Enento Group Oyj

OMXH:ENENTO

Earnings Call Transcript 2022-Q1

[Pia Katila, executive]

Good afternoon and welcome to Enento Group's First Quarter 2022 Earnings Webcast and Conference Call. My name is Pia Katila. I'm Enento's Investor Relations Manager. And today, I'm joined by our CEO, Jeanette Jager, at this time to online connection, CFO, Elina Strahlman.

We will open this news conference with our Q1 presentation followed by Q&A session. And what comes to the agenda. Jeanette will start with the topics of the first quarter and then open our customer experience program as well as have an overview to our new services.

And after Jeanette, Elina will continue with results and development of the first quarter. And for your information, all the presentation material is now available on our investor pages and this webcast recording later today.

At this point, I have pleasure to hand over this to CEO, Jeanette Jager. Please, Jeanette.

[Jeanette Jager, executive]

Thank you, Pia. Very warm welcome to take part and discuss Enento Group's interim report first quarter. This was my first quarter in Enento Group, and it was a quarter where we experienced a new wave of COVID and the war in Ukraine.

As for any new CEO, this first phase is very much about getting a view of what do we do well and what can we continue to improve. In dialogues with customers, employees, partners and investors.

My conclusion from the first quarter is that our management team and our employees are motivated and committed and have a good understanding of both our customer needs and our services. I've seen both opportunities as well as challenges on our journey to pursue profitable growth.

Despite the challenging market environment or our net sales increased in 2 of our 3 business areas. As previously announced, based on our cooperation agreement, the banks have now reached a decision to transfer the Tambur platform to be jointly owned by the banks. I'll come back to this later.

The development of the Nordic business platform is progressing, and we have just launched new Swedish ESG report on top of this platform. We continue to see platform development to be key to operate and develop services more efficiently. But we also see a need to develop our plans and priorities in this area to secure successful long-term margin improvements. We continue to see both short and long term benefits of building and operating and Nordic future-proof platform.

I earlier mentioned my impression regarding our abilities of customer understanding. I'm convinced that it truly and further developed customer-centric mindset within Enento will lead to even more loyal customers and further growth.

Our aim is to deliver a superior customer experience and now in Q1 2022, our NPS level on the company customers continue to be high, and our consumer NPS levels has increased.

We have a structured approach by using both the technical and an organizational setup for systematic cross Nordic customer experience program. Our Nordic cross-functional customer team has as their top priority during this year to take action on all the customer feedback we get. And we continuously take the insight to concrete actions.

Loyal customer stays with us longer, buy more, try new services more often and will recommend us to others when they see that we actually can deliver the kind of services that are according to the needs and also in a matter that they feel are relevant for them.

Within the business segment, we have an NPS of 30 in Sweden and 48 in Finland. When it comes to loyalty level from our consumer customers, we have increased the loyalty level with 10% in Q1 compared to last year and about 90% of our customers says that we actually have a very good support in service.

We follow the development of the NPS on a continuous basis. So it's not a yearly follow-up. It's actually on a touch basis, so a pulse survey. And again, as I mentioned earlier, from the survey and comments inputs and insights are taken into action continuously.

Here, I just wanted to show you some examples of what our customer shares with us. When we have asked our customers what they think have improved, they mentioned, for example, our onboarding process and that we are more proactive.

Now regarding the Swedish housing transaction service, Tambur, Enento has successfully managed and developed the Tambur service platform introduced in 2018. It has been used since then by Swedish banks and real estate brokers in-housing transaction processes. Banks have been satisfied with the service that handles most of the housing transaction in the Swedish market.

As previously announced, though, based on our cooperation agreement, the banks have now reached a decision to transfer the Tambur platform to be jointly owned by the banks. Enento will continue to provide the services based on the housing transaction service platform until the final handover date in 2023. The conditions relating to the transition period are being negotiated.

Now the share of new services was in Q1, 5.9%. We launched altogether 8 new services in Q1. And to name some highlights, we continue to develop our ESG offering and launched ESG report for the Swedish market and the new version of ESG report for the Finnish market. In addition, we launched ESG online service for easy and secure ESG data reporting and data collection from companies.

Now Enento has been a pioneer and a leading provider of ESG data on the Finnish markets since 2017. Like mentioned earlier, in March this quarter, we launched the first ESG report also in Sweden. That means that today, thanks to our ESG reports in Finland and Sweden, we know how sustainable 1.3 million companies are in those markets.

In addition to that, we have launched a new online service for companies to report their ESG data to us. Our plan is to develop these services also to the other Nordic countries. A need for reliable ESG data has changed from nice to have to must have. We strongly believe that sustainability offering presents a truly Nordic growth opportunity for Enento Group.

Now talking about sustainability, I think it's fair to also mention our own sustainability and our sustainability report. As a company, we focus on sustainability in 4 main areas: to be sustainable as an employer, our environmental impact, a sustainable investment and how our data and services contributes to sustainable economy in the society.

We have a key role in supporting a sustainable economy and preventing over indebtedness in the society. The discussion regarding our indebtedness is ongoing in our markets, especially in Sweden.

By our offering, we promote availability of unique data and expertise on positive credit information. Our positive data in Sweden is very comprehensive and already covers more than 98% of all their consumer loans.

In 2022, our plan is to get our daily updated credit register in full use to provide on-time positive credit data for decisioning purposes. We published our sustainability review in March, and I take this opportunity to highlight that we now have been able to decrease our own emissions with 87.5% since 2019. This is not only due to decreased traveling during the pandemic, but also related to a big decrease in emissions when it comes to our IT hosting environment.

So now over to the Q1 and our figures. When taking into account the market situation, where Q1 was affected by both the corona and the war in Ukraine, we had a decent quarter in terms of growth. Revenue grew by 4.4%, thanks to strong performance in consumer credit business in both markets.

We also saw a very strong growth in the Finnish compliance services due to the sanctions. This struggles on the enterprise business side, on the other hand, continued. We haven't seen increased activity levels or sense of urgency rising when it comes to counterparty risks and the volumes of risk management services have continued to remain on the low level. Nevertheless, macroeconomic effects, we are considering what actions could get us back on growth track.

Adjusted EBITDA development was negative and declined by 1.3% from last year. Following the expense development of EUR 300,000 related to Tambur, but also higher IT costs and timing of marketing costs.

Following the platform program, we are starting to occur with higher license and maintenance costs and the new services developed on top of the new platform are also increasing IT capacity-related costs. Naturally, this lead to weakening margins. We are taking actions to secure better profitability development for coming quarters and longer term.

And by that, I would like to hand over to you, Elina. Please continue.

[Elina Stråhlman, executive]

Thank you, Jeanette. Very warm welcome on my behalf as well to this Q1 results briefing. So let's continue with few key figures still before diving into more deep into the revenue and profitability development.

So as Jeanette already mentioned, Tambur development expenses and write-down of those impacted our adjusted EBITDA by some EUR 300,000 now in this first quarter. In addition to that, we also recognized a write-down related to already capitalized development assets of EUR 1.3 million. And that then impacted through depreciations and amortizations. And this write-down then explains the relatively high decrease in our adjusted EBIT compared to the adjusted EBITDA. Altogether, the Tambur impacted our EBIT by some EUR 1.6 million.

Another key figure that I wanted to highlight is the one that Jeanette also already mentioned the share of new services that slightly declined to 5.9% level. The decline there is mainly being explained by the seasonality. As you may remember, we calculate revenues from new services into this KPI 2 years -- during that 2 years after the launch. And now we had some bigger vintages from 2020 dropping off from the baseline, which explains this slight decline in this figure. But we do continue to see a positive development in this going forward, and we have strong pipeline of new services to support the development.

If I then move to the more detailed revenue by business area view, and let's start first with some highlights. So as mentioned, we continue to see very strong growth in consumer credit business, and that is obviously visible in the growth of Consumer Insight business area, where we saw some 8.1% growth this quarter.

Consumer credit business continued to develop strongly in both markets, but especially in Finland, where the removal of the interest rate gap of 10% clearly boosted the revenue significantly.

The development in the smaller business lines in this area of direct-to-consumer and consumer marketing services was rather moderate. And that those areas were clearly impacted by the macroeconomic situation. But then that moderate development was then covered and mitigated by the strong development in the consumer credit serves.

We also saw very strong growth in digital processes, and there behind that growth is the high demand for compliance services in Finland following the Russian sanctions. So that explains a large part of the good development in this business area.

On real estate side, we still continue to see modest, but positive development in both countries, but clearly, Finland and volumes in Finland were more impacted by the macro situation in that area.

And then finally, Business Insight. As Jeanette mentioned, there, we continue to see struggles in the Business Insight's Enterprise Services in Finland, which slightly declined. There, as I said, we haven't seen the markets picking up, our market activity increasing, nor the sense of urgency increasing likewise. And therefore, the volume levels have continued to be on low stagnated levels there.

Also, the other business lines in that area, premium and premium services, the big development was rather moderate also in these areas now this quarter, and that boost then the Business Insight growth -- growth to flat levels now this quarter.

We continue to see good potential in the premium and premium services and there, we see that the Q1 performance was more seasonal -- seasonal variance, and we believe that the growth in the coming quarters will support our revenue development.

Then adjusted EBITDA, as I said, their adjusted EBITDA declined, and that is clearly visible in the increased other operating expenses. And the key reason behind this decline are the expense Tambur development as well as the higher IT costs, but also timing of certain marketing activities.

But if I go through now line by line, the development shortly. So starting with the materials and services, those costs increased by EUR 300,000, and what's behind that is the high growth in consumer credit business in Finland that comes with a variable data acquisition costs.

Personnel expenses increased by EUR 0.5 million in first quarter, and that relates to the higher amount of people we have. As we have discussed before as well, we are and we have been accelerating our efforts in platform transformation and business development initiative likewise. And that is then again visible as increased production for own use.

Then finally, the other operating expenses, as I said, those increased now by EUR 1.4 million and altogether, the Tambur related impacting this is some EUR 400,000, including the expense development and some other activities.

Otherwise, the costs are mainly -- higher costs are mainly explained by higher costs in IT, following especially the platform transformation and that's progressing. We are starting to incur higher license costs, maintenance costs and IT capacity-related costs likewise in this area.

On top of that, we had some marketing activities now in this Q1 that increased the cost levels in other operating expenses. As Jeanette also mentioned, we naturally are looking at these increased costs very carefully and taking actions likewise to secure the profitability for the future quarters.

Free cash flow, the development was more positive, so to say, free cash flow was EUR 7.1 million. And despite the slightly lowering EBITDA, the cash conversion improved to 53.6%. The cash flow was positively impacted, especially by the change in working capital and the timing of payments in that area.

We also had slightly lower level of investments, mainly related to some server investments that were made in the comparison period. And development -- service development investments continued on previous year's level.

Then key indicators, basically no news in that. Financial position continues to be strong and net debt to adjusted EBITDA was at 2.3x level. So good level continued on that.

And then finally, a few words on the revised outlook and guidance. So as said, we have now slightly revised the outlook and guidance following the increased uncertainties and risk levels that we see following the situation with Ukraine war and its impact, especially to the Finnish markets. We continue to target around 5% growth and somewhat improving adjusted EBITDA margin for the full year.

However, as I said, we see that the macroeconomic risks and uncertainties have clear erosion since we have given this guidance originally. And therefore, we have revised the revenue guidance slightly.

But this was what I had to say about the figures and guidance. And Pia, I think we can continue now with the questions.

[Pia Katila, executive]

And we are now ready for the questions, and we start with the questions over the telephone conference line. Please, operator.

[Operator]

[Operator Instructions] Then we'll go ahead and take our first question please.

[Felix Henriksson, analyst]

It's Felix Henriksson from Nordea. There seems to be a bit of an echo on the line about I will try best. So just perhaps maybe provide a bit more color on your sort of more cautious growth guidance. Perhaps, do you see more uncertainties in the business or the consumer side of the business? And when you think of the moving parts for 2022, what was the surprise on the upside, what do you think?

[Jeanette Jager, executive]

Yes, Elina, why don't you start with the part of the revised guidance as this is very much something we have done in order to be cautious towards the macroeconomic effects on our business, which is also a quite big business in Finland. But Please go ahead, Elina, to explain our thinking about the revised guidance.

[Elina Stråhlman, executive]

Yes. So far, we have seen that the demand for consumer credit services has continued strong. And we believe that kind of development will continue. We see bigger risks when it comes to the business information and Enterprise Services side in that we are in Finland.

Obviously, when giving the guidance, we were expecting a rather high growth for the Finnish markets overall. And now we see that the market environment may continue in a more stagnated mode throughout the year. And that is the risk that we see that the market volumes will not support us in this area even in the latter part of the year. And this is the risk that we wanted to highlight. But as said, we, on the other hand, have various activities on our own and to boost sales and revenue on this area as well.

Then real estate side to comment on that really briefly. So that is real estate obviously another area where there are risks in relation to the volumes and demand of our services going forward. So far, the development has continued positively in both markets, but then we also know that the increasing interest rates and overall -- business of consumers may impact them negatively the housing transaction volumes in markets and demand of our services likewise. So these are the clear risk areas that we see -- whoever you see impacts at the moment.

On the other hand, compliance services continues to be obviously opportunity that we also saw now in the Q1 realized. So this is how I would summarize the situation from our business line perspective.

[Jeanette Jager, executive]

Indeed. And even though we do see that there might be opportunities in the risk services as well as also compliance, we are not sure whether that can actually balance the uncertainties that we then might see in other areas, for example, then continuously within business information. And then we do have some uncertainties on the credit information there I would like to underline that as of now, we are doing very well within that area.

[Felix Henriksson, analyst]

I have a follow-up on a different topic, the Nordic IT platform renewal. Could you please provide sort of a progress update to us on recent developments. Is the renewal process progressing, let's say, on pace with what you expected when you started the progress and do you still expect to see significant margin and cash flow benefits from 2024? I wonder what just if you indicated in your Capital Markets Day in '21?

[Jeanette Jager, executive]

Elina shall we do so that you start and then I continue as this is also connected to earlier communication.

[Elina Stråhlman, executive]

Yes. So I can start with what -- how we are progressing. So we have been focusing our efforts in the Swedish markets, where we have continued to modernize the consumer credit related data and building new services on top of that we for example, now in Q1 also have launched the daily credit register in that market. We also launched now the first business information service ESG report in Sweden on top of the -- top of the new platform, to name few highlights in this area.

What comes to the -- what comes then to the progress in general, as we have also previously mentioned. So we see that the focus is on -- has been now in building new accounting services. And with that then also gradually start migrating the customers to the new platform. However, we see that, that will also mean that the benefits will come somewhat more gradually in the coming years.

[Jeanette Jager, executive]

Indeed. Now, I still haven't had the time to actually verify the conclusions. And as we all know, we also have a new CIO, Daniel, who started 2 months ago. Though both of us are paying definitely a lot of attention towards this area as this is strategic for us, has been and will continue to be as we move forward.

We have seen some excellent development on modernization. We have seen excellent development of using modern technology to both -- to develop new platform data layers. We have seen new services. And now the platform I'm referring to is then becoming a Nordic platform for us in the future. And that is excellent.

As mentioned earlier, I still also naturally want to make sure that we have as well the plans in place. And when those plans materialize themselves from road maps into also the cost efficient part of that one. I don't know if that was an answer to your question, but please, if you would like me to elaborate and just continue.

[Operator]

[Operator Instructions] And we have no further phone questions at this time. And I would now to hand the call back over to your presenters.

[Pia Katila, executive]

That was all for this time regarding the questions. Thank you.

[Jeanette Jager, executive]

If there is no more questions -- if there are no more questions, I would like to thank you very much for your time and for your interest, and I wish you a nice day, evening and hope to see you again soon then. Bye.

[Elina Stråhlman, executive]

Thank you. Bye.