Qiwi PLC (QIWI) 2015 Q3 法說會逐字稿

Greetings and welcome to the Qiwi PLC third quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Yakov Barinskiy, Head of M&A and Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. Welcome to the Qiwi third quarter 2015 earnings call. I'm Yakov Barinskiy, Head of M&A and Investor Relations and with me today are Sergey Solonin, our Chief Executive Officer; and Alexander Karavaev, our Chief Financial Officer. A replay of this call will be available until Tuesday, November 17, 2015. Access information for the replay is listed in today's earnings press release, which is available on our Investor Relations web site at investor.qiwi.com. For those listening to the replay, this call was held and recorded on November 10, 2015. Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements about our expectations for future performance are subject to known and unknown risks and uncertainties.

Qiwi cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the Company's most recent Annual Report on Form 20-F filed with the Securities and Exchange Commission for factors that could cause our actual results to differ materially from any forward-looking statements. During today's call, management will provide certain information that will constitute non-IFRS financial measures such as adjusted net revenue, adjusted EBITDA, adjusted net profit, and adjusted net profit per share. Reconciliations to IFRS measures and certain additional information are also included in today's earnings press release.

With that, we'll begin by turning the call over to Sergey Solonin, our Chief Executive Officer.

Thank you Yakov, and good morning, everyone. Thank you for joining us today. The third of quarter of 2015 was solid despite the challenging economic situation in Russia and decreasing consumer disposable income. We fully consolidated new businesses of Contact and Rapida, continued to gain market share, strengthened our strategic relationships, and launched new products. Our total payment volume increased by 65% to reach RUB271 billion while payment volume in Money Remittances and E-commerce market verticals grew even faster by 275% and 81% to reach RUB63 billion and RUB34 billion respectively. As of September 30, we had 16.7 million Visa Qiwi Wallet accounts and around 150,000 kiosks and terminals reflecting a 20% decrease in the number of kiosks in Russia due to the regulatory one-off effect on our agents.

Though certain verticals are continuously pressured by the economic situation in Russia, this effect is partially offset by persistent growth in others, primary E-commerce vertical. In these circumstances we see many opportunities to strengthen our position and gain market share in the existing markets by executing new partnerships and introducing new products and services as well as entering into new market segments, which are complementary to our core business. I'm also glad to see that the E-commerce vertical continues to be the largest vertical in terms of net revenue. This makes us believe that we continue to execute our strategy well and penetrate this diverse and technological market by offering our highly useful and convenient solutions to our customers and merchants.

Now, I would like to walk you through some important recent developments. Our kiosk network in Russia significantly decreased as a result of the enhanced controls by the Central Bank of Russia towards our agents. We can see that other market players experienced a similar trend and we are expecting the number of kiosks to grow throughout 2016. Although these matters currently have a negative effect on our physical distribution network, we believe that the increased transparency of the kiosk market will ultimately benefit Qiwi and allow us to improve our share in this market.

With this, I will turn the call over to Alexander, who will take you through our financial results in more detail. Alexander?

Thank you, Sergey, and good morning, everyone. I will now walk you through the detailed financial results of the quarter that Sergey just described. First of all, I would stress that from now on we present the financial results including acquired businesses of Contact and Rapida in accordance with IFRS. That means that we consolidate the entire volumes, revenues, and costs of the acquired businesses starting from the acquisition date which is June 1, 2015. Total adjusted net revenue increased by 6% to reach RUB2.5 billion, up from RUB2.4 billion in the third quarter of last year. Payments adjusted net revenue increased 5% to RUB1.8 billion as a result of strong net revenue growth in our Money Remittances and E-commerce verticals, which grew 128% and 29% respectively. It was offset by a significant decrease in Financial Services net revenue by 61%.

We see considerable pressure in the Russian retailer repayment market, which does not allow us to demonstrate better results overall. Net revenue yields across three key verticals decreased as a result of the consolidation of Contact and Rapida, which are carried on significantly lower net revenue yields than Qiwi legacy business with the effect being more pronounced for Financial Services. Telecom vertical strength remained mostly unchanged with a slight increase in volumes and decrease in yield driven by the same factors. Average blended payment net revenue yield was 0.68%, down 39 basis points from the prior year with Contact and Rapida generating a payment net revenue yield of 24 basis points. Our total average net revenue yield was 0.93%, down 51 basis points from the prior year.

Other adjusted net revenue increased 11% to RUB693 million, up from RUB626 million in the prior year mainly driven by growth in activity fees, interest income, and agents overdraft. Moving on to expense. Adjusted EBITDA decreased 12% to RUB1.3 billion, down from RUB1.5 billion in the prior year. Adjusted EBITDA margin was 53% compared with 64% in the prior year. Adjusted EBITDA margin compression primarily resulted from higher bad debt expenses as well as increased rent, office maintenance, and professional fees expenses. Adjusted net profit decreased 3% to around RUB1.1 billion, down from RUB1.2 billion in the prior year. Adjusted net profit was largely affected by the same factors as adjusted EBITDA though significantly mitigated by traditional foreign exchange gains due to higher ruble volatility.

Finally, as we continue to pursue our M&A strategy and consider the market favorable for deals, our Board of Directors recommended refraining from paying a dividend for this quarter as well as for the next few quarters. Now, on to our guidance. We are committed to fulfilling the same full-year guidance that we provided together with the second quarter results. We expect both adjusted net revenue and adjusted net profit to increase by 18% to 22% over 2014. This yield is crucial to strengthen our market position this year in order to be prepared for driving future growth once the consumer confidence is back.

With that operator, please open up the call for questions.

Thank you. At this time, we will conduct a question-and-answer session. (Operator Instructions) Vladimir Bespalov, VTB Capital.

First, I have a question on your full-year guidance, it basically implies a very good acceleration in the fourth quarter. Could you provide some color, maybe you see some improvement in the growth of kiosks after the [drop] in the third quarter and basically what's going to drive this growth? The second question that I have is on your dividend guidance. At some point the Russian media quoted Sergey as saying that you'll have good visibility on your M&A activity by the end of this year, but now it looks like you're going to pursue M&A opportunities for several more quarters. Could you comment on this? What has changed since then? Thank you.

It's Alexander. On the full-year guidance so we really believe that in Q4 we will be performing slightly better than in Q3 and this is primarily due first of all on the bottom line due to the fact that we will be much more careful with the expenses. So, we have already the program on how to keep the expenses under control especially in that time. On the revenue side, we believe that generally seasonality works in a way that in December we are gauging our revenues as compared with other markets like in E-commerce and then in some other segments. So, we do not really feel that something really unusual will happen in December. We still expect some spike in revenues. And I pass over to Sergey for second part of your question.

Well, I do reiterate that we are discussing few M&A opportunities right now. The problem we face is uncertainty about what's happening in the economic situation of Russia and uncertainty on some verticals that we will look at and we are waiting a little bit to see if the market stabilizes and if we can (technical difficulty). As I said if we do not do the deal then, next year we will distribute the dividend.

Thank you. That's clear.

Bob Napoli, William Blair.

The acceleration in growth in E-commerce I know some of that is from the acquisition, but is there underlying an acceleration in growth and what is driving that and what is the outlook for that segment?

This is Alexander. So, it's primarily the continuing trend of offline to online so we still see a substantial growth of the classical E-commerce meaning the online health is good. As we started to feel certain anti-cyclical effects of the virtual goods like the gaming and so unusually what would be happening is that in a crisis time the gaming usage and the usage of virtual depend increasing in Russia and we are generally benefitting from that trend in Q3.

Okay. Is there stabilization in your business at this point from a regulatory and economic standpoint, any stabilization and what are your thoughts on 2016 growth?

As we can see right now, we see that September was actually the month where we saw full exposure of regulatory changes for our agents so we see that we are recovering right now. So, generally it usually takes quite a lot of time to renegotiate the rental fees for our agents with landlords et cetera, but it seems that they managed it in a shorter period; but still I think that some of the contracts are long-term so it will take maybe half more year to fully recover. So, my outlook for 2016 is quite tightly connected to what will happen in our macroeconomic environment. So, we still see that the banks on loan repayment side and on deposit side are quite weak so we think that we will still experience some problems on the banking side, which will be offset by E-commerce segment. But generally the biggest worries, my personal worries, are still around banking segment about banking payments, loan repayment segment. So, we think that there is some capacity to fall still in that segment looking forward.

I guess our clients would rather see you not pay such a big dividend and retain capital whether it's for M&A and especially if you're stock weak to possibly over the course of next year to buy back stock. So, just food for thought that there are other thoughts out there versus just paying a very big dividend. And I'll pass it on to the next questioner. Thank you.

Let's say this; if we're not decided with M&A activity, then there will be options for us either to pay dividend or to buyback. So, we will review this option as soon as we make a final decision on our M&A.

Zach Shafran, Waddell & Reed.

One, Sergey, how would you suggest people think about the number of kiosk in the coming year or so? And two, how should one think about given that you had to increase commissions, what that's going to look like and how much further you might have to go in the coming year?

I believe that we will gradually increase the number of kiosks so it will be not a quick increase because we already have some effect from this regulatory and we understand that this is some kind of a minimum amount that we got in September and I expect that throughout 2016 we will increase this number so it will be increased. I wouldn't commit on the percentage, but we see that the dynamic is positive. I don't believe that we will completely get the same volume of kiosks that we had a year ago, but I think that we will come maybe halfway to that within a year. So on the yield side, we believe that we increased our market share quite significantly in this year and partially this effect we have on our decreased yields in the third quarter. So, we think that we have potential for yield increase, if you see our volumes are quite good so we are generally thinking about being positioned more strongly on the market so getting a little more share on the market. But for 2016, maybe from the second quarter of 2016, I believe that we will start the campaign for slow increase on the yields. So, you will see that.

Thank you.

Igor Gerasimov, Goldman Sachs.

My first question is on your amortization of fair value adjustments. Could you please elaborate a little bit more the nature of that item and say whether it is recurring or not?

Amortization of fair value adjustment, the vast majority of that amount comes from the recent acquisition of Contact and Rapida. So, it's a special treatment under IFRS where you basically allocate the expense of the purchase price over the net assets of the acquired businesses to various intangible assets. This is obviously recurring until the time when it's fully amortized, which usually happens within 5 years to 10 years from now though that item is non-cash because we paid in stock. So, this is more a special treatment under IFRS rather than the [operational] metric I would say.

Okay. My second question is on your preliminary outlook for 2016. You already shared partially your outlook and what you expect with regard to Financial Services, but maybe you can go through some other segments of yours? Thank you.

Unfortunately I'm not really in a position to guide on that call so we are now let's say in the middle of our budgeting exercise where the management and the Board of Directors are involved. That will be finalized as usual in December. So, what we may say is that obviously we really see 2016 as a tough year although if the economic macro situation will not change as compared to what we have now, then we are positive. So, we are expecting certain growth next year although about the right numbers we will tell you on the next call.

Okay. Thank you. Understood.

(Operator Instructions) [Svetlana Sukhanova], Sberbank.

It's Svetlana Sukhanova from Sberbank. My question would be on Telecom volumes. I was pretty much surprised to see Telecom volumes growing while I was originally expecting that given 20% reduction of your payment of your terminal network in Russia, I would have expected Telecom volumes falling even by larger extent. Can you please elaborate on that?

So, the growth of Telecom volumes is primarily due to the acquisition of Contact and Rapida so we have not really seen any substantial shift in that market as such. So, it's just the acquired volumes.

But as per your earlier guidance, you were not saying that Contact and Rapida got Telecom payment volumes so you were talking pretty much about E-com, financial services, [volume].

Yes, I mean that volume is not that substantial in Contact and Rapida, but still it's like few percent given that the volumes of Contact and Rapida are large as such, that adds a certain percentage to our total consolidated volumes.

Okay. My second question would be when will we see standalone sister financials of Contact and Rapida? Earlier you were talking about --?

We are in the final stage of preparing those so hopefully we're going to be publishing those within a month from now. This is our plan.

Okay. And my next question would be about if you can disclose yields at Contact and Rapida. It looks like when I was comparing actual reported results in my estimates, I overestimated financial services yields at Contact and Rapida and other lines as well. Can you give us any guidance? What do you mean by significantly lower yields compared to?

We actually never published their yields separately in this press release and it amounted to 24 basis points in Q3.

In financial services?

No, for the whole company. But this pretty much resembles. Financial services, we are not really able to provide to you the detailed data, but given that their blended yield is 24 basis points. So, the volumes depreciated (inaudible) would usually be having higher net revenue yield probably around twice as high as 24 basis points and that effect would mean that the financial services net revenues would be lower than that amount, but we are not really able to provide the detailed breakdown.

Okay. My just very last question on this point would be was this 24 basis points for Q3, have I got you right in terms of quarter?

Yes, correct.

And my last question would be about bottom. You already discussed why you expect hike in December. But overall in terms of this regulatory changes, can you see a bottom or you think if you strip out the seasonality in Q3 bottom would be in Q4? If you strip out seasonality in Q4, when would it bottom Q3 or Q4 again if you strip out seasonality of this regulatory crisis?

We believe that from a regulatory point of view Q3 is probably the bottom. I mean again it's very difficult to segregate those assets. I mean obviously December and Q4 historically was the best quarter of the Company from a seasonality point of view so that's why we expect slight increase. But I mean as Sergey said, in Q3 we really would believe that we hit the bottom in terms of the number of kiosks in Russia.

And I would say that seasonality in December for example is higher than October and in November we usually have slightly lower seasonality than October. So it's really difficult to say, but generally yes, Q3 was the lowest I believe.

All very clear. Thank you very much and good luck.

[Faiyaz Alamu], Janus.

My first one is just want to clarify one point you just mentioned when you said if the macro situation doesn't change you will still be positive. I'm just wondering what do you mean by that given that consensus expectations for GDP for 2015 are around negative 4% while for 2016 they are around zero to 1%. So when you're saying you'd be positive, you mean under a negative 4% GDP growth scenario in 2016?

No. We will be positive on the zero case scenario so if nothing really will fall in the next year, then we have a positive outlook. If the economy will fall, then depending on how much it falls we may think about this differently. But if it is zero and we believe that it may be as you said 0% to 1% then we will experience positive growth.

Okay. The second question is on the regulation, can you give us more color on the state of the competition in the terminal business given that you guys have been impacted by around 15% and given that none of the competitors are public so we don't have real color on what's happening? But how do you describe the state of the industry now versus where do you think it's going to go through like how many players are right now in the terminal business versus how much do you expect to be over the next few months or a year? And I'll ask my third question after that answer.

As far as I know, the overall fall of the volumes in terminal network was down around 30% to 35%. Our volumes fell a little lower. So, I can say that some of the competitors just closed down recently, I know about few such cases. So, generally at Qiwi now we are a little better than the overall market I would say and for the future I believe that in this regulatory environment it will be very, very difficult for small terminal networks to survive. So, I think that we will have maybe one or two competitors who are big and the small players should be joining or merging into one player otherwise they will face bankruptcy. That's my personal point of view.

So effectively you believe there are going to be three or four players in the industry in the future? Can you tell us how many players are there now in the industry?

There are around 20.

So, you think that the industry is going to consolidate down to four?

Yes.

Okay. Another question I have is can you talk to us a little bit about the long-term strategy of Qiwi and what's the ultimate goal from all these acquisitions that you're doing like where do you see the Company in three to five years? How do you visualize the Company because this is something we don't really discuss much?

I would really like to postpone it for the acquisition because it may give a little light on what we are doing and I would not like to really say about that. So, I can say that our core business as a payment company will be our focus anyway so we are talking about different companies that it will give us much better market position for the future. So, it is either increasing market shares at some point or having a more solid outlook for the future. So, you can say that it's kind of protective strategy, more protective, so we are trying to get a much better market position together with bigger importance for the market. That's as much as I can say. If we do the acquisition or we will cancel the deal, then I will be able to elaborate much more on that.

My next question is the yield in or on Contact and Rapida volumes are significantly lower, which I believe is what brought your total average yield lower. How easy or difficult is it to start applying higher yields to these businesses and where are you in the revenue synergy cycles?

Right now as I said, I think in the third quarter you've seen the yields that are quite stable. So, we are not in a position to increase the yields in a falling market for Money Remittances in the bank. So, we think as soon as the market stabilizes and we believe that this will happen in the second quarter of the next year so from that point, we will start to moderately increase or slowly increase yields. Again, I think that it will be a very slow process and it took us three years in our core business to increase yields. So, I think that it will take few years to bring up yields of Contact and Rapida closer to our numbers, but I believe that in say three years' time it is absolutely possible. And we will start around second quarter if the economy will not be falling as we've talked with you before.

Another question also on yields, the commission paid to agents have increased significantly this quarter if I'm correct. Can you first of all tell us how much did they increase and can you draw us a path where do you see this going? Do you expect this commission to decrease in the future or to increase to keep your agents network? Can you explain as much as possible about this specific point?

We really increased a little bit. Just a little we increased commission for our agents to support them on this regulatory change. So, we thought that it would be a right way to do for our partners who are working and managing all these terminals, networks, and rental agreements. So, we think that this is pretty enough so we don't expect that we will do it anymore and maybe return something back next year depending on the economic situation again, depending how the outlook will be in the next year. So, it really depends if our agents will be not worse than now, then it will be stable. If better then it depends, we can decrease.

Okay. Final question I have, which is a softer question. You're growing basically around 20% in a negative GDP growth environment and given what you just mentioned multiple times about the correlation of the GDP growth with Qiwi, do you believe that it is still possible for Qiwi to grow at rates that you delivered in 2013 and 2014 of more than 40% growth if GDP growth was above 2%? Is this possible?

If you give me 3.5%, I would commit, yes.

To over 50% or over 40%? Okay. Thank you very much. I'm done.

Bob Napoli, William Blair.

Just a question on your remittance business. Historically before you made the acquisitions, I think you were primarily all send. With the acquisitions, what is the mix of your business versus sending and receiving?

The proper angle to looking at that. I mean we just acquired additional sender side and additional revenue processor so the recipient side is anyway controlled by the recipient side bank. We are mostly on the sender side of course from sending from Russia to the west. It may happen that this proportion can change a bit towards recipient side because some people are going out now of Russia. But we still believe that majority of course will be on the sender side.

Okay. And I guess I mean the send side of the market is down pretty hard because of weakness in the ruble, the receive side seems to be up quite a bit. So are you seeing the pressure from the sends being down?

The proportion will change a little bit to the recipient side because more money will come in because it's not businesses, it's people who are sending money. So, there is now a little growth on the recipient side and some fall on the sender side because of the macro.

Okay. You mentioned some new products in your remarks, Sergey, anything that you could point out of new products that you've launched?

We are continuously working on a lot of new projects so we very recently launched payments with Visa. We're currently launching a lot of small things and add-ons in our interfaces. We did launch a few interfaces in the Wallet for money remittances so you can remit money now in telegram and in different social networks. So, we just started with that so you can already try and the growth there is very impressive on messengers right now. And I also say that the Wallets with operators, we're little bit thinking how to relaunch and how to renegotiate something on the Wallet so that we can still do some marketing expense maybe in the next year and they are increasing. So it's not stable there, generally increasing. If you look at the quarterly base on the Wallet, you will see that our loyal customers are increasing and we are quite happy on that. So in this, we are on the right track.

And then last question just on your EBITDA margin, 55% this quarter. I mean you've been mostly above that and I understand going through the challenges you are. But any thoughts on the EBITDA margin as we go into 2016?

I would not really expect any substantial expansion of EBITDA margin as compared to what we had in Q3 so probably a little bit [annual] increase in Q4. In 2016 we would really keep that stable so that's kind of our base case scenario to have a cushion to invest in our product and the [Company]. But again, I will tell you the proper guidance as soon as we are through the budgeting exercise.

Thank you.

Dmitry Trembovolsky, Goldman Sachs.

Just a few follow-ups to what my colleagues were asking. First of all, just on the EBITDA margin. What is the key initiatives that you want to make on the cost side so where do you want to tighten things up a bit?

It's very (inaudible) or now having Contact and Rapida we will have some room for improvement there so we might be cutting a certain number of employees. There's various initiatives like in the business travel expenses, in the office maintenance, and the other things. It's kind of routine work that we kind of expect to evolve in a slight decrease in expense in Q4.

Okay. You mean nominal decrease, right?

Correct, yes.

Okay. Now can I just check also you used to give very different timings for potential M&As for which you hold cash. Is there any new guidance which you give on this front like when we should expect something?

I believe that in December we will have a Board meeting where we will discuss the M&A opportunities so we are preparing some documents and deals to that time. Then depending on how we will talk it through on the Board and what agreement we will come to, depending on that we will be able to guide you on that further on.

So in December you already have decisions or once you have the Board's approval you also need to like negotiate with the sellers and do the rest?

The main decision will be on the Board of course, but then there could be some details that usually come up maybe in the last minute that we didn't discuss through on the due diligence process.

So, December is the new date. Okay. And can I just ask you so -- sorry?

We were actually expecting to talk about that in the fourth quarter so it's more like --.

Okay. And if you cancel these deals or they won't happen for any reason, how should I think about the dividends? So should I just assume you'll restart paying them from the current net income or shall I also assume you will distribute all of the cash or some of the cash that you keep right now on top of restarting paying from the net income?

It depends of course how the Board will react. I will be on the side to distribute everything, but then there may be some operational issues in the Company that we have to talk through with Alexander and then there may be some ideas on the Board level. But generally if you ask me, then if there is no deal I would definitely distribute everything.

All right. That's pretty clear. Thank you.

Olga Naydenova, BCS.

Just a follow-up on dividends and possible redistribution of the M&A resources that you have. Did I hear correctly that you said in this call that you refrain from dividend payment for two more quarters so what is the timeline? I'm sorry for asking this again.

As Sergey just mentioned, we expect to finalize our view on potential M&A until the end of this year. So it doesn't necessarily mean that we will announce this year, but this time the Board (inaudible) to really take all the major decisions. If there is no deal, then we may start to pay dividend next year, but again this is something that we have to discuss internally with the Board.

Okay. And my other question is maybe on something different. Today CBR has withdrawn license from Russlavbank, the one that used to own Contact and Rapida for a while. Can we expect any counterparty risks arising from that or you're completely out of that partnership and we can be comfortable?

So, actually you can be comfortable. As soon as we acquired Contact and Rapida, we had the internal process to diversify the number of banks that show Rapida and Contact as a settlement bank. So as of today, we do not have any substantial exposure to Russlavbank. We issued a separate press release that we do not feel that we have any (inaudible) with Russlavbank and Contact continues to operate in a normal manner using all the other settlement banks that we have.

Okay. Thank you very much.

Thank you. At this time, I would like to turn the call back over to management for closing comments.

Thank you, everyone, and we will talk to you on our next call. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines this time and have a great day.