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Good day, and welcome to the GRENKE AG publication of the quarterly statement for the first quarter 2022. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mrs. Anke Linnartz of GRENKE. Please go ahead.
Good morning, ladies and gentlemen. Welcome to our today's earnings webcast and video conference call. I'm Anke Linnartz, Head of IR. And with me today are our CEO, Michael Bücker; and our CFO, Dr. Sebastian Hirsch. We will start off with the presentations by Michael Bücker and Dr. Sebastian Hirsch and are going to have a Q&A session right after the presentations.
I stop here and I pass the call on to Michael Bücker.
Yes. Welcome, ladies and gentlemen, to the presentation of our results for the first quarter of 2022. You might have already seen this in our press release this morning, but allow me to repeat our key message. We are back on our growth path. With the end of the first quarter of this year, we are fully on track with our annual guidance for 2022.
We operate in an ever-challenging environment caused by the corona pandemic and now the war against Ukraine. Despite this, we are successful once again in strengthening GRENKE's equity base and high profitability during the past quarter.
Overall, we achieved leasing new business of almost EUR 0.5 billion in the first quarter. With an increase of more than 36%, we were significantly above the first quarter of the previous year. And I would like to point out that this strong increase occurred in all regions where we operate. And we also increased our net profit to EUR 20.5 million in the first quarter, which was almost 50% higher than in the first quarter of the previous year. This meant that our net profit increased even stronger than our new business. And lastly, our current equity ratio of a comfortable 19.7% clearly exceeded our self-set target of 16%.
Now let's turn to our regional performance. We are particularly pleased with the development of our South Europe, North and East Europe regions. Both of these regions had almost identical growth rates of 58%. The growth leader this quarter was Italy, where the investment catch-up effects appears to be particularly strong.
With that, I would like to hand over to our CFO, Dr. Sebastian Hirsch, who will explain our first quarter results to you in detail. Sebastian, up to you.
Thank you, Michael, and also a warm welcome from my side to our call to the results of the first quarter in 2022. Let me first talk about the development of the contribution margin 1 and 2 you see on that slide. In comparison with the first quarter of the previous year, we have to take in account the overall view 2021 because the first quarter was influenced by the pandemic and a very selective decision for new leasing business.
The average ticket size was below EUR 7,500 per contract. Starting Q4 last year, we accelerated our new business with a clear focus on volume and number of new contracts. With driving new business, the average ticket size came up to EUR 8,000 in Q1 '22. At the same time, we had to deal with a very dynamic interest development and rising interest rates, as you are aware of, which brings us to a migration in our leasing rates to pass it through.
The CM1 is a net present value, always calculated with a daily market interest plus our current funding spread. During the time of that fluctuation because of rising interest rates, we will see a time lag in our CM1 ratio as it was in the past. Overall, we are very satisfied with that development. It is in line with our expectation. The increase of CM2, in total, gives us enough confidence for our future earnings. And in terms of interest rates, it's for sure that our existing portfolio is covered against rising interest rates.
Let's talk about our P&L. So overall is absolutely in line with our planned figures -- with our planning. We fully met that figures. The decrease of net interest income corresponds with the development of lease receivables because of the volume development over the last quarters.
And opposite to that, the cost for settlement of claims and risk provisioning have dropped significantly. We saw a 29.2% decrease in settlement of claims and risk provision to EUR 31.6 million in the first quarter. The corresponding loss ratio was only 1.4% in Q1 '22, 0.6 points lower than in the same period last year with 2.0%.
To sum it up, based on a more or less stable cost level, we delivered an earning before taxes of EUR 27 million and a net profit of EUR 20.5 million.
Please let's move to that slide. And here, we see the development in settlement of claims and risk provision as it was of March -- per end of March in that year. We provide a few to the balance sheet perspective. It's not the P&L perspective. It's a balance sheet perspective and the risk provisioning and settlement of claims for all the leasing receivables split it up into stage 1, stage 2 and stage 3. The provisioning ratio in stage 2 and 3 increased. Stage 2 was 14.6%; stage 3, 76.2%, as mentioned here.
In Germany, to point that out, only 93% of our gross leasing receivables are in stage 1 of impairment, roughly 7%. 7% stage 2 and stage 3, that's a quite low number, and it's a testimony to our continued high portfolio quality, especially in our home market. And the risk provisioning for leasing receivables rose by EUR 12.1 million.
With the settlement of claims and risk provisioning in Q1, as I mentioned, the loss rate stood at 1.4%. All in, we are well covered with the risk provisioning level of today, and the payment behavior of our clients is unchanged, stable.
That brings us to the cash flow because of the stable payment behavior. Also, our cash inflow is quite stable during quarters and also in Q1. Q1 proves our steady of -- our strategy of matched funding. The existing business continues to be largely cash flow neutral, as we enjoy the benefit of our term match funding strategy. To fund the new business, we raised new funding and use the strong cash position we had at the beginning of the year. The using of cash results in a slight negative cash flow on a periodical view, but that's what we aim for, that we aim for with the beginning of that year to be careful in steering our cash and aim for a lower level than in the previous year. Also going forward, we remain to committed to our conservative financing policy with matched maturities.
That brings me to the funding mix, and you are aware of that. Quite unchanged. We have 51% in the senior unsecured pillar, which is quite important for us to having the capital market access to issuing bonds. I will come to that later on.
Stable also GRENKE Bank, very important pillar, a very important source of liquidity, with a term deposit business, roughly 30%. And also the asset-based funding is quite important for us, especially to having no maturity transformation, no currency transformation in our portfolio, and we're using that in some important markets in Germany and France but also in U.K., Brazil, for example, to covering also currency risk with that funding.
And the last slide brings me to our successful senior unsecured bond issuance we did, and we took advantage early that month -- early last month, sorry, in April. It was to go to the capital market. It was likely to come back because it was the first new public issuance since September 2020, despite attempt last year, and it was quite successful, with EUR 150 million. Coupon, of course, because of rising interest rates, 4.125% per annum, a very well matching in our maturities with the '24 maturity for that funding.
And over 70 investors at the end of the day in the order book, a very international order book, and that gives us confidence that we are having access to investors that we are able to funding our business with bonds. And also our strong cash flow position I showed you before, that access to the capital market will bring us in one of the next transaction, maybe to a benchmark bond to going for a bond of EUR 500 million because our cash is strong enough, with the rising new business to covering a maturity of EUR 500 million.
And with that, over back to Michael.
Yes, Sebastian. Thank you very much. Ladies and gentlemen, despite the challenging circumstances of the last several months, we have, once again, delivered excellent results in the first quarter of this year. Facing the war against the Ukraine, supply, bottlenecks, higher interest rates and inflation, we continue to demonstrate the robustness of our business model and our company with its more than 1,800 employees.
And against this background, our expectation for leasing new business for the full year remains unchanged at EUR 2 billion to EUR 2.2 billion after a level of EUR 1.7 billion in the previous year. And in terms of net profit, we have laid the foundation to achieve our forecast for the current financial year. Based on the high profitability of the existing contract portfolio and the volume of new business we expect, as already announced, net profit in the range between EUR 75 million and EUR 85 million, and we are standing by this target. And we also continue to be firmly committed to other targets because here, we are also right on track.
And as announced in our outlook at our annual press conference, the next major milestone we have set ourselves is for 2024. In 2024, we intend to double our net profit and new business compared to 2021. And with regard to the net profit, I should emphasize that the 2021 baseline year does not include the extraordinary effect from the sale of our share in viafintech.
So how do we intend to double these figures? By building on GRENKE's historical strengths combined with scaling our business at a faster pace. We will leverage our outstanding proximity to the customer, our unique international network of specialist resellers, on our distinctive industry product and partner know-how and our understanding of efficient, simple processes in the small ticket business.
I would like to close here. For today, we'll provide more details on GRENKE's strategic road map tomorrow at our first capital markets update. And yes, we cordially invite all of you to attend. This will be a hybrid event. And as part of the agenda, we will explain in great detail our corporate strategy.
So thank you very much for your interest and your attention this morning, and back to Frau Linnartz.
Yes. Thank you for your presentations. We are now ready to enter our Q&A session. [Operator Instructions]
So the first question comes from HSBC, please, Johannes Thormann.
Johannes Thormann, 3 questions from my side. First of all, regarding the valuation effect in the income from fair value measurement, those EUR 4 million. [indiscernible] revert in the next quarters? Or do you expect additional gains? Can you elaborate a bit more on this?
Secondly, on your costs. If we adjust last year for the EUR 6.7 million extraordinary cost, we've seen a 13% increase in costs, which has been remarkably high. And if you could elaborate, what has driven this cost increase?
And then last but not least, you stick to your full year tax rate guidance of 25%. Or looking at current performance, what is the better level?
More or less, questions for you, Sebastian.
Okay. Thank you, Mr. Thormann. And a warm welcome to you. I will take the question.
At first, the fair value measurement, it's a temporary impact. And over the last quarters, we sometimes have seen a negative impact on that, and it's because of our hedging. Not all instruments are in the hedge accounting because that's not always possible under the rules of IFRS, and there are some specific interest rate swaps linked to our ABCP programs. And that brings you a difference in the valuation each quarter -- per end of the quarter because you have to evaluate the interest rates for the [indiscernible] on the market perspective with a fair value, and the ABCP, which is part of our financial liabilities, is more or less booked to book value. And only you have to take in account the foreign exchange rate. And then we will always have a time -- like, during the hedging of time and at the end of the time, that is 0 over the total period.
So we will not see from today's perspective, further valuations, but as always, when the parameters of valuation are changing, then it could be that you will see an impact on the one or the other direction. So it could be positive or negative, but over a total period, it's hedging, and that hedging is neutral from the P&L perspective.
And the cost, thanks for that question, too. That's right. The cost, because of the special audit in the last year there, we are today more or less in the process of normalization. And the main driver in costs were, on the one hand, the sales cost because we are accelerating our sales in Q4, and also in Q1, we think was a very good result in comeback in volume.
And also we hired, over the last year, new people for several functions, also internal function for having a better internal control system and better compliance and something like that. And that is a part of that we've seen here, but we think that the cost level over the year will become more and more normal that you can see also on the guidance on the cost-income ratio. Today, it was roughly 55%, and we guided a cost-income ratio of 52%.
And tax rate is always not that easy to looking forward, but the 25% is also, from today's perspective, fair enough to looking forward for that year and also for the coming years.
Thank you. Thank you. So we move on to Mengxian Sun from Deutsche Bank, please.
So 3 questions from my side as well. The first one is on the revenue. So compared to the last quarter, the profit from service business and the new business was lower compared to 4Q 2020 -- 2021, although the contract numbers and also the new business volume was up compared to the last quarter. Are there any changes on the insurance premium or the fee that you charge on your new business in this quarter? And so what's the driver for the decrease?
And then the second question is on the loss rate. So also compared to the last quarter, the loss rate is at the bottom end of the guidance range, 1.4%, but the last quarter was even lower, below 1%. So what is the driver of the loss rate increase in this quarter compared to the last one?
And the last question is, can you comment on the leasing demand on the general market in the recent quarter from your observation or probably from your discussion with the dealer, if possible? So are you impacted by -- still by the supply chain issues, et cetera?
I'll start with question number 3. Yes, thank you for the question. And that's really interesting at the moment, what's happening. In times like these, our services and our type of financing is also, for resellers and for our customers, really essential and more important than ever before. Renting and leasing is liquidity saving. And in difficult situations like we have at the moment, liquidity is -- yes, is critical and key and most important than ever before.
So therefore, the way we do our business with all our products we have is in the middle of interest of our resellers and the middle of interest of our customers. So there is -- we see nothing negative in the development of our sales at the moment. And opposite, it's going on, and we will fulfill our targets.
Yes. Then I will go for the other questions. At first, talking about the loss rate. That's right. When you look only to Q4, there was roughly 1%, and now we're talking about 1.4%, but we have to take in account the whole fiscal year 2021. It's always more or less a technical issue in Q4 because when you go to the balance sheet to making your P&L per end of the year, it's always more a whole year period, and the Q4 is technical like a correction for the whole fiscal year.
And that was more or less technically why the loss rate in Q4 was only 1%. The whole loss rate over the whole year, that is more or less a better comparison for that year. And so we are more or less stable from a loss rate perspective, and we feel, as I mentioned, very comfortable with that because the payment behavior is quite stable. No rising in terminations and something like that, and no early indicator is showing us that we will see a high -- a pretty high loss rate, but we stay to our guidance. And you're right, it's now on the lower end of the guidance, but we stay to our guidance because of the uncertainties from the macroeconomic perspective.
And the other question was compared to the revenues, especially the service business. The service business is more or less stable and driven by the number of new -- of leasing contract or running contracts and also by the volume of leased assets. That's the main driver for that. There's no change in insurance premium or no change in pricing of that to that quarter. So the main driver for that is the running contract, the number of running contracts and -- that you have to take in account, but the business is quite stable and also quite profitable as it was in the past.
I would like to add perhaps something, if [ I'd like to ], Frau Linnartz. I would say you're asking what's the general demand in general market. I think we see there a long-term trend. And this long-term trend will not fade at the moment for leasing, and we will see also in the ESG topic and in medical health is significantly demand in what we are offering. So therefore, leasing is growing all over the world at the moment, and we will show tomorrow at our capital markets update what the situation in the market there is.
Thank you. We'd like to move on to Marius Fuhrberg with Warburg Research.
Three questions from my side as well. Once again, on the loss rate and your Q4 call, you mentioned that you're willing to take higher risk in order also to make more business but also that your expected credit loss should go up. In line with this, should we expect the loss rate to develop to a more sustainable level, like 1.6% for the full year instead of the currently rather low loss rate?
The second question on your CM1 discussions, you mentioned that in higher interest rate environment, you temporarily would expect lower CM1 until you pass through the -- your conditions to the customer. Is the -- yes, so to say, downward move, which we currently saw in Q1, is that the maximum altitude you would expect for this? Or should we expect the CM1 to go down even further when interest rates are increasing even more?
And third question is on growth in Italy. I mean we saw high growth rates in Italy in the past as well, which then translated to a higher risk cost and -- yes, in the beginning of the COVID crisis. Did you -- or do you change your approach nowadays [indiscernible] on what kind of risks or customers you would accept there? Or is it, yes, more or less the same?
[indiscernible]
Okay. Then I -- we'll start with the loss rate and what rate expectation for that year. We guided our loss rate, I think -- and so the 1.4% is more or less a result of today, and the development of loss rate is always depends on 2 things: on the one hand, on the losses, on the P&L perspective in terms of risk provisioning and settlement of claims; on the other hand, also on the volume development because that's, let's say, the denominator of the loss rate.
And so you have to take both in account. And I think in the middle of the guidance, that is fair to calculate with that. And maybe it is also a bit conservative, could be, because, as we mentioned in the past, at that time, when we are going for new leasing contracts, each leasing contract is an investment of a small, medium enterprise and that in a very difficult macroeconomic time. So the risk provisioning, the expected credit loss models are, more or less, looking too conservative of that -- decisions of that, let's say, credit portfolio in the crisis because it is an investment. It is maybe an investment in a crisis and that kind of company, small, medium enterprises are more or less healthy.
And that is not comparable to a client who's going to a bank and asking for EUR 10,000 cash because you don't know what will happen with the EUR 10,000. We are exactly knowing what will happen with the EUR 10,000. It's an investment in IT, in other equipment, what is the need for the company doing the business and also at that time. So that is why we are very comfortable with our, let's say, credit portfolio situation, risk situation and the loss calculation. And so I think to expect the middle of the guidance is fair enough, and the rest is maybe more or less your own scenario to go forward.
In CM1, so it's fair to say that the level of Q1 is also more or less fair maybe -- could be that 25, 50 basis points lower. That depends on the dynamic of the interest rates because we are calculating, as I mentioned, always with the current interest rate of the market to giving the flavor to our sales what is happening on the market. And the assumption is a bit that we are going to refinance each leasing contract today under market conditions.
And in the practice is not to say -- not the case because we go into issuing a bond and then going with that bond making a new business or going on an ABCP program and more or less a package. But we are calculating, that and during the time while -- where interest rate's rising, we will see a bit more fluctuation in our CM1, but it was also the case in the past. So I think that could be a range of 25 to 50 basis points lower on the CM1 level. If you would like to...
Yes. Thank you. Italy, so the same still is also for Italy, what Sebastian said. I would say during the corona pandemic, we were very quite selective when it came to new business, especially in Italy and also with our resellers, and we lost some, but we have the choice of the best in Italy at the moment. And you can be sure, as the new CEO, I took a deep sight into Italy and into the portfolio of Italy, and it's safe. So we're really happy with that. And Italy is now coming back, therefore, our #1 in the first quarter in terms of sales, and we are really happy with the development in Italy at the moment.
Thank you. We have Roland Pfänder, please, from ODDO.
Yes. Two questions from my side. I would like to come back to your risk provision on the balance sheet. What is the comfort level there, meaning do you have meaningful risk buffers you can lift from, if it's necessary? Or would you even consider, maybe in the future, having a management overlay just to increase provisions beforehand, like some other banks do?
Secondly, did you run maybe a correlation regarding macro trends and leasing -- new leasing business growth? If you look in the 10 years past, how did this behave? That would be of interest from my point of view. And more generally, could you talk about cost flexibility you could use if things would go the other way?
Now I would start with question #2. Yes. Yes, we see big macro trends. And we see the megatrends of the European or the worldwide economy, yes, in sustainability, ESG, medical health, et cetera. And we are in the middle of this, and we'd like to go in the middle of this.
And we are -- make product development at that -- in that case, and we will, especially tomorrow at our capital markets update, speak about what we see in the market also for us. It's a big lever to make more business, and we like to be in the middle of these megatrends, and we'd like to follow the trends we see in the society. And there's unimaginable volumes to finance in the transformation of the society, and GRENKE with its worldwide appearance will be in the middle of this trend, more to that tomorrow at our capital markets update.
Yes. And I would like to add from the macro trend perspective, let's say, more or less normal macro trends and not the pandemic, our experience of the past is that we can deal a very good leasing growth and several macroeconomic environments, and especially during the macroeconomic crisis, leasing, as Michael mentioned, is a very good opportunity for small, medium enterprises because it's not cash needed. You don't need a bank credit line or something like that.
It's quite easy to go in for that. And so it's a good opportunity to taking care for your own cash and liquidity position. And that's why leasing, especially in that environment has been -- while interest rate's rising, inflation might be -- banks are more careful than leasing companies. Then leasing could be a very good opportunity for small, medium enterprises, especially in that environment.
And to the risk provisioning on the balance sheet, I what -- I guess that we have meaningful risk above us. That's fair to say. It is. So it's a quite careful risk calculation when I look inside to our risk models, the overall risk modeling, including also macroeconomic parameters. And I think it's also quite normal and common in that situation because we are in the crisis. Because of the pandemic, nobody knows really how many of the crisis is behind us and how many of the crisis will maybe come the future. The war from Russia, it's a new parameter.
So the macroeconomic parameters are not that easy to fill in. And so there are buffers in our risk measurement. And it's fair enough to say that we are careful, let's say, hedged with that buffers and can be free to looking forward.
And cost flexibility, that was always the case in our P&L, looking to the cost structure that there is a flexibility. When the business will run down, there is an opportunity also to run down cost. But in the past, it was during the financial crisis. It was also during the pandemic we decided to stay with our employees, especially because after the crisis, the next level, the next dimension of growth will come, and therefore, it's quite important to having the employees on board, to having the structure infrastructure on board to today coming back to the level where we were before and going beyond that. So our strategy is more to staying for that. And of course, that brings us today to a higher cost level, to a higher cost-income ratio. But the day after tomorrow will bring us a very quite profitable -- very good profitability on the P&L with our contribution margin and our staffing.
So we have now Mr. [indiscernible], please, from [ Richter Capital ].
I have 3 questions. So as far as GRENKE is involved typically with the competitive advantages that you have, you have seen GRENKE come out of crisis quite strongly versus competitors and maybe the competitive landscape becoming more easily. Now during the last couple of years, you also had to step back a little bit from pushing the business forward. So the first question would be, what does the competitive landscape look like now that you're coming back to the growth [ models ]? do you see typical patterns like you saw during past crisis? The second question that I have is, during the last 2 years, GRENKE decided to not focus on small and medium business loans anymore. Now with the capital becoming more scarce, is that something that is up for review where you say, okay, with the existing relationships that you have from the leasing and franchising business, maybe it makes sense to also extend that business again and take that up again?
And the third question, I apologize if I missed that, as far as the takeover of the franchises are concerned, has there been any progress regarding valuations and negotiations that you can share with us?
I'm starting, Sebastian. Okay? So yes, we see big advantages for us and for our business model. Higher interest rates, higher inflation is more or less good for our business model. We spoke about it. And yes, we are, for us, in the SME, small business ticket leasing segment, the only one who's really standing worldwide. We are in 33 countries around the globe, and no one has this range of business over the globe.
And we see, really, advantages for us, and we will -- can play with these advantages in the future, and we will go on this topic tomorrow at the capital markets update. And it is both, it's also our organization, how we do the business and, on the other side, also the products we are new developing and also the megatrends where we go in. So yes, that's right. We see big advantages for us and for our companies because we are so international, and yet, we have the experience of this internationally. And no one at this point can follow us all over the world.
Yes. And the second question for Sebastian, if you allow, yes, we see exactly for our bank, a really interesting topic at the point of sale for our leasing sales because we see also in the -- especially in terms of ESG and sustainability, lots of products, lots of objects, which we -- which should be financed by us, where we are a little bit limited with leasing because subsidies came from the state. And there are the products of the bank, really interesting. So to combine the advantages, yes, from leasing and bank financing over the bank is really interesting for us, and we are working on it.
Yes, absolutely. But as you mentioned before, Michael, there is an additional opportunity, let me say it like this, the loans with GRENKE Bank because our focus is to double the new business and leasing worldwide. There are a lot of opportunities because of the international competitive landscape of international trends, as Michael mentioned, and that's our focus because that's the base for our future growth for our future success.
And we would like to add some additional services, as in the past business, small, medium enterprise loans. And I would like to say something to the franchisees, and we've also made a great progress here, but sometimes, it just has not everything can be harmonized on an appointment like today. That's life, but we are about to take over the first franchisees. And we are, so to say, on the home straight, but it's not really finished that, but we will come back to you as soon as possible as we finish the first takeovers of the franchisees.
So we have no further questions for the time being. [Operator Instructions] So nobody has registered so far, so I think this is time to conclude our call. Thank you very much for joining us today. If questions spring to your mind after the session, please e-mail to us. And I wanted to remind you of our capital markets update tomorrow. And I hope to see you there. Have a great day, and best of luck. You may disconnect now.