Kaspi.kz - Q4 2022

Transcript

Operator (participant)

Hello, and welcome to the Kaspi.kz fourth quarter and full year 2022 financial results conference call. My name is Harry and I'll be your operator today. To ask a question during Q&A, please use the raise hand button on your Zoom toolbar or dial star one if you're joining us over the phone. It's now my pleasure to hand you over to David Ferguson to begin. David, please go ahead whenever you're ready.

David Ferguson (Managing Director, Head of Investor Relations)

Great. Thank you, Harry. Good afternoon or good morning, everyone. I'm David Ferguson from Kaspi.kz. Welcome to our fourth quarter and full year 2022 results. As usual, on the call with me, I have our CEO, Mikheil Lomtadze, our deputy CEOs, Tengiz Mosidze and Yuri Didenko. As usual, Mikheil will take you through the strategic highlights. I'll take you through the financial highlights and guidance, and then we'll open the floor up to Q&A. The entire team are available to take your questions. On that note, I'd like to hand over to Mikheil. Mikheil, over to you.

Mikheil Lomtadze (CEO)

Hello, everyone. Pleased to present the last full year and the 4Q numbers. Yeah. The slides, we don't have them on the screen.

David Ferguson (Managing Director, Head of Investor Relations)

The slides are showing on my side.

Mikheil Lomtadze (CEO)

Really? Well, I don't see them. For some reason.

David Ferguson (Managing Director, Head of Investor Relations)

Harry, can you just confirm, can participants see the slides or not?

Operator (participant)

yes, confirming that the slides are currently being shared.

Mikheil Lomtadze (CEO)

Let me see. I don't know. I don't see the slides on my screen, unfortunately. I can do it from my paper presentation. Slide number two. Our performance has been very strong through the last year and the 4Q specifically. The team has done a great job in the execution. As you can see, our Payments business has grown RTPV 53% year-over-year. The revenue has grown also 53% fast. Net income because of operating leverage, 60% up year-over-year. The Marketplace GMV, you know, 60% year-over-year accelerating in the fourth quarter revenue 67% and net income 68%.

Our Fintech business continued good growth with the TFE of 27%, revenue 27% and net income 7%. Our consolidated business, you know, has grown net income on 37% and the revenue 40%. This is the set of an extraordinary results, and subject to the shareholder approval, we also have a KZT 610 gap or GDR dividend recommended for Payments to the shareholders. Obviously, the next slide. Obviously the Kaspi Juma has been fueling our business really well. We have launched Kaspi Juma last year after the, you know, COVID break. The growth has been extraordinary. Two 3 events during the year. Just to remind everyone, it's actually a 3-day event.

The three-day event, you know, which is six days for the total for the two events, almost 14% of our total GMV. This is a truly nationwide shopping event, which has been created by Kaspi.kz. What is also remarkable, the second event actually grew 47% compared to the July event, and we're talking about several months difference between those two. Really excited and very strong performance. The next slide on the guidance. As you can see, our team has won again, pretty much exceeding the guidance on the back of extraordinary execution. I'm not gonna really go through every single of those numbers.

you know, very importantly, the GMV, you know, RTPV, growth, you know, net income margin numbers, adjusted net income, very importantly, I mean, we have exceeded the guidance in 2022. another proof how execution-driven is the management team of Kaspi. In terms of the split of the profitability, the Payments and the Marketplace businesses are growing fast. therefore, you know, taking the increasing share of our bottom line. we have 59% of our bottom line now is coming from the Payments in the Marketplace, we're really excited about this. you know, we believe that the diversified, providing diversified, sources of revenue, net income, you know, different type of businesses really is extremely and very important competitive advantage of Kaspi.

Next slide is just to take a step back. We have a lot of new investors, and just to remind everyone the business model of Kaspi.kz. We have two products, or two Super Apps. One Super App is for consumers, another Super App is for merchants. Both apps are extremely unique in actually in every comparison to any other example in the world. Consumers on a Kaspi.kz Super App, you know, they can do pretty much everything and around their regular daily needs, right? They can manage their personal finance, they can make payments, they can transact in stores, they have access to wealth of government services. They have ability to order items with a free delivery through the e-Commerce.

They can get items out of the Kaspi Postomat. They can do a P2P bill payment transactions. Really a very, a very wide range of the products and e-Grocery is one of the latest sort of additions to our Consumer Super App alongside with the government services and Travel. The Merchant Super App, which is the Kaspi Pay, we're replicating the success and the knowledge of Kaspi.kz Consumer Super App. Now, you know, our merchants can accept the payment, they can have access to government services, they can pay taxes. We've just created the service.

ile your tax reports, B2B payments, instant invoicing, and we've also launched last year cash register, when you can actually provide the, you know, the online seamlessly the receipt, sort of, fiscal receipt, for both cash and cashless payments. They're very exciting products which will actually grow in scope over coming years. What is even more important is not just the standalone type of apps, but actually that we're creating these two sort of shoots of the products, but how we actually connect because we believe that by connecting consumer to merchant, we create more value for both for consumers and for merchants, and also create very strong network effect and competitive advantages.

Things which connect both is the Payment network, is the Marketplace where we enable sellers to buy and consumers to. Sorry, sellers to sell and consumers to buy. Delivery services when you can trade across the whole country. Then financing, both on the consumer side and the merchant side, increasing the share of wallet ability to purchase items, but also for businesses to develop their business. Then marketing services, again, highly personalized advertising when merchants can reach right users. Really, the power of our business model is not just a Super App strategy, but also how we connect both to each other. If we look at the potential that we currently have, we traditionally show the cohorts in our annual presentation.

You can see that, you know, RTPV continues very strong growth, and yeah, there is no sign of the slowdown. Again, you know, more merchants, more users, more transactions per consumer, more transactions per merchant is driving the growth for the RTPV, and obviously we're creating more opportunities to transact as we add more verticals over time. The same on the Marketplace. You could actually see that, you know, differently from many other e-Commerce and Marketplace in the world, actually, we are accelerating our growth post-COVID. That again tells you how resilient our business model is.

As we continue adding more merchant and increasing the SKUs, adding more diversified payment options, especially on the merchant side of things, we see actually acceleration of GMV on our cohort. We see both strong user acquisition, but also more transactions and the more growth per consumer in our Marketplace business. If you go into the another dimension, which is the penetration of different consumer products per user. You can actually see that we have a wide range of the products, and some of them are in early stage, like e-Grocery, extremely early stage. Some of them like P2P are instruments when we have completed the build-out of the users. However, we continuously drive transactions and we drive engagement.

Again, to take a step back, our strategy is always build the foundation with consumers, build foundation with users, build the network effects, then build more business around the merchants and consumers. Actually, any of those products are really growing fast, but they're at different stage of the strategy and execution by our team. Then if you look at the number of merchants, you know, this sort of growth we have generated is really driven by the fact that we have been building the merchant base. Initially we started with consumers, now we've also built the base for the merchant side of things.

We have more than doubled the number of merchants during 2022. Really excited about it, and that obviously is driving the transaction. More consumers have more merchants to transact at. As a result, you know, we have strong growth across the board. If we look at the infrastructure sort of building up, what we call is a POS network devices. We have built this unique foundation for also the future growth. Now 92% of all the transactions are actually done through the Kaspi.kz POS network, and only 8% is done through the third-party acquiring.

We've largely completed sort of building that side of the infrastructure for our business. If you look at some of the new services which we're launching, the B2B is extremely important part of our business now. This business didn't exist at all before about, you know, sort of a bit over a year ago. That's a service which connects the brands and the wholesalers and the distributors to the convenience stores to the smaller merchants, and the growth has been really healthy. We have grown more than 3.5x in terms of the amount of the transactions and almost 3x in terms of the number of transactions. Again, some of the leading brands are joining, like Coca-Cola, you know, Pepsi, Nivea.

We're really exciting about this new business, and we believe that's the foundation in other services which will follow our B2B strategy. We have been also building another project, what we call infrastructure. That's, that's a last-mile-delivery. Postomat didn't exist basically a year ago. Now we have built the largest network of last-mile-delivery. You can see that we went virtually from zero to, you know, almost 3,400 Postomats across the country. Now, almost third of all our deliveries are done through the Postomat. If you look in terms of number of deliveries, then even mind-blowing. We almost, you know, over 2 million deliveries we have managed through the Postomat.

Postomat is not just only more efficient and cheaper for us, but also it's more environmental friendly, and we control the user experience. The consumers are extremely happy, and we plan to roughly double the number of Postomats during this year. Another business which went from zero to number one business in the country is airline and railway bookings. That business also didn't exist actually, I don't know, 18 months ago. Now we are selling over 3 million airline and railway tickets in the 4Q. The growth has been almost 2x in terms of GMV. Really very, very, very good example of, you know, how execution-driven is our team is.

Also we create the value for airlines and the railway by, you know, helping them to digitalize the sales. Really very excited about this. There is another addition to this business. As we speak, actually we're launching the package holidays. I've mentioned this briefly, I think, last year in meeting some of our investors. That's another sort of big market for us, about $1 billion in the GMV addressable market. We believe about 1 million travelers. Average ticket is about $1,500, which is a great size also for BNPL opportunity. We're launching with the three primarily destinations, which is the Turkey, Egypt and Emirates.

The take rate is also will be very attractive, will be 8%-10%. We're launching already. Usually it's the first stage when we allow our employees to use it, and then we roll out nationwide. Just to give you a bit of a look into the user experience, how we are really organized, it's really straightforward. You can basically search any tour in this destination. You can select the hotel, which is helped by the reviews and the ratings and the pricing, then you can complete your transaction with our Kaspi Gold payment or BNPL.

Very importantly, you know, we finalize our part of the transaction by giving you all the details of the tour and actually putting you in touch with the agents or tour operators that will help you on the way. Really very excited about this opportunity. We'll be building that this year. Another opportunity that, you know, we're going very strategically about is e-Grocery. We're very excited about probably the largest market that we have in front of us. We're making investment into rolling out nationwide the e-Grocery business across the country. If you look at the recent performance that we had, we have talked about e-Grocery through the year.

This is not, for us is not, just entirely new business, so we validated it. If you look at the e-Grocery GMV, we have grown it 8x during last year. The number of purchases is, you know, already 668,000. We're talking mainly Almaty, a bit of Astana, so it's sort of two major cities. We're, we're excited the way that the business has been built up. We're excited about the trends that we have and the results that we achieved in Almaty and Astana already. If you look at the kind of simple rationale from our side, you know, that we have the business which is at least, you know, market of at least $12 billion in front of us.

We have Kaspi.kz who has, you know, technology, who has ability to design this remarkable user experience, but also a lot of operational experience on this type of businesses. Then we have a Magnum partner who is the largest food retail network in the country and they have extraordinary food retail experience. We also are building on the back of already proven kind of validated business model, especially in Almaty. The highlights of this investment, it's around KZT 70 billion will invest over the course of next three years. That will be an investment to build the infrastructure, again, the dark stores and also provide the working capital. 90% stake in a Magnum e-Grocery and will retain a brand Magnum because it's a number one brand in the country.

We're, again, just to repeat myself, really excited about this partnership when we can 1 plus 1 will equal 3 kind of partnership. We'll fund the investment will fund the growth and the regional expansion. Just to give you a bit of a highlight on what I mean under the first dark store in Almaty is basically, I don't know if, I don't know any example in any other parts of the world when, you know, within the whatever four or five quarters, you can break even. This is just example of how we have achieved in Almaty on the first dark store. It's a bit positive in the fourth quarter. We have, and with a store utilization of 65%, we've increased the gross margin to 30%, just also by managing strategically the assortment. That's business, huge market, validated business model.

We're really excited to roll it up. Just to give you a bit also overview of the process itself. Again, you start from the Marketplace. You really have a dedicated button on our front page. You have a catalog of different items. We're going actually from consumer sort of FMCG type of goods, but also fresh. You select the products and extremely importantly that you also actually would, can select the time slot when the item is delivered. This has been a really important feature which we've developed as we learn about this business. Then you obviously pay. We have been able to validate the business model and economics and we reached around KZT 25,000, so sort of $25 average ticket. That makes a huge difference in economics. All the orders over 5,000 are delivered for free, which is about $11.

David, back to you.

David Ferguson (Managing Director, Head of Investor Relations)

Great. Thank you, Mikheil. I'll run you all through the financial performance of each of the respective platforms, starting with the Payments Platform. As we've talked about consistently since the IPO, strategic objective has been to scale the merchant side of the ecosystem. Here, again, you continue to see good results in that regard with the merchant base up 101% year-on-year. That's a function of Kaspi Pay. It's a function to a lesser extent of bill payments. These products continue to work and help us continue to grow the merchant base. This will inevitably slow, just as has happened on the consumer side of the equation. What's important in 2023 and beyond, merchants will continue to shift more volumes to us driving RTPV. Similar message on the consumer side of the equation.

Here, the growth is more modest, although still respectable given that this is our most mature platform. As Mikheil showed you in the cohort analysis, if we give consumers, whether that be new or old, more opportunities to pay, they will use these services. That drives RTPV growth. With that in mind, RTPV growth has been strong and consistent throughout the year, finishing the fourth quarter up 53%, actually in line with the full year trend. This is important in the context of the question around the health of the consumer. Well, what you can see here is that our payment business is indicative of the health of the consumer. Whether you look in Q1, Q2, Q3, Q4, you see a very, very similar trend and very, very strong trend throughout, both in RTPV or in number of transactions.

On the take rate side of the equation, 1.2% take rate both in the fourth quarter and for the full year. That is ahead of the guidance of around 1.1% that we gave you at the beginning of the year. It is a function of timing. As Kaspi Pay at 95 pips and as Kaspi B2B increase in the mix, take rate mechanically comes down. Hence, the guidance for this year is take rate around 1.1%. Again, it's just a function of product mix. On the next slide, you can see here how RTPV payment mix continues to evolve. I guess the takeaway here is that it's not just about offering existing consumers and merchants more opportunities to pay, but we can also grow our entire addressable market. B2B was 1% of RTPV last year. Today, it's 3% of RTPV.

That might not sound like a big number, but in the context, our RTPV is big. B2B, as Mikheil said, in the fourth quarter grew 3.5x. It will be additive to RTPV growth over the medium term. More broadly, incidentally, can just be the start of one of a long list of targeted merchant products, not just in Payments that we can develop. Interest-free balances in the fourth quarter increased 11% year on year. For the full year, they were up 21% year on year. That is actually slightly above the guidance that we provided at the beginning of the year. It's certainly the case that what has happened over the last 12 months is that interest rates have moved up. Kaspi Deposit is very, very popular. Kaspi Deposit interest rates are currently 15%.

There has been a relative switch in favor of in consumers keeping funds in deposit versus their interest free wallet. That said, trends in line with our plan for 2022 and for 2023, we expect robust growth in wallet balances of around 15% year-on-year. To wrap up on payment financials, that fast and consistent RTPV growth, combined with stable take rates throughout the year, translated into fast and consistent and stable revenue growth through the year. Up 53% in the fourth quarter, up 54% for the full year. As has been the case in previous years, with Payments Platform, you've got a combination of things on the cost side.

We continue to eliminate third-party costs, Visa and Mastercard, as we move more volumes to our own network. We keep a tight control on costs, particularly this year on sales and marketing. That combined with just the inherent gearing that sits in this business model and remains intact going into 2003, drove margin progression both in the fourth quarter and more materially for the full year. Moving on to Marketplace. Just as for the Payments Platform strategy was to grow number of payment merchants, in turn that drives growth in number of Marketplace merchants. Here again, you see a very strong trend, up 159% year-on-year. Why do we do this? More merchants, more SKUs. We increase the breadth and depth of the product proposition.

Drives, on the one hand, more consumers, on the other hand, more transactions per consumer. Here you see decent growth in the number of consumers, up 28% year-on-year to 6.1 million. With still more upside potential as we go forward. Looking at then GMV trends on the back of that. Here, you see that GMV was strong, up 61% in the fourth quarter, up 81% for the full year. Actually, again, indicative of the health of the consumer Marketplace for the year as a whole, outperformed the guidance that we provided.

Given the scale of our Marketplace and its relevance across all areas of consumer spending, from grocery to Travel to consumer electronics, it gives you a pretty good snapshot of how the consumer was feeling for the year, and particularly in the fourth quarter. Take rate for the year, stable, 8.2%. I think this is important because I remember a lot of discussions around Q1 of where the take rate was down year-on-year, and investors asking around that. I think the message here is that, number 1, you need to look at it over a longer period of time. There can be volatility from a quarter-on-quarter basis. Overall, you've got sort of two dynamics going on here.

The benefit of our promotional activity, particularly Juma, drives take rate up, offset by lower take rate businesses such as Travel and grocery. If you take that, and again, you look at the guidance that we're giving for 2023, the longer run trend is that take rate continues to be stable or going forward to move up despite these sort of lower take rates part of the mix. m-Commerce continues just delivering good numbers. This has been a very, very consistent trend now for several years. Number of purchases up 37%, GMV up 60%, so higher ticket size in m-Commerce. Take rate stable for the year, up in the fourth quarter, slightly again linked to promotional activity. Overall a very, very strong performance throughout the year from Marketplace.

When we look at e-Commerce, what is important to take out here is that e-Commerce performance has consistently accelerated throughout the year. GMV growth of 57% in the fourth quarter was the strongest quarter of the year. Q3 was up 32%, Q2 was up 23%. You can see here that in this part of the business, the run rate has been very strong into the end of the year. We've talked previously about the divergence between number of purchases and GMV. Again, we focused on particularly adding more merchants in e-Commerce, more SKUs to drive more transactions per consumer, and just to embed our sort of long-term competitive advantage. Over time, you will see that these numbers move closer together.

Good performance from e-Commerce, particularly at the end of the year. Reiterates the point really here, you can see quite dramatically the increase in SKUs. It gives you a good sense how we've strengthened it. It's not the only area we've strengthened market e-Commerce's proposition, but it is one area, SKUs increasing 1.9x over the course of the year. We increased the depth and breadth, the relevance of this proposition to all consumers with good results. Here too, this will change going forward, and we'll focus on less on adding more merchants, less on adding more SKUs and more just on helping the existing merchants sell more. This is where products like advertising and logistics, and merchant financing become particularly relevant. That's more going forward than what you're looking at in 2022.

Another area where we strengthened the consumer merchant proposition of e-Commerce is free consumer delivery. There's a cost to this. It's an investment, the return is quite clear, both in growth in merchants onboarding, and in terms of consumers adopting delivery. Now, 95% of orders are delivered. 46% of those orders are delivered within 2 days. You've seen here quite a substantial increase in volumes, up 241% year-on-year. That's material. Going forward, higher volumes help us improve the unit costs, the economics of delivery, making it more affordable for our merchants. On Travel, still very, very strong growth here at the top line. Take rate moving up, that just reflects a change in mix. Rail is a higher take rate than flights.

Going forward, growth will remain strong, but as Mikheil talked about, you'll get the added upside as tours start to kick in. It will be more in the second half of this year than the first half of the year. Tours will be GMV additive to Travel and will also be substantially take rate additive to Travel as well over the medium term. Tours additive to Travel additive to Marketplace GMV still and going forward. Here you see how the mix has changed. Travel becoming more important in the mix, although you should bear in mind that in the fourth quarter, that is a seasonally softer quarter for Travel, and it's a seasonally more important quarter for e-Commerce.

If you go into the first half of the year, you'll see Travel increases in the mix and e-Commerce moves down, but it's just a reflection of normal seasonality. Wrapping up Marketplace financials. Here, you saw strong GMV growth, stable take rate, therefore that translated into its very similar trends at the revenue line, with again, the fourth quarter being the strongest for Marketplace. Investment in free delivery is a cost that does mute margin upside. Despite the substantial investment we've made in delivery, you can see here that margins remain very solid for the fourth quarter, for the full year. Actually, despite the investment in the fourth quarter, Marketplace margin moved up once again. Again, both on the top line and the bottom line, Marketplace finishing the year in a very strong position.

Moving on to the Fintech side of the business. We focused strategically this year on growing the deposit base, recognizing the opportunity to take deposit market share. I mentioned earlier that Kaspi Deposit is a popular product, and you see very strong growth in deposit customers at a faster rate than in loan customers. Deposit customers up 35%, loan customers up 15%. Kaspi benefited from very strong market-leading deposit inflows over the course of the year. Part of that is the attractiveness of our deposit account, but part of that is just the attractiveness of the full suite of services. At the first quarter and during the first half of the year, we talked about scaling back origination TFE in response to economic volatility and uncertainty.

Approval levels have been back to business as normal since the summer, and you've seen that we've ramped up acceleration in the third and fourth quarters. Again, you can take this as indicative that the trends we see amongst our consumer base are healthy and robust going forward. Another area you can assess, sort of think about credit quality is in terms of conversion. That's been stable throughout the year. That tells you that consumers are borrowing, repaying early at exactly the same rates that has been the case over the year and broadly similar with the long-term trends. Consumer repayment activity as evidenced by conversion rate remains very healthy. Strategically, we've always talked about growing BNPL share of mix. You see that continue to play out. It will have been boosted by Juma.

One of the components of Juma is BNPL in the fourth quarter. What you also now see is that merchant financing, which is a similar product, similar type product, but aimed at merchants, is now also becoming more material in the mix, and that will continue into 2023, where you should see merchant finance take another step up in terms of its importance. These products are all low risk, short duration, whether we're talking about BNPL or we're talking about merchant financing. Low risk, short duration, but also lower yielding, and that's the reason for the decline in yield both in the fourth quarter and for the full year.

That decline in yield is consistent with the guidance that we provided at the beginning of the year, and the trend, and consistent with the guidance that we are providing for 2023. As we've attracted deposit inflows, particularly towards the end of the year, the loans to deposit ratio has fallen, to 79%. Going forward, more deposit customers, more deposits will enable us to drive more origination, more TFE over the medium term. You'll see that that ratio gradually moves up over the medium-term horizon. Looking at credit quality, this has been a question that understandably has came up consistently, throughout the year.

If you look at first and second payment default rates, if you look at delinquency rates, what you see is, whilst there can be volatility on a quarterly basis, the longer run trend is that these levels remain very, very low and actually broadly consistent with the long run, long run trend. Credit quality as a whole remains very, very healthy, both in terms of origination and in terms of collection. Ultimately, the best measure of how we originate and how we collect is cost of risk. We started the year guiding for cost of risk around 2%. We finished the year with cost of risk of 1.9%, but with the fourth quarter at 1.6%, which was the strongest of the year.

Additional macro provisions that we put through at the end of the first quarter were fully amortized. You see that being completed in the fourth quarter as we talked about and expected to happen earlier on in the year. Again, we continue to guide cost of risk this year around 2%, i.e. we expect broadly similar credit quality trends in 2023. On NPLs, underlying NPLs of 5.9% have been stable since last summer. What has happened is, well, we consistently aim to improve origination. We consistently aim to improve collections. When we write off debt, we continue to pursue collection. That's always been the case. What has increasingly happened is that we've got better at collecting previously written off debt.

In 2021, we wrote off after 761 days. As we've got better at collecting longer.

Operator (participant)

This meeting is being recorded.

David Ferguson (Managing Director, Head of Investor Relations)

To wrap up on our Fintech financials, what you are seeing, particularly in the fourth quarter, you have the impact of lower origination in the first half of the year, combined with lower yield throughout the year, results in softer revenue growth. Although still very decent, 27% in the fourth quarter versus 32% for the full year. The real impact of, is on the bottom line, where what certainly did happen last year is higher funding costs. That cost has driven more deposit customers, more deposit inflows, but it negatively impacts Fintech profitability. In the fourth quarter, funding costs were up, 95% year-on-year. They were up 62% year-on-year for the full year.

That does have an impact on profitability, even with the partial offsets of lower provisioning and lower sales and marketing costs year-on-year. The key takeaway on this, though, is that margin pressure is cyclical, not structural, and as interest rates normalize, we'd expect those deposit customers and their funds to stay with us, but to have the ability to drive more origination at lower cost and hence margin recovery over the medium term. That's the wrap up overall of the financials. I think ultimately we finished the year with very strong trends, particularly in Payments and Marketplace. 40% top line in the fourth quarter, consistent with the full year at 30% bottom line growth, slightly higher than the full year trend and broadly slight stable margins down slightly year-on-year.

In terms of 2023 guidance, I won't run through this line by line, but I think the simple message here is that each platform, whether it be Payments, Marketplace or Fintech, we continue to expect very strong top-line trends. Pricing trends, i.e. take rate year-on-year, again, are consistent with what you saw in 2022. Whilst ongoing investment in free consumer delivery in Marketplace and in e-Grocery in Marketplace will have some profitability there, we are investing in Marketplace for the future. This is what keeps the GMV growth strong for longer. Again, I'd reiterate the point on the Fintech side of the equation, higher interest rates are helping us attract more consumers, more funding. This will ultimately help us drive more origination, more transactions over the medium term.

There is a short-term impact on profitability, that short-term impact is just that, short-term cyclical rather than structural margins will recover as interest rates normalize. Meanwhile, credit quality remains as strong as ever. Well positioned to finish to have a good year in 2023 and expect bottom line net income growth of around 25%. On that note, I'll pause. Harry, I'll pass the line to you, we can open the call.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question and you've joined us via Zoom, please use the raise hand button on your Zoom toolbar. If you're dialing in over the phone, please dial star one on your telephone keypad now. That's the raise hand button if you've joined us via Zoom, or star one if you're joining us over the phone. We'll just leave a moment for any questions to come in. Great. Our first question is from the line of Gabor Kemeny of Autonomous. Gabor, please unmute locally and proceed with your question.

Gabor Kemeny (Managing Director, Senior Analyst)

Yeah, thank you, and thanks for the presentation. I have a few questions, firstly on the Fintech, and I'd like to pick up on your point, David, that you mentioned that the rate cycle, I mean, there's some temporary developments here. Firstly, what is the interest rate outlook embedded in your 2023 guidance? How do you expect funding costs to develop specifically? The follow on from that, I think you mentioned a 15% rate you pay on new deposits these days. I reckon the buy now, pay later financing came with a similar yield in the past period.

How are you planning to accommodate the pricing of this product to a higher rate environment? Are you planning any changes there?

David Ferguson (Managing Director, Head of Investor Relations)

Gabor, thanks for your questions. I'll just take the second one, and then I'll pass it over to Mikheil on the longer term outlook. What you should bear in mind, well, you know the guidance for this year on yield, I wouldn't think about any one individual product. You know, overall, the yield guidance is around 25%. What you should also bear in mind is that just short of a third of the funding comes from deposit accounts, which are interest rate 0%. The current rate on 10-day deposits is 15%. That's the main source, although not the only one of funding. Also, you should bear in mind that we have interest-free deposits where which cost us 0%.

The guidance implies the current rate of interest, so if funding costs change over the course of the year, we'll adjust the guidance accordingly. In terms of the longer term outlook on funding costs, I don't know. Mikheil, do you have any view to add there?

Mikheil Lomtadze (CEO)

Well, I think you've pretty much responded. I can just take a step back and again, just reinforce what we have talked on the last conference call as well, our strategy. Our strategy is we have a long-term strategy, and we invest into consumer relationship always. And we know that that investment into consumer relationship, merchant relationship, it will eventually pay back. And therefore, the interest rates went from whatever, you know, 8%-9% to 15% over a very short period of time. And, you know, for next year, we basically are for our next year guidance, we basically are thinking in terms of being in the same interest rate environment.

When we think about the interest rates will go down, you know, then we will be beneficiaries of this, but also we'll have a much larger user base. But, you know, this year we're not projecting a dramatic reduction in 2023, and our guidance therefore based on the current interest rates.

Gabor Kemeny (Managing Director, Senior Analyst)

Okay. I think that is clear. Thank you. Just another question I had on how much room you see for share buybacks given the limited liquidity of the shares, and what are your latest thoughts on a possible US IPO, please?

David Ferguson (Managing Director, Head of Investor Relations)

Okay. Maybe I'll take those two, Gabor. The simple answer is absolutely nothing has changed, either in regard to how we think about capital allocation or in terms of what we'd like to achieve in terms of particularly improving liquidity on the exchange. On the first capital allocation, I think our track record at returning cash, whether that be in the form of a dividend or buyback to shareholders, is pretty. Speaks for itself. In terms of buybacks, we've been consistently in the market now over the pretty much every day, give or take, for the last year. Going forward, again, nothing has really changed in that regard. We have cash. We stand ready to make buybacks subject to market conditions and subject to liquidity, and we'll continue just to watch. We can move quickly.

We'll watch and see how things evolve over the next couple of months. On the second, on the exchange, we've talked about this before. We would like to see, have a more liquid stock, which likely means a change of exchange. That was impossible last year due to market conditions. Like everyone else, we're watching market conditions closely. We hope this year will be better. If it is, we can move very quickly.

Gabor Kemeny (Managing Director, Senior Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Mikhail Butkov of Goldman Sachs. Mikhail, please unmute locally and proceed.

Mikhail Butkov (Equity Research Analyst)

Good day. Thank you very much for the presentation and the detailed guidance for the year ahead. My first question is on Marketplace. You guide for a 35% GMV growth in 2023. Can you maybe provide some color what is the mix between the new customers and growth in purchases for older customer cohorts do you expect? Because it is interesting, if we look at the page number 10 of the presentation, it looks like that the new customers mature quite fast and, both old and new customer cohorts have broadly similar level of GMV. How much more potential for growth, do you see for the existing customers? I'm interested to ask. Thank you. It's the first question.

David Ferguson (Managing Director, Head of Investor Relations)

Mikheil, do you wanna talk about longer term growth potential for Marketplace consumers?

Mikheil Lomtadze (CEO)

Yeah, sure. I mean, in terms of our, the way we really operate is, we, you know, that we have this unique situation when we are constantly adding new verticals. We're constantly expanding SKUs. We have dramatically increased number of offerings on our Marketplace. We're also entering the new categories. We also acquire the consumers. From that perspective, I think you don't really have to become sort of the rocket scientist and very granular in analysis. We're just growing across the board. The reason why the cohorts, the earlier, you know, later cohorts starting from a more GMV just because we have a more assortment, right?

In terms of the, you know, purchasing of the consumers, we basically see the consumers very active across all our, all our verticals. I wouldn't be breaking down the consumers into new or old. You know, they are actually buying the same type of items as we constantly expand those items, and we constantly expand the basket basically of offering for a consumer. On top of the fact that delivery is driving a lot of growth as well, right? Because now we have this the last-mile-delivery network, which is the largest and the only probably in the country, which is hugely convenient for smaller ticket purchases as well.

Again, this is just a reflection of the fact that the assortment is growing really fast, the number of merchants growing as well.

Mikhail Butkov (Equity Research Analyst)

Okay, thank you. Thank you for this answer. The second question is on the summary release of the macro provisions. Just wanted to clarify, do I understand it correct that you released some macro provisions and you expect some NPLs to be collected later on the back of that? Just wonder why didn't you reflect the income which you will receive from those NPLs at the factual point of time of collection and release it in advance, if I understood that correctly?

David Ferguson (Managing Director, Head of Investor Relations)

I'm not sure the two are connected. On the macro provisioning, we put through macro provisioning through the P&L in the first quarter of 2022. That was amortized throughout the course of the year and has been fully amortized. That's one. That's sort of, I mean, the first thing. Second and unrelated to that, the decision to bring previously written off debt back on balance sheet is just that. This is a balance sheet transaction rather than a P&L transaction. If that debt is subsequently repaid, then there'll be a netting effect in the cost of risk. But at this stage, it's just bringing debt that's off balance sheet back on balance sheet. There's no P&L implications for that. Incidentally, I mean, that's not nothing, that's nothing new.

Mikhail Butkov (Equity Research Analyst)

Okay. Okay, the last question is just on the buyback. Previously when you were asked on the reasons for the buyback, you mentioned the valuation for the stock. Looking at comparing the stock price today and when the buyback began, it is, it looks quite differently. Maybe what's can you provide any new color here on the reasons and the outlook for the buyback with this regard. Thank you.

David Ferguson (Managing Director, Head of Investor Relations)

I mean, I'd just say, Mikhail, it's not related to valuation and in fact, again, I'd just make the point absolutely nothing has changed. We have cash, and as we've written in the statement, we stand ready, subject to market conditions and subject to liquidity, to make buybacks in the market. While there's no specific news on that today, our openness to doing it in the future is no different to our openness three months ago, six months ago or 12 months ago. The only difference versus 12 months ago is that we've delivered better than expected numbers, and you can see that we've got a pretty strong outlook for next year. Nothing's really changed. I wouldn't overplay it.

Mikheil Lomtadze (CEO)

Okay. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Sergey Dubin of Harding Loevner. Sergey, your line is now open if you'd like to proceed.

Sergey Dubin (Portfolio Manager)

Yeah. Good afternoon, gentlemen. Thank you for the call. Congratulations on outstanding results. Two questions. The first regarding Magnum JV and your investment and what are you gonna be doing there. When you say that it's, roughly, I guess, I calculate, around $155 million over three years, do you count only CapEx in that or is that OpEx and operating losses of the initial operating losses of these stores as they scale up?

David Ferguson (Managing Director, Head of Investor Relations)

It's CapEx. I'll pass maybe to Mikheil to talk more generally about sort of how he sees that investment playing out.

Mikheil Lomtadze (CEO)

Sergey, thank you for your question and thank you for congratulating us. You are the first one to congratulate us for the hard work we have delivered for our shareholders.

Sergey Dubin (Portfolio Manager)

Yeah. You definitely deserve that, so thank you.

Mikheil Lomtadze (CEO)

In terms of the number, yeah, it's all in. It's basically everything related to this business funding, both capital expenditures, which will be the majority of it, but also the working capital and the marketing if needed.

Sergey Dubin (Portfolio Manager)

Okay. In terms of what you sort of would be doing versus Magnum in that partnership, because my impression was that so far you really, you know, you were handling sort of the, you know, front end, consumer facing front end, the web interface, right? You were collecting your sort of fee off the top. This sounds like more heavy investment. Who is gonna be doing all the heavy lifting when it comes to grocery in terms of deliveries, in terms of managing inventories, all that kind of stuff? Would that still be Magnum or would you, would you be more involved in that?

Mikheil Lomtadze (CEO)

Well, I mean, just first of all, to clarify, that's a, it's a standalone subsidiary for e-Commerce business. Which means that that business unit is actually everything around e-Grocery just reinforced by us. The e-Grocery unit itself is providing... You know, if you think about now Kaspi, we are the ones that are delivering and also the buying and storing. It's a 100% control of the value chain. Now, we truly believe that, you know, this is, we take this business extremely responsibly, so it's, you know, low margin business, clearly, so we have to get things right.

Having this investment into this venture, but also having more control over the experience means that we can bring up to requested level the customer experience which we're looking at. We have got increasingly comfortable during the year and once we've built the first case of a one dark store, broke it to basically brought it to the break even. We have the consumers which are just incredibly satisfied, and we believe that now we can, if we double down both on technology side and operations, we can build this transformative business for the food retail, like we have done for any other industry. You can think of it as basically investment from Kaspi now just to scale the business model which we have proved last year.

Sergey Dubin (Portfolio Manager)

Okay. Delivery would still be outsourced, I would guess, to third parties, right? You would be managing this. It's kinda like essentially a, you know, e-Grocery front end, e-Grocery back end in a sense of inventory plus all the CapEx that goes into the boxes themselves, the stores. The last-mile-delivery would still be outsourced to these various third party companies, correct?

Mikheil Lomtadze (CEO)

Well, the way we manage... I mean, this is the business which is highly repetitive, which means that it's... I mean, the excitement that we have from it is that we have an incredible retention of repeat consumers. That actually means that you really have to have a very strong sort of, you know, operations behind it, which we have built together with the Magnum last year. The portion of the couriers are the couriers which, you know, we run. Significant portion is Uber-type couriers which are employed for the specific job. At the end of the day, it's really a technology that is managing those couriers. What is important that in a grocery you have to... The reason why...

The most important reason for the success in this business, apart from the reasonable ticket size, is also that you deliver on promise to our consumers. You deliver on time, you deliver high-quality products, and therefore, you know, there is more requirement on the delivery side than just on the e-Commerce part of the business. Again, portion is almost like full-time sort of people working. Portion is third-party contractors, Uber-style, employed for delivery.

Sergey Dubin (Portfolio Manager)

Gotcha. Last, just to round up the discussion on that one. You showed this break-even analysis for one store in Almaty, which obviously reached break-even in fourth quarter, which is quite remarkable. Would you expect more or less the same trajectory for all 15 locations? Because I take it they go to big other, you know, other locations, Almaty as well as Astana, which is big cities, a lot of population, et cetera. You would expect same economics for, or similar economics for the other stores you are rolling out in the country as well?

Mikheil Lomtadze (CEO)

Yes. We I mean, explain you the strategy. We are technology data-driven company, right? What we always are going after is, you know, most importantly is the satisfaction of consumers, the top line. If we have a top line, the bottom line actually follows, and we know how to build a very efficient operation. From that perspective, everything we do in our business, specifically in the grocery, it's all data-driven. I mean, we know exactly what, when, and in what frequency or quantity, at what price consumers will buy. You know, we are not. Our growth is not coming just as a result of the capital expenditures, right, of the footprint. Our growth is, actually, our capital expenditures and investments are following our growth.

I'm not sure if I'm explaining this, in a simple words, but we're not. I mean, we hate wasting money. I mean, you have seen that's why we're business which is profitable, but also makes consumers extremely happy.

Sergey Dubin (Portfolio Manager)

Okay. That's fine. My second question is regarding the lending business or the lending side. One thing I would just maybe, Mikheil, if you can comment on. Your cost of risk has been in a neighborhood of 2% or 3%, right, for a long time now. You said that you write off the loans now in three years or a little bit under three years, in you know, 1,080 days. If you look at these two facts together, right, how would you explain... Like, your NPLs seem to be in the 6% range. Is there, like, any old NPLs that sit there? Like, why aren't they more closely aligned to the cost of risk numbers?

Mikheil Lomtadze (CEO)

Well, I mean, cost of risk is actually the combination of our, you know, both origination risk or our collection processes and things like that, right? The NPL is just a balance sheet number, right? From that perspective, you know, that's why we always prefer to think in terms of cost of risk and the vintages, because that's an important indication and also the nature of our business, right? Our average maturity is, you know, 6-7 months, and therefore, you know, that's basically we're turning our portfolio, you know, almost 2x during the year. The most important number that we believe from the cost perspective is actual cost of risk and the vintages. If you, David, if you go to the vintages slide.

There you see on the both, you know, origination vintages, default vintages, collection vintages. I mean, this is what basically is a reflection of cost of risk, right? Again, NPL is just a balance sheet number.

Sergey Dubin (Portfolio Manager)

Yeah, yeah. What I'm saying, just, the balance sheet just accumulates what NPL generates, right? Like, why wouldn't... Well, over time, it can, it can vary, you know, in the short term, but over time, I would have expected these to be more closely related, right? As, as you, as you just said, if you have these NPLs that been around for three or more years and you're constantly generating 2% or 3% cost of risk, and then you're writing off stuff as well, it just... You know, it's, in your business, like, 6% NPLs is not that high a number given the consumer focus that you have. I'm just curious, like, why is it not more-

Mikheil Lomtadze (CEO)

Again, I mean, we don't... We think about NPL as this is, for us, is not an end of relationship with the consumer, right? We don't accrue interest rate after 90 days. We actually stop accruing interest rate. As a result, you know, we continue working with the consumers. When I mentioned that we turn the, you know, the portfolio 2x during the year, you know, the NPLs are, you know, 3-year NPLs on our balance sheet. We're not selling our portfolios to the third parties. Again, you know, our collection is extremely impressive, but the collection is also very customer-oriented.

You know, basically, if you turn the portfolio 2x a year with, let's say, I mean, cost of risk of, you know, around 2%, then you book those NPLs on your balance sheet for the whole year, but it's 2x turnover of the portfolio. Now if you take three years, this is how you get to, you know, 5%-6% NPL. We treat it as a still consumer relationship, and we work with the consumers. We help them out to go through this process, and that's why, you know, our collection is so impressive as well.

Sergey Dubin (Portfolio Manager)

Okay. Then the last point on that, sorry to take more time, but just very quickly. There was some mention about off-balance sheet debt getting brought back onto balance sheet. Like what's the reasoning or why is it happening now?

Mikheil Lomtadze (CEO)

No, it's just, the Our collection has been constantly improving. You know, as a result of changing the write-off policy, you know, we believe that, you know, if we, if those NPLs on the balance sheet, they just will de-deliver the, you know, the better consumer relationship. You know, we can have a more, sort of communication with the consumers and things like that because they have developed the cash flow. Again, that's the balance sheet number, and as David explained to you in terms of the cash flow, net income, cost of risk, they have been always in the P&L because we, you know, we again, we work with the consumers during the whole stage of their relationship with us. Even if the loan is off balance sheet, we still continue working with those consumers.

It was always in our P&L.

Sergey Dubin (Portfolio Manager)

Okay. Okay, that's fine. Thank you very much.

Mikheil Lomtadze (CEO)

Sure.

Operator (participant)

Thank you. Our next question is from the line of Ronak Gadhia of EFG Hermes. Ronak, please unmute locally and proceed when you're ready.

Ronak Gadhia (Managing Director, Frontier Banks analyst)

Thank you. Well, congrats again for the results. Just maybe a couple of follow-up questions from the, the previous callers. Firstly, the first one is on margins on your Fintech Platform. Is it possible to maybe share what the effective yield is on your buy now, pay later type products versus your traditional, you know, general consumer type loans? Just, you know, just trying to get a sense of where the yields in that, on that ecosystem will eventually stabilize as maybe buy now, pay later type loans continue to grow. Then the second one is Kaspi e-Grocery.

You know, based on the business model that you just described, how does that, you know, how does Kaspi e-Grocery, how does that interact now with Magnum on a standalone basis? Is it a competitor or is it, you know, is it a working relationship? Just trying to understand, you know, the relationship between the two entities now.

David Ferguson (Managing Director, Head of Investor Relations)

On the first, the simple answer is no. We don't break out yield on a sort of product-by-product line, mainly because that's just not actually really how we think and run the business internally. We give you the overall yield. You know what it was for last year. Last year's guidance incidentally was around. You're asking about longer run trend. Well, last year's guidance was around 25%. This year's guidance is around 25%. That doesn't tell you the longer run trend, but actually you see it, there's a high level, a reasonably high level of consistency there. That's something you can probably take away. I don't know if we'll go into any more detail than that. Maybe the second question, competitor or partner, Mikheil?

Mikheil Lomtadze (CEO)

Yeah. Well, I mean, partner, it's a joint project. I mean, it's standalone subsidiary. Clearly there is a lot of, you know, food retail expertise, the knowledge in the Magnum. The brand Magnum will be kept for e-Grocery business. Again, we have been, you know, working together for, you know, year, over a year. The management teams are extremely comfortable and, I think that's actually is one of the most important reasons for the long-term success, because this type of joint efforts are not successful when there is a different incentives on different company levels in the management teams. Here we're fully aligned and has been already proven.

Now we're just doubling down on the effort really just to scale across the country. Yeah, definitely partner.

Ronak Gadhia (Managing Director, Frontier Banks analyst)

Okay, understood. Just one final question also. Going back to your Fintech ecosystem, when I look at the balance sheet, at the end of last year, it seemed the balance sheet was quite liquid, quite a lot of assets in cash equivalents or investment securities. Could you just comment on what we should expect from a balance sheet perspective in terms of asset allocation, going into 2023?

David Ferguson (Managing Director, Head of Investor Relations)

No major change in terms of asset allocation.

Ronak Gadhia (Managing Director, Frontier Banks analyst)

Okay. Because your loan deposit ratio is a bit lower relative to where it has been, you know, historically. Is that something we should expect, you know, you to, for you to sustain?

David Ferguson (Managing Director, Head of Investor Relations)

It's a bit lower than where it was for part of last year. I'm not sure if it's that much lower than where it's been historically. I think you'll see it move up and in. You know the nature of our lending. We can ramp up lending very quickly. We can scale back lending very quickly. So we think in terms of short-term, our lending products are short-term in nature, designed to drive transactions. So I don't think there's a real fundamental change in either funding or the lending product. I think it's just timing issues if you're looking at it on a quarter-on-quarter basis.

Ronak Gadhia (Managing Director, Frontier Banks analyst)

Okay. Understood. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Can Demir of Wood & Co.. Can, your line will be open now if you'd like to unmute locally and proceed with your question.

Can Demir (EMEA Financials Analyst)

Yes, thank you very much for this presentation. I just had a follow-up question on the e-Grocery. Is it fair to say that Magnum has a different view on the outlook or the profitability outlook in e-Grocery business? Because they now only have 10% share in the JV, and I guess they don't have a separate e-Grocery product because you will use their brand, or the JV will use their brand. Is it fair to say that you kind of disagree with Magnum on what you can make out of e-Grocery?

Mikheil Lomtadze (CEO)

It's a very scientific. I don't know it's a science or art, this argument. You lost me.

Can Demir (EMEA Financials Analyst)

No, because I think they wouldn't own 10% of the JV if they were thinking you would make a killing out of that business. Am I right in saying that?

Mikheil Lomtadze (CEO)

The, you know, there's, you know, over 90% of the, of the consumers are delivered from, almost 100% consumers delivered from Kaspi.kz Super App and the orders and the whole technology and so, you know. There is no argument about the. Both are interested. We just believe that with investment and technology, this can be a huge business.

Can Demir (EMEA Financials Analyst)

Okay. Fair enough. I won't push you more on that, Mikheil. Also on Travel packages, I think the ticket size will be a bit larger, right, in when you finance Travel packages. Does that change your approach to underwriting? Because it feels like you're shifting into a different category, if you will, in lending.

Mikheil Lomtadze (CEO)

Well, I mean, no, because, I mean, our lending is... I mean, the cost of risk is driven not by, it's not driven by what you buy. It's driven really who you are. It will be more of a egg and chicken basically situation. What I'm saying is that those 1 million people that are traveling are those that can afford it. Again, when we originate financing, when we make risk decisions, we are driven by the risk profile of a consumer. We never push on the consumer higher tickets, we don't leverage the consumer, that's why our cost of risk is so remarkable. From that perspective, the brief answer is no. Actually those people that are traveling those destinations are the ones that can actually afford it.

Again, you know, we will be also, you know, people are also going with their own financing, so there will be combination of both, you know, I'm spending my own money, or I can take a bit more expensive tour if Kaspi financing me. We're already done all the tests. I mean, obviously when we're announcing this business, we have done a lot of homework.

Can Demir (EMEA Financials Analyst)

Of course. Of course. My last tricky question. David didn't want to break out the loan rates, but it feels like you didn't put up the rates despite the increasing yields, right? Is it fair to say that your lending product compared to your competition is much more compelling now? Is it a fair thing to say?

David Ferguson (Managing Director, Head of Investor Relations)

Whether it's fair or not, I'm not sure it's the right way to look at it, because I think that our lending product is priced at a level that drives day-to-day transactions. It is not comparable necessarily with what you might regard as a competitor and their unsecured consumer loan products, which are probably larger ticket, longer duration with a different end purpose in mind. We've always priced at the level we price at because we think it's the right level to drive transaction activity, and I think you see that's pretty evident in the end results in the context of the complete ecosystem, which is very different to how a traditional lender would be pricing an unsecured loan in isolation. Nothing's really changed in that regard.

Can Demir (EMEA Financials Analyst)

Right. Thanks, David. Thank you. Bye.

Operator (participant)

Thank you, and we have no further questions registered today, so I'd like to hand back to Mikheil and David for any closing remarks.

David Ferguson (Managing Director, Head of Investor Relations)

Thank you very much, Harry. Thank you everyone for your time today. That wraps up today's call. If you have any follow-up, please feel free to get in touch with us, and we hope to meet some of you over the next couple of weeks. Thanks again, and speak to you at our Q1 numbers. Thanks, everyone.

Mikheil Lomtadze (CEO)

Take care. Bye-bye.

Operator (participant)

Ladies and gentlemen, this concludes today's webinar. You may now disconnect from the call.