flatexDEGIRO AG

Hello and welcome to the FLATx D0 Preliminary Results 2023 Analyst Call. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. Today we have Frank Nihaga, CEO, and Dr. Benignanos, CFO, as our presenters. I will now hand you over to your host, Frank Nihaga, to begin today's conference. Thank you.

Yes, good morning, everyone. A warm welcome here from Frankfurt. Together with me is my colleague, Dr. Benon Janos, our CFO, Achim Schreck, our head of IR, and Dr. Thomas Lindner, our head of finance. I'm Frank Niehage, and I'm happy to present and start with the commercial highlights out of last year. before I then hand over to Benon to shift gears and give you a bit more details and color on the financial results. Needless to say that last year was a challenging year not only for us but for the whole industry given the geopolitical situation both in Europe as well as in the Middle East. Further interest hikes and high inflation caused irritation and challenges to the whole industry and obviously our clients. However, in such a challenging environment, we were happy to show further commercial growth, leading to the second best financial result in our history of the firm, which we are a bit proud of to share with you today. As I said, Binon will later give you a bit more details on that. However, it was not only a strong year in 23. We even kicked off a very strong start in the first two months of this year, showing over 10 million trades in the first two months. and seeing over 80,000 new clients coming onto our platform with over 1 billion fresh money gives us a good level of comfort and hopefully we will show the best record numbers this year. Coming back to our regulatory aspects, we are very proud that we did hard work together with BaFin and our special auditor and managed to finish almost 70% of the relevant issues. And very positive, I like to highlight that we have a general understanding, both with the regulator as well as with Mavaz, that the key findings, the most serious ones, will hopefully be resolved in summer this year. And even better, if that is the case, then there will be no need for a further after audit. So this is very good news. And thank you to all our employees who helped to get that done. And thank you very much again to the very helpful support, both of the regulators as well as our special auditor, Mazars, who helped us to get the homework done. So all in all, it's a wonderful basis. So after our figures, which are today only preliminary, are fully audited, we can show you a CET1 ratio exceeding 30%. And obviously, that will allow us then to continue with the announced capital allocation strategy, which we published end of last year. asking the general meeting this year to come up with two things, a minimum dividend and a share buyback program of 10% of our capital over the next years. So all in all, a positive outlook, and we are happy to continue like that. Let me move over to the commercial growth in a bit more detail. And if we look back from 20 over 21, 22 into 23, we show continuous growth in new clients, which proves to us that the platforms, both Lejeune and Flatex, are very attractive. And if we combine it to the peers, we are proud to show over two times growth in client growth, and obviously that's not normal. We managed that client growth, although we reduced marketing spend. And to highlight again, in 22, we spent almost $50 million on marketing. We managed, and well, to reduce that down to $34 million in last year. we will continue slowly to reduce it hopefully to 30 this year and We will continue to manage our cost in general very very careful Further to commercial growth I like to highlight that we saw over 4.5 billion fresh money coming in last year and that although we don't pay interest and that proves again that both the client growth as well as the fresh money coming in, the clients come to us because they want to invest and they don't want to save. We are not the saving platform, we are the investment platform. And even better, over 91% of the fresh money was then directly invested, again proving that we are finding the right clients and we are thankful to our clients that they use the platform for investing. That then even led to the fact that the client increased their wealth with us, highlighting a number below $40 billion back in 22 and over $51 billion almost 52 in 23. And the trend is further positive. And that's good that our clients are growing their wealth with us. And that proves that investment does make sense in capital markets in these times. As I mentioned earlier, we had a challenging 23 industry-wide, so there's no surprise that the trades per client per annum were lower than the years before. And if we compare us again with our listed peers, I would say we are in the mid, with an average of around 22 trades per client per annum. And obviously, that led to a reduction in trades. When they were in 22, 67 million, we only booked 57, so 10 million less than 23. However, our strategy to monitorize our income per transaction is still on, and we managed to increase average commission per trade from 406 in 22 to 4.13 in 23, and we will continue to improve it this year. Due to our balanced and mitigated business model and running a full-fledged banking setup, we were able to improve our interest income from $71.5 million in 2022 to $136.3 million in 2023, so improving that a lot and compensating the less trading activities. So especially in these times, it's helpful to run a business model like that. Let me move over to how clients perceive us and how about awards. I don't know whether it's a coincidence, but last year we could present seven awards in the German-speaking countries. And at the same time, we got seven awards in the international countries. So very respectful awards showing that the clients are happy with the platform. That doesn't mean that we can't improve and do better. We are constantly working on that and want to improve quality. But we also like to thank, at this point in time, all the clients who trust us and who participated in those awards. And thank you all for that. Moving over now to more details allows me to thank you all and to hand over to my colleague, the CFO, Dr. Binonyanos. Bin on the floor is yours. Thank you.

Thank you very much, Frank, and good morning, everybody, from my side as well. As Frank mentioned, 2023 has been the second best year of our history, and I have the pleasure of now providing some more detailed financials as well as giving you our outlook for 2024. We did see some remarkable developments in the past year. For the first time in many years, interest levels continued to rise sharply. Most indices, however, climbed up the wall of worry. For most investors, 2023 marked a much-needed comeback when it comes to both stock and bond market performance after a brutal 2022. Big Tech and the artificial intelligence bandwagon in particular was largely fueling the S&P 500's positive performance in 2023. Yet, retail investor activity declined in the last year compared to 2022, which can be mostly attributed to two factors, low volatility and high interest rates. Firstly, general volatility in the stock market declined throughout the year. Using the CBOE volatility index VIX as a yardstick, the year started around a vol level of 20 and declined throughout the year to about 15. Secondly, let's take a quick look at one of the most important financial ratios, the price-earnings ratio. General overnight banks' deposits, or overnight federal debts to use other words, of the Eurozone trades at 4 to 4.5%. That relates to an inverse P-E ratio of 22 to 25 times. For the U.S. markets, U.S. deposits slash debt tread a P-E ratio of 18 to 19. While tech firms were in an isolated manner easily able to clear that hurdle, it was much harder for the broader stock market to rise. Our adjusted revenues in 2023 grew 6% to 391 million. For the fourth quarter standalone, we were able to show a revenue growth of 14% year on year, up to 100 million. There were no adjustments in the revenue number 2023. However, in 2022, adjustments of 34 million were non-operationally added to the revenue line from releasing provisions for the long-term incentive plan. I will come back to the point of adjustments later in the presentation. Commission income declined by 14% in 2023 to $235 million. However, we were able to grow commissions in the fourth quarter of 2023 by 5% to $55 million compared to Q4 of 2022. As mentioned in my introductory statement, the full-year decline was driven by lower trading activity of retail investors, which was 25% below last year's levels. That also means that a good 10 percentage point of the decline we've been able to compensate for by growing our customer base and improving the average commission per trade. The remaining reduction in commission income was overcompensated by interest income, which grew 91% to 136 million year-on-year and 77% to 55 million in the fourth quarter of 23 compared to the fourth quarter of 22. As in the past, FlatEx De Hero has maintained its strategy to not pay interest on cash deposits. The fact that we've been able to attract over €10 billion of net cash inflows onto our platform over the last two years, despite rising interest levels, shows our strength as an execution-only online broker with a focus on trading active clients. Let us take a look at the earnings before interest, taxes, depreciation, and amortization EBITDA. EBITDA declined 23% year-on-year to €140 million. The respective comparison for the fourth quarter shows a decline of 8%, which is largely due to the release of provision for the long-term incentive plan in 2022 that I already mentioned. If we adjust for the long-term incentive plan, adjusted EBITDA grew 7% to 154 million euros for the full year and was up 27% in the fourth quarter of 2023 compared to the fourth quarter of 2022. All those EBITDA numbers fully include non-cash markdowns in real estate investments that I have given more details on in the Q3 2023 earnings calls. They also include special effects such as generous one-time salary hikes due to general inflation pressures over the past two years and fines paid to the regulator, as well as the Italian Competition Authority, AGCM, which, as you know, we are challenging in court. Let me give you an update on the real estate investments. For the full year, the non-cash markdowns of those investments totaled 11 million, the vast majority of which were taken during the third quarter. There were only marginal changes in Q4 of 2023. Provided that the general interest rate level does not rise unexpectedly, we do not expect any meaningful effects in 2024 either. We were able to beat our 2023 adjusted revenue guidance of 38 million by generating 39 million in revenues. We were able to grow both our adjusted EBITDA and adjusted EBT margin slightly year-on-year, and we were effectively on target compared to the guidance issued early 2023. Technically, we were 50 basis points shy of 40% on the adjusted EBITDA line. Without the aforementioned non-cash real estate markdowns, defiance, and inflation compensation, the respective margins would have been several percentage points higher. For the past year, We have shown the IFRS segments Fin and Tech in our annual statement. When we release the annual report, you will find a new segment reporting which we are introducing to further enhance transparency. The Fin and Tech segments effectively reflected the B2C and B2B business that the group has focused on historically. As we have shifted and evolved our business model to an online broker, we are replacing the old segments with the new segments, FlatX and Dehiro. One important note, though. While the names suggest that these segments represent precisely the brands FlatX and Dehiro, this can only be a rough approximation. The segment FlatX includes, for example, FlatX and V-Trade operations, all credit and treasury operations that do not fall explicitly under the Dehiro brand, and outsourcing solutions. IT services are allocated to the segments based on revenues. In any case, the new segments more properly reflect the way we run and manage our business and enable you to get a better and clearer view on our core business. The first transparency initiative was, by the way, at the beginning of 2023 when we introduced monthly KPI figures. The new segments now represent a second step. A third and fourth measure will now be introduced in a moment when we move to the outlook for 2024. We are aiming for the best year in our financial history in 2024. What now follows is a brief comment on adjusted earnings. In this presentation of the 2023 financial results, I have used the word adjusted or adjustments 11 times so far. Adjustments add complexity to financial statements that we would like to avoid in the future where it is possible. As more than 50% of the long-term incentive plan is executed, we will absorb those costs going forward as normal operating personal costs. We expect the future annual impact on the profit and loss statement to be smaller than in the past. We will continue to show the details on adjustments on a like-for-like basis to allow for comparison of 24 to 23. The adjustments will, however, be de-emphasized to allow for simpler and more transparent headline key figures. So no adjustments is the third transparency improvement. The fourth one is on the financial KPIs we focused on. We have used the EBITDA metric over the past years. The metric comes from a period some 10 years back when FlatEx De Giro's earnings power was substantially lower. The group had no integrated IT department and no banking license. It was simply a different company back then, and the metric has served well. Below EBITDA comes depreciation. Depreciation is a relevant line item for us, being a highly vertically integrated company. We are happy to have this high level of internalization and happy to invest. It gives us freedom and allows us to act quickly. The regulatory reapplication of credit mitigation techniques through automation within 10 months would not have been possible without full control of our IT. We also know that we would currently end up paying more for outside IT than in-house IT developments. Naturally, the growth of the path also increased the depreciation line, mainly due to the De Giro acquisition. We will now move forward and de-emphasize EBITDA in favor of net income, accompanied as needed by financial metrics below the EBITDA line, such as operating income, pre-tax income, or earnings per share. We therefore also provide our outlook for 2024 with a clear focus on top and bottom line as follows. We aim for revenue growth of five to 15%, i.e. a revenue range of 410 to approximately 450 million Euro for full year 2024. The goal is also for net income to grow between 25 and 50% for a range of 90 close to 110 million Euro. This is our top line and bottom line outlook for 2024. So to repeat, The net income line includes all costs and depreciation, effects from all long-term incentive plans, any markups or markdowns from investment activities, and no adjustments of any sort are made in the guidance numbers we are presenting. In the planning for 2024, we are also not relying on any tailwinds from the markets. While trading activity at the start of the year has been okay so far, as one would expect in the seasonally good first quarter, It's way too early to project a sustainable uptick in the trading activity of retail investors already. It might happen once interest rates come down, but as we said, it might. We do not want to get ahead of ourselves, so we currently plan with a similar retail trading activity in 2024 compared to 2023. With regards to such potentially lower interest rates, that would of course also have a countering effect on our interest income, which we are mindful of. We plan in general with very similar average weighted interest levels in 2024 compared to 2023. While 2023 started low and ended high, we expect the reverse for 2024. Please feel free to reach out to Achim in investor relations if you would like to discuss some of your assumptions. But as Frank already indicated, yes, January and also February has been favorably and above our assumptions. However, the year is long and there is another 10 months to go. Nevertheless, we are confident that we can continue to grow our customer base and grow in general our brokerage franchises. I would now like to hand back to Frank for a quick update on the successful resolution of BaFin findings.