Nelly Group AB (publ) (NELLY) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Qliro Group year-end report conference call. [Operator Instructions] Today's conference is being recorded. I will now hand the call over to Marcus Lindqvist, Chief Executive Officer, Qliro Group, who is joined by Mathias Pedersen, Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to this conference call regarding Qliro Group's fourth quarter and full year results. Today, we will start the call by taking a look at our strategic direction and the communication that we announced yesterday evening. So yesterday, we announced that Qliro are to be listed on NASDAQ main market during the first half of this year. And in preparation with this, the Board have set new financial targets for Qliro. And I will cover those a bit later in this presentation. In conjunction with the listing, we will issue new shares to fund the continued expansion of the company. It is also planned that Qliro Group will remain as an owner for a limited period after the IPO. Yesterday, we also announced that we now are preparing CDON to be separated from the group during the first half of the year, through a listing on NASDAQ First North. The Qliro Group's shares will be distributed to Qliro Group's shareholders. This follows a very successful year for CDON, with rapid marketplace growth and the return to profitability. As for Qliro Group, we will remain listed and will run the remaining businesses, which is in this current plan, Nelly. So in connection with this, Qliro Group plans to change its name to Nelly Group. And following the split, my job will be completed, and at that time, I will also leave the group. With that, let's take a look at our businesses and the performance during the fourth quarter. As always, I will start with our fintech company. Qliro is now ready for continued growth outside the group, and as previously communicated, we intend to IPO the company during the first half of this year. The process is ongoing, and we believe it will be a great boost for the business and the team to be listed. Qliro has 2 business areas: payment solutions, which is a checkout, easy to do payments and related services for e-commerce, and this is the core of the business, as it enables us to build relationships with millions of consumers. And we use these relations to build a Digital Banking platform, which is then our second business area. The cornerstone of our business is how we utilize multiple touch points to offer more comprehensive financial services to consumers and some of this will be done in partnerships like the one we just recently announced with [ Insurely ]. And Qliro is also built on a very modern platform, that can scale and manage growth for many years. And we also have the commercial foundation, thanks to our roots in e-commerce. Overall, we believe the company has reached the right phase for independence. Moving over to the Q4 results. During the quarter, Qliro's loan book grew by 39% to SEK 2.1 billion with the fastest growth within personal loans. Business volumes increased by 2% to SEK 1.6 billion, where volumes from CDON decreased slightly due to their phaseout of own inventory sets. Total operating income rose by 8% to SEK 88 million, where SEK 76 million was referred from payment solutions and SEK 12 million from Digital Banking Services. Operating expenses, excluding depreciation, amortization and impairment, increased by 15%. And this was mainly driven by continued commercial investments, continued IT development and recruitment to strengthen Qliro prior to its listing. During the quarter, costs of approximately SEK 4 million arose from the IPO process and organizational changes related to that. Our operating income or EBITDA ended up at negative SEK 14.3 million for the quarter. Our depreciations increased by SEK 9 million to SEK 20 million as more parts of the technology platform previously developed became operational. As for net credit losses, they increased by SEK 15 million to SEK 32 million in the quarter, where SEK 25 million refer to payment solutions and SEK 6 million to Digital Banking Services. Credit losses within the segment payment solutions, were affected by a negative one-off effect, totaling of SEK 6 million, resulting from the sale of a Finnish portfolio with overdue loans. Moving over to the loan book development. As you know, our growth and composition of the loan book is the most important driver of future revenue and earnings. And after the total loan book, SEK 1,343 million refer to the e-commerce payment service, and that is the segment that we now are calling Payment Solutions, and SEK 727 million to personal loans, and that is the segment called Digital Banking Services. Driven by a growing volume of business and lending, net interest income increased by 24% to SEK 48 million for the quarter. This comprised of interest income of SEK 57 million and interest expenses of SEK 8 million. The new bond loan that we issued during the third quarter last year gave -- has given the company greater financial flexibility, but of course, has also increased our interest expenses. Moving over to the financial targets that we announced yesterday. And let's go through them one by one. So as for growth, in the medium term, our target is to achieve an income growth of 20% to 25% on average per annum. As for cost, we have the ambition to increase our operational efficiency, and our target is to reach a cost-to-income ratio of 50% by 2023. And finally, when it comes to capital, in the medium term, we shall remain adequately capitalized to support strong growth opportunities, and in the longer term, our target is to maintain capital buffers of at least 150 basis points over the regulatory requirements. We have also commented on our outlook for 2020. And Qliro shall maintain a strong asset quality as the business continues to grow. For the financial year, Qliro's target is a net loan loss level below 1.25% of managed Payment Services volumes and below 2.5% of average lending volumes for personal loans. We expect a negative profit before tax for the full year 2020, mainly related to the first half of the year until the full effect from new merchant partnerships are materialized. So that's Qliro. And I will now move over to CDON. And CDON has established itself as the Nordic region's leading marketplace. We are very confident in this position, as e-commerce is growing and marketplaces grow even faster. Internationally, marketplaces dominate e-commerce space, and we see a great opportunity for CDON as Nordic consumers' shopping behavior continues to change in this direction. CDON is the Nordic leader with the widest assortment and impressive reach and visitor numbers. As you can see on the slide, we have a growing and impressive list of merchants that take advantage of our reach and technology. We strongly believe that CDON is rightly positioned for this future shopping behavior and growth opportunity. Let's take a look at CDON performance during the quarter. The sales of approximately 1,000 affiliated external merchants increased by 75% in the quarter and the total gross merchandise value grew by 3% in the quarter. Commission income increased by 39%, which has boosted gross margin by as much as 4.5 percentage points to 19.5%. Following previous investments in our technology platform and process automation, we continue to make efficiency gains and has been able to reduce the number of employees, which has led to reduction in employee costs of 16% in the quarter and 21% for the full year 2019. The company also achieved a positive EBITDA of SEK 23 million for the quarter and SEK 15 million for the full year. This means that we have met our financial targets for growth for the quarter and the year, and previously published estimate of positive operating profit for the full year. As a result from increased profitability and reduced working capital requirements, we continue to see a decreased inventory levels, which were 41% lower at the end of 2019 compared to the previous year. In the product segment, consumer electronics and media that we are phasing out, we can see that sales declined, and this contributed to decreasing net sales of 24% to SEK 422 million in the quarter. The Phaseout also contributed to an increase in average shopping basket size, but also has a negative effect in the number of orders and visits. For CDON, we affirmed our previous financial targets, which are to achieve a growth rate in external gross merchandise value above 20% per year and achieve an operating margin before depreciation, amortization and impairment compared to net sales above 3%. As for this financial year, our assessment is that the external gross merchandise value will continue to increase significantly faster than the target and that the operating margin target will be met. Let's move to the next slide for a brief summary of CDON and their performance during the full year. As you can see, all indicators in CDON are pointing in the right direction. Our external merchants grew their business significantly through our platform, reaching almost 60% of the total business. And external sales growth has now increased with 63% during 2019. The enlarged assortment following onboarding of new merchants generate more visitors, and we see that our new business model is more capital efficient, lowering inventory levels and increases gross margin, which was 6 percentage points higher during 2019 compared to the year before. Finally, we can see that we strengthened our market position and in combination with a reduction in operational costs, we made a strong profit improvement during the year. Overall, we have a great team in place in CDON that has made a terrific work the last year, delivering on strategy and to transform CDON to a growing and profitable business. And finally, let's move over to Nelly. Nelly is a digital native for the young generation of fashion-conscious women. Also Nelly has an impressive reach, and about 20% of our target group in the Nordics, visit us weekly for inspiration and shopping. With 1.3 million customers, we can set trends and have many interactions to take advantage of. At the core is, of course, our own brands, which stands for about 40% of sales, which is then complemented with an additional 300 external brands to help us build a strong shopping experience. Moving to the results of the quarter. Nelly's sales decreased by 1% in a generally weak market. And to manage our overstock from previous quarters, we ran several major campaigns, which led to reduction of the stock less by 20% during the quarter. The number of customers and orders declined, while the average shopping basket increased by 2%. The product margin was hampered by a weak Swedish krona and by clearance sales in order to reduce inventory. The product margin decreased to 43%, and lower sales and a lower product margin resulted in that our gross profit decreased to SEK 75 million for the quarter. The gross margin ended up at 18.8%, and our EBITDA amounted to negative SEK 13 million for the quarter. And in order to address the development in Nelly during the year, earlier this week, we announced that we are initiating an action program to ensure that the company has the right foundation for profitable growth going forward. And Nelly will be focusing its operations on the Nordic market. Outside of the Nordics, we intend to reduce our own sales efforts and increasingly drive sales through other channels. The program also includes continued measures to reduce inventory levels and an organizational adjustment of about 25 positions. And this change for a Nordic focus will have a slight negative effect on the overall growth during the year, since sales outside the Nordics is expected to decline, but it will have a positive effect on profitability and our business in the Nordic countries. Another long-term initiative that is very important for us is the relocation of our warehouse from Falkenberg to Borås, which is expected to be done during next year, where we then continue to evaluate our logistical setup, which is basically the level or the degree of automation that we will have in the new warehouse in order to provide the best balance of customer experience, quality, and of course, cost. Also for Nelly, we affirm our previous financial targets, which are to achieve an organic growth in net sales above 10% per year and achieve an operating margin before depreciation, amortization and impairment above 6% per year. But as for 2020, our assessment is that net sales will increase, although not in line with the target and that the operating margin before depreciation, amortization, impairment will amount to in between 2% and 4%, while, of course, the growth will be somewhat hampered by the transition to focus the business on the Nordic region. That was my comments on the business. So Mathias, can you please take us through financials and balance sheet, please?

Thank you. Thank you. And as we still are a group with these 3 companies, I think we should start looking everything from a group perspective, top-down starting with the combined results. So on a total group level, sales declined 12% quarter-on-quarter. And as you know, that the growth would include financial services and external merchants volumes in CDON. They are still offset by the declining net sales in CDON. And this quarter also the decline in Nelly. But as stated many times, the decline in CDON is, of course, the result of a conscious decision to phase out inventory-based sales in less profitable categories. Gross margin declined 0.9 percentage points, reflecting the lower margins in Nelly this quarter, while CDON continued to have a favorable impact on gross margin development. Net sales were boosted 0.4% due to exchange rate fluctuations, which, however, had a slight net negative effect on margins. Net financial items comprised of interest costs related to leases reported according to IFRS 16. And bottom line, there was a net loss of SEK 48 million in the quarter compared to a profit of SEK 13 million last year. On the next slide, for a quick look at the combined e-commerce cash flow, where there was a seasonally positive cash flow. Seasonal pattern within e-commerce usually includes inflows in the second and the fourth quarter of the year, and Nelly managed to reduce its inventory during the fourth quarter sales season, while CDON's inventory rose slightly, as the company is coming to a close in its transformation process. Our net working capital increased in the period, following the seasonal pattern as well. We spent SEK 9 million on capital expenditures within Nelly and CDON and put SEK 43 million to work through equity contribution into the subsidiary, Qliro. Moving on to the balance sheet for the nonfinancial part of the business. We had a net cash position of SEK 314 million at the end of the year and no usage of external financing at that time. So regarding inventory, and as Marcus has mentioned, CDON succeeded in decreasing its inventory compared to last year with 41%, while Nelly's inventory was slightly higher than last year. And as has been mentioned, the company needs to work further to reduce its inventory, which presently is not optimized. Finally, let's have a look at the balance sheet for the financial arm, Qliro AB, where on the asset side, net lending amounted to SEK 2.1 billion, of which SEK 1.3 billion in pay after delivery financing within the business area, Payment Solutions; and SEK 0.7 billion in personal loans within the business area, Digital Banking. On the financing side, the Swedish loan book was mainly funded by public deposits of SEK 1.8 billion, while the multicurrency credit facility was used to finance the loan book denominated in other Nordic currencies, and this is to limit currency risks. Qliro also had an additional SEK 508 million in undrawn commitments. Looking at the regulatory capital requirements. Risk-weighted assets amounted to SEK 2.2 billion. Own funds with a capital base, amounted to SEK 384 million, of which SEK 334 million was Common Equity Tier 1, and the balance was made up of the recently launched Tier 2 bond. The capital adequacy ratio for Common Equity Tier 1 was 15.5%. And in the consolidated situation, the CET ratio was 20.9%. So Qliro remains well positioned for further loan book growth, supported by savings accounts, unused credit facility commitment, its parent company and its upcoming IPO. And with that, Marcus, back to you.

Thank you, Mathias. So with that, we are -- we conclude on the presentation itself, and we are ready to take any questions. So operator, do we have any questions on the line?

[Operator Instructions] We take our first question.

This is Nicklas Fhärm with SEB Equities. I have a few questions. I'll start with maybe 2 or 3, and then maybe I can come back. Firstly, on Qliro, I just happen to see that Klarna's sales finance credit losses, the run rate at Q3 is at about 86 basis points, which compares to your new target of 125 basis points, looking a bit high. I was just wondering if you could give us some reasoning behind that target level, please.

I don't think we are prepared to elaborate on that target in relation to Klarna. This target is, of course set, because we think we can achieve this during this year, and that's how we see it.

But if I rephrase the question, is there -- like, is there a bit of a headroom in this target, you think? Or is it more reflecting the business you're in, quite frankly, over the medium-term period?

I believe we need to stay where Mathias stopped. So basically, that will be part of discussions and presentations in the IPO process going forward for Qliro.

I think the main take away is that credit loss levels from the payout delivery. So the payment solutions arm should be modeled by looking at the volumes going through that machinery, while the credit losses for the personal loans within digital banking should be modeled upon the volume of outstanding loans at each point in time, so...

All right. Can I also ask you what's your assessment of the financial impact for Qliro after CDON has been dividended and broken out of the group, if any?

Well, no apparently, because there is, of course, a contraction situation between CDON and Qliro, and that continues for years to come.

Okay. Is that contract -- do you care to share any contract length in this relation?

Well, it will be disclosed as part of a prospectus.

Okay. And my third question on Qliro. I think it's very useful for the cost income guidance. And I was just wondering, now developing towards 50%, perhaps in 2023, how do you see this ratio develop in 2021 and 2022, please? Is this going to be very back-end loaded? Or do you think that there could be a gradual step down from current levels towards your target?

Well, we will leave that as well to the listing process, unfortunately. We don't want to kind of give some -- comment too much on that upcoming.

All right. I have a few more questions, but perhaps I can get back into the call.