance on a quarterly basis. As you can see, we continue on a clear growth path. In the third quarter of 2025, which is traditionally the weakest quarter in our business year, our leasing new business reached EUR 781 million after EUR 739 million in 2024. And at the same time, our CM2 margin normalized to 16.6% after 3 very strong quarters. In sum, this puts us well on track for our annual targets of EUR 3.2 billion to EUR 3.4 billion in leasing new business at a CM2 margin of above 16.5%. Looking at the bottom line on a quarterly level, the trend reversal in our earnings development becomes clearly visible. After 4 quarters of earnings below EUR 20 million, we have, as projected, returned to our earnings growth path. While losses remain elevated, our strong earnings performance was driven by the solid operating income from our portfolio as well as our effective focus on cost discipline and efficiency measures, which resulted in a significantly improved cost/income ratio. Looking forward, we expect our group earnings to continue on this track in the fourth quarter. Regarding our annual earnings guidance, we are confident to reach the projected corridor of EUR 71 million to EUR 81 million. A mere repetition of our Q3 result in the last quarter would take us past the threshold. Should our loss rate, however, remain elevated at the current level of 1.8%, we expect group earnings at the lower end of our annual guidance for the full financial year 2025. As I just touched upon, the still elevated losses in our portfolio, I would like to cast some light on how we are dealing with this situation. Since we experienced the first higher losses in Q3 last year, which resulted in increased settlement of claims and risk provisions since we have implemented measures to compensate for this trend and improve our profitability, both on our cost side as well as our risk side. The effects of these measures are shown in the widening gap between the 2 bars, driven by the strong development of our operating income, coupled with our focus on cost discipline, our operating result before settlement of claims and risk provisions increased by EUR 7.2 million to EUR 78.7 million compared to the previous quarter. And during the same period, our settlement of claims and risk provisions increased only by EUR 4.4 million to EUR 51.5 million in the third quarter, thus being overcompensated by our higher operating result. We will continue our measures for higher profitability and expect a further strengthening of our profitability in the upcoming quarters. Now I would like to turn to our income statement in more detail. In the first 3 quarters of 2025, we saw a continuous improvement of our operating efficiency. While income from operating business increased by EUR 68.1 million, driven equally by growth in net interest income and profits from new and service business, our operating expenses only rose by EUR 25.9 million. This solid overcompensation translates into our improved cost/income ratio of 55.4%. Taking this together, our operating result before settlement of claims and risk provisions grew strongly by roughly 20% to EUR 217.2 million. And this positive trend stood in contrast to the continuously elevated settlement of claims risk provisions, which reached EUR 146.3 million. Consequently, our operating result came in at EUR 67 million, while our group earnings for the first 3 months reached EUR 48.6 million. With this result, we are, as I said, well on track for our annual target of EUR 71 million to EUR 81 million. I would now like to draw your attention to our cash flow statement. We started the year with a strong cash position of EUR 973 million. And throughout the first 3 quarters of 2025, we saw an increase of over 9% in payments from our lessees to EUR 2.1 billion. Repayments of refinancing of EUR 2.9 billion stood against EUR 3.1 billion in new refinancing, while our deposit business remained widely stable. Resulting from EUR 2.4 billion of investments into new lease receivables, our cash position on the 30th of September this year normalized, reaching EUR 775 million. This continued strong cash position, combined with our diversified funding mix, provides us with a solid foundation to finance our future new business growth. Now before we come to our guidance for 2025, I would like to also share some insights on the just mentioned funding mix. As you are aware, we continue to rely on our well-diversified, well-established 4 debt pillars to finance our new business. Senior unsecured with EUR 3.1 billion made up 36% of our funding mix. Our newest addition to this pillar is our fifth benchmark bond of EUR 500 million at a favorable coupon of 3.875%, which we launched in September. Further, we successfully placed our first Australian dollar bond of AUD 125 million also in the third quarter this year, which underlines our continuous growth ambitions in our future core markets. The deposit business of Grenke Bank remains an integral part of our refinancing mix, accounting for EUR 2.2 billion or 25% and our asset-backed pillar, including especially ABCPs and global loans made up 14% or EUR 1.2 billion. And last but not least, external funding, such as through our cooperation with Intesa in Italy, for example, accounted for around EUR 650 million or 8% of our whole funding mix. Yes, ladies and gentlemen, our outlook for 2025 remains unchanged. In a continuous challenging macro environment, which is shaped by economic uncertainty for many of our customers, we have successfully maintained our strategic course. With a strong new leasing business at a solid CM2 margin, we are laying the foundation for our future profitability and are well on track to meet our annual target of EUR 3.2 billion to EUR 3.4 billion in leasing new business. Given the still elevated loss levels, we are satisfied that our measures are effective. By growing our operating income while implementing stringent cost discipline and efficiency measures, we keep improving our operating leverage and have compensated for the higher loss levels. And this is reflected in our current cost/income ratio, which is well below our annual target of below 60%. Now should the full year 2025 loss rate remain just under 1.8% as it has so far for this year, we expect group earnings to come in at the lower end of our annual guidance of EUR 71 million to EUR 81 million. Lastly, before entering into our Q&A session, I would like to inform you of a change in our reporting. In the future, we will align our communications more closely with our strategic focus on profitability and enhance efficiency in our reporting. Therefore, starting with our 2026 financial year, we will publish our new business figures for the respective quarter within the scope of our regular reporting publications and no longer publish quarterly new business figures separately. Yet, we will publish our new business figures for the full year 2025 on January 7 of '26. You can find all our publishing dates in our Q3 report or on our website alike. And with that, I would like to thank you for your attention and look forward to your questions.

Thank you very much, Martin, for your remarks and your presentation. Ladies and gentlemen, we will now enter into our Q&A session. [Operator Instructions] So with having said that, I would now like [ Mr. Fender ] to go ahead. We will unmute your audio line. Please do not forget to unmute as well. [ Mr. Fender ], please go ahead.

Some questions from my side, please. First of all, net interest income, it's hovering around EUR 100 million for the last 3 quarters. I would have expected a little bit better or faster development upwards. So are there some points behind this you could highlight? Second question, could you give us an update on the digitalization initiatives and the efficiency gains you are planning to get out of this next year? And maybe you could also indicate headcount growth and staff cost growth for next year, just to see if this allows for operational leverage going forward?

Yes. Thank you, [ Mr. Fender ]. Happy to answer your questions. Let me start with your first one right away. The Q3 of this year was actually the first quarter where we fully had in our P&L the whole business of the Intesa part of the Rent ForYou business, which we assumed at the end of the second quarter. And with the Intesa business, we also assumed, as I showed in our funding mix, a couple of loans, and these are shown in the interest expense, which weighs a little bit on net interest income with a low single-digit million effect. However, the income side from this portfolio because it's an operating lease portfolio is shown in a different line from a P&L perspective, which is shown in the service business. So you have to take this in account when evaluating the evolution of our net interest income. Your second question on the digitalization program, yes, we are making very good progress there. We have already implemented some measures regarding everything that is around regulatory requirements on borrower unit checks, which are now easier to do not only -- no longer manually, but really automatically, which helps our sales guys in saving time to concentrate on settling new contracts and to make new business. And also from a cost perspective on our digitalization program, we are in plan there, spending around these roughly up to EUR 10 million for the first 3 quarters, where we expect a little bit more than EUR 10 million, maybe up to EUR 12 million, EUR 15 million for the whole year. So there, we are both on a good way, not only from a cost spending side, but also from the implementation side, also which when it comes to our transition to cloud services to the migration more from hardware-related IT systems into the cloud, which is integral part of our digitalization program. And your last question on the headcount and staff costs, well, we have not out any plans for next years out there. The guidance will be published, as you know, at the beginning of next year. What I can say is that roughly 60% of our costs are related to FTEs, our staff costs. If you take all costs in the P&L into consideration, it might be even more. So you can imagine that we really need to be careful when it comes to FTE increases. What we can say is that we expect FTEs and staff costs to increase at a lower pace than 10%, so at a really single-digit cost growth only there.

So [ Mr. Fender ], do you have follow-up questions? Your line is still open.

Maybe just one follow-up. Obviously, this quarter was helped by disposal gains again. How sustainable is this? I think you guided that the expected value is rather close to 0. Nevertheless, the last quarters were quite supportive. And maybe you could just again shed a light on what's going on there and what you expect maybe for next year?

Yes, the result from disposal gains is a lasting effect still from the lower new business portfolios around the corona pandemic of 2020 and 2021, where relatively less objects coming back because relatively less contracts were settled, which have come to an end now 4 years later with our average maturity. And on the other side, relatively more contracts are still in subsequent lease and contributing also to this result of disposals, which would be otherwise if they would be still in a normal leasing contract shown in the interest income, but it is currently higher than in a normalized world, I would say. And we expect these -- what we have seen as a fading in effect, I would call it, over the last 4 to 5 quarters, we expect this as a fading out over the next quarters as well. We do not expect this high level of disposal gains for the next quarters.

Okay. We will move on with the next question coming from Mr. Lukesch from Kepler Cheuvreux.

Also 3 questions on my side, please. Firstly, touching on the consolidation effect of Intesa you just mentioned. Could you maybe run us quickly through the P&L lines, which are really affected here and give us the impact just from Intesa? Secondly, on the risk provisioning, which was clearly at a higher level, you guided that this might be higher than we would only reach the lower end of the earnings guidance or pretax profit guidance for the year. Could you maybe elaborate a bit more on the economic environment? You mentioned the macro. What changed? Why is the amount up probably on also larger business because impairments were a little bit down on the quarter. But how do you expect that to continue combined with the macro effect? And thirdly, on the cash balances, you run us through the cash flow. Where do you see the minimum threshold for cash balances since you reduced cash by EUR 200 million this quarter? And together with that, where do you see then the equity ratio? I think you have the target of around 16% still for the year. So would that imply an additional reduction of cash?

Yes. Thank you, Mr. Lukesch. And also starting with your first question, I just mentioned the Intesa effect shows up, firstly, in our interest expense, which weighs on net interest income, as just explained. The second one is then with the other way around with a positive sign in our service business, namely the income from the operate lease of the running out portfolio of Intesa, which we still have on our book which were around EUR 200 million running out smoothly over the next years. And the new business, that's also important to mention, new business coming from Intesa is already treated in our Grenke , namely as finance lease receivables under IFRS. Also, we have effects from -- on the cost side, from the consolidation of the Rent ForYou company, especially staff costs and other costs. So these are the 3 main line items from a P&L perspective. And also, you might have seen that from a balance sheet perspective, there are minority stakes that is also affected or reflects the transaction with Intesa, where Intesa holds 17% of our Italian subsidiary.

Could you maybe quantify the amount on the interest expense and also on the service business? As I understand, I mean, on the service business, it's -- going forward, we will see a kind of normalization of that line, right? That was a onetime effect or which -- or will it phase out? Is it a onetime or which will disappear next quarter? Or is it a phase out over the next quarters?

On the interest expense side, this will remain, so to speak, because this is part of our whole funding and all of the funding is reflected in our interest expense. However, the effect on the operating lease income, which is part of the service business, this will fade out over the next quarters and years. And on the cost side, these effects will remain because they are now integral part of our Italian subsidiary. On the risk provisioning side, yes, we have this elevated -- still elevated level of risk provisions on that end. However, we have first signs that the losses, the termination of contracts has reached its peak, and we are seeing some positive signs there that it will no longer increase, which is a positive one. You have already also mentioned that the impairments have come down a little bit. That's right. In the third quarter, the increase in Stage 3 loans has increased to a much smaller extent as in the quarters before. That is also a positive sign. However, which also weighs still on our risk provisioning is that within the Stage 3, these loans, whether they will recover or not, could have also continuing also fading out effect on the risk provisioning. But overall, we expect this risk provisioning level to be stable. And currently, we have this loss rate of 1.8% for the whole year. But if we would add another digit to that number, it would be 1.7% high. So we are also near to 1.7%. That could be possible, but rounding-wise, it has to be shown as a 1.8%. On the cash balances, Yes, we have now EUR 700 million on our balance sheet. It's also some date effects, if you wish, because if there is a new benchmark bond just in that quarter or just 1 day after the end of the quarter, the cash balances are fluctuating. We feel very comfortable with this EUR 775 million currently. Maybe EUR 900 million is a little bit too much. However, we have a growing business, though there always needs to be some EUR 100 million of cash balances at least. Also, we have some regulatory requirements for which we have to hold cash on our balance and a rough number between EUR 500 million to EUR 1 billion would be a good ballpark. However, EUR 775 million is a good one currently. Also, it shows that we have a better deployment of our cash, if you wish, into the new lease contracts, shifting from cash to lease receivables to higher earning assets on our balance sheet contributing to the P&L. And lastly, coming to your last question on the equity ratio, that strengthened our balance sheet and with that also strengthened our equity ratio, which is currently at 16%. I wouldn't say that we have a target equity ratio of 16%. Balance sheet equity ratio, it's more orientation figure for us. If it would be below 16%, which could be expected because our fourth quarter is traditionally the strongest one in terms of new business. So we expect the equity ratio to come a little bit below 16%, but that's nothing where we have to matter about because we are always looking at our regulatory requirements where we have enough headroom and take this balance sheet equity ratio more from an orientation perspective.

So Mr. Lukesch, your line is still open. Do you have follow-up questions?