KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Good afternoon. Welcome to the presentation of KRUK's First Half of 2020 Results. My name Michal Zasepa, I'm the CFO of KRUK, and I'm here with Piotr Krupa, the CEO. Thank you for dialing into this conference. We'll have a presentation now. After this presentation, we ask you to send us questions via chat, chat device. Please write your name and name of your institution, and we'll be very happy to answer all of your questions. Let's start, Piotr.

Thank you, Michal. Good afternoon, everybody. Today, we would like to share with you some information about the second quarter results, COVID quarter, but we are more optimistic than a quarter ago. And as you know, we -- company posted the net profit of PLN 43 million, and this is better than we expected. And we delivered also the cash EBITDA approximately PLN 600 million. From operational point of view, the April was the weakest month of the second quarter. But fortunately, the following months, like May, June, July as well and also August, we see better recoveries and better performance against the operational targets before the pandemic. This is good information and still with some optimistic view. Despite the negative portfolio revaluation, our performance, by far, exceeded the market expectation and, of course, we still -- we and nobody I think so, of course, don't know how the pandemic will develop. Also, due to the fact of the COVID, KRUK has temporarily reduced investments in the new portfolios, but we expect that supply portfolios to increase in late 2020 or definitely, this is my bet, in 2021. Overall, in the first half of the 2020, we invested almost PLN 80 million. What else? The management board believes, and I also, that KRUK has very good or good financial and liquidity position, and we make the decision to share part of the net profit last year with shareholders. And it will be the sixth following year the company has shared the profits with the owners. This is still also important. As a general early comment about our operation, because in my point of view, the operations are the most important part of our business, KRUK has effectively implemented the remote-working system across the all markets during the lockdown until now, and we expect that we still stay at home next couple of months. Let's see. 85% of our employees working remotely. I asked Michal to show you and show us the more detailed information about the P&L, revaluation and cost. But I would like to draw your attention about the cost, but we are happy that we achieved our targets. We reduced the cost as well in the second quarter and first half of the year. Michal, please.

Thank you, Piotr. I'll now scroll to Slide #5. Indeed, we are happy to be profitable again after Q1 in Q2. Year -- second quarter of 2020, of course, was heavily impacted by COVID. And you see that in the negative revaluation, which, for second and first quarter of this year, totaled PLN 200 million in portfolio revaluation and about another PLN 20 million as other adjustments that we made. That is a very significant negative impact, but the good information is analyzing the trend of recoveries. The bottom was in April. And from April on, we see gradual improvements. In some countries, these improvements is quite significant, that is in Spain, fortunately, and that is Romania. In some countries, we didn't actually see a shortfall of recoveries over plan, which is Polish retail unsecured portfolios. And we are talking to you at the end of August. This trend continues throughout August. So knock on wood, we don't see any significant negative change in macro environment legislation that would affect us. We think that the worst is already behind and the future should be a profitable future for KRUK. In terms of new portfolios, of course, they are small. There are likely to be much lower this year than last year. Still, in the second half of this year, we think we will significantly increase investments. How much? It's very difficult to say. As of today, we continue to be very cautious in investing new money. And also, we don't see a very big increase of supply. There will be increase of supply of portfolios definitely in autumn and in Q4, but it's not the wave that is caused by the crisis. We think that we'll have major at the end of this year or in the following years. As Piotr mentioned, we are, today, much more comfortable about the company going through the crisis with stable financial situation, low level of debt and stable liquidity level. We have a significant amount of cash available in either undrawn credit lines or cash at the bank. We are prepared to resume investment, but we need good outlook, stable outlook and supply. In this difficult year, KRUK shows strength in the sense that we recommend profit distribution to shareholders. We are proud to continue that event in such a difficult year. A reminder, on Monday this week, shareholders will vote on what way they want the profit to be distributed. If this is as proposed by the management in the form of a buyback with a significant premium to the current share price, please make sure we subscribe and please everybody of our shareholders to subscribe. We want to make sure that all of our shareholders understand and know that they need to subscribe in order not to be effect negatively by not participating in this program. I will now comment all of our geographies as we present the financial statements. Poland comes first, Poland, excluding Wonga business. In terms of recoveries, they continue to be very strong for the Polish unsecured portfolios. We, as you may remember, expected a negative hit from COVID. In Q1, we wrote down Polish assets by about PLN 30 million. That turned out to be overly cautious. We actually received back that money in cash in Q2. That's one of the reasons why you see Polish revenues growing very significantly in Q1 into Q2. We see that the Polish retail business continued to be robust, and we're very pleased with that. It doesn't mean that the COVID did not hit us. It just means that through operational improvements achieved over the past few quarters, we were able to more than offset the COVID effect on our polish business. That did not happen on our corporate and mortgage portfolios. They suffered in Q2, and this PLN 14 million of negative revaluation pertains to the asset class. Overall, mortgage or secured portfolios remain, in our view, somewhat more risky asset class with less predictability for the future. We think the unsecured portfolios will continue to perform well. We think we wrote down secured portfolios as much as needed. But every month will be a check, another check for this asset class. Fortunately, the biggest class of our assets in Poland is, by far, in unsecured consumer portfolios. In terms of investments, you see here only PLN 18 million invested in 5 portfolios in Poland. That shows you how cautious we are. There are new portfolios on sale announced or even now at the -- during the valuation process. There will be more investment in Poland, I hope, much more than in Q2. How much more becomes still uncertain. Romania, in Q2, we saw an improvement in recoveries. As you may remember, the deviation from recoveries in Q1 was quite significant, double digit, over 20% drop versus the plans. That was mostly due to legislation, COVID legislation that resulted in our inability to collect money through [ rebates ] on some types of cases. That legislation ended in the mid-July. And from that on, we see an improvement. We are on the trajectory that we set for ourselves around May. Therefore, there is no change in value portfolios in our biggest class in consumer unsecured, but we also have in Romania secured corporate assets. We rebounded them down by about PLN 7 million. Similarly like in Poland, secured portfolios remain somewhat more risky asset type. On the other hand, we're quite optimistic about unsecured portfolios, observing the recoveries in July and August. Investments were very low, only PLN 3 million we invested in portfolios in Q2. There will be much more in Q3 and Q4, although it will not be a very strong year in terms of investments in Romania, if you compare it to the previous year. Still, we believe, also in Romania, the supplier portfolios will increase as the consequences of the pandemic will be seen in the books of the banks. And they will be forced to move forward with more servicing or more capacity or we'll be deciding at some point to sell the portfolios. Italy. It's some of the good and some of the bad news. The bad news is we wrote down our unsecured assets again. And most of this write-down of PLN 42 million is unsecured portfolios that we have in Italy. This is an assumption that courts in Italy will continue to be slower than pre-COVID. And our recoveries in the next 4 quarters will be significantly lower than planned. This is the reality. We still have not resumed some big cases to the courts in Italy at the scope that we anticipated in the budget. We hope that we'll be changing gradually for better. But at the end of Q2, we take this write down. The good news is we see improvement in recoveries. Regardless of the situation in courts with the current amount of cases in the legal process, we see improvement on many. So this is short-term improvement that is a good sign. Overall, uncertainty remains, but we believe that based on what we know, this is an adequate cut to the value of the assets, and we expect there will be no further, unless situation in macro economy in Italy will change. We will continue to be cautious in terms of investments in Italy this year. Other markets comprising mostly Spain but also including Czech, Slovakia and German assets underperformed. As you assumed here, even the cash EBITDA was negative. And there's 2 negatives that happened there. First, we wrote down our secured assets in Spain. This is -- all of this negative revaluation of PLN 11 million. And in addition, we made a decision to write-down about 50% of the goodwill of Espand, our servicing business in Spain, which is a one-off noncash event. We believe the future will be much better. We expect and we see improvement in recoveries. As I mentioned, Spain was the market where we saw the deviation from recoveries deepest in April, but there is a strong rebound. Now May was better, July was quite good. June was quite good. July was very good. We are keeping finger crossed for August, but situation looks much better than it looked a quarter ago. So here, even more than in Spain, we believe there shouldn't be additional negative revaluations in the next couple of months, quarters of this year, unless we see the second wave and additional negatives that we don't see today. As for the servicing business, we believe we will be decreasing the losses in the second half, and we think it's quite likely we will see a recovery and return to profitability in 2021 because we believe the current crisis will translate into more supply of service business for Espand, which we will be ready. On Slide 14, you have a list of legislations of changes that affected us. The good information is there is no news here. You saw that a quarter ago. Some of that changes already expired. Some of them will continue until the end year -- end of the year or beginning of next year, and we don't see now additional initiatives that could affect us negatively. So from today's perspective, it looks like the legislative situation stabilized. And also the future will be better than the first 2 quarters of this year. In that situation, we want to reinforce our priority, safety of our employees, safety of contact and safety of our clients. We make sure we are acting as a responsible member of the society. We continue to work remotely to protect the health of our employees, but the good information is we believe we do it quite well. We work on full capacity, field advisers. Our very important collection tool is used well in all of the countries. We only selectively looking at the COVID pandemic decide on this city or town we temporarily hold with the visits. We are now quite well-trained toward that new environment that we believe we also make quick improvements into remote work, our online ability to collect. And I comment to Wonga's results, our cash loan business in Poland. We believe 2021 and the future years offer good opportunity to grow for Wonga because there will be less competition in Poland. The banks will be also cautious to lend to people in an environment of increased credit risk. But 2020 is a tough year for Wonga because Wonga sells much less loans to protect its risk, its balance sheet, but also because clients overall in Poland are willing to lend less often than before, a natural thing during the crisis. Wonga also feels some of the negative effect of the increased credit risk. That's about PLN 7 million of additional provision. And there was also an increase in provision, or so-called linear provision remittance that was ordinanced by our auditor. All of that hits 2020 results, but we believe the company will be positive on EBITDA and from 2021, it will significantly improve the results. This is the summary. And now I will ask you for questions. We have no questions currently. In the meantime, Piotr, do you have any commentary?

We can say that the next quarter would be okay or better. And like Michal said and I announced before, this month, July was good and, of course, we expect Q2's trends in the next couple of months, and we wait for the big wave of the NPS, but definitely it's happened in the upcoming quarters. We are competent we make good business on those time.

Thank you very much for listening to our presentation. We wish you health. Please remember, if you're a shareholder -- oh, there are questions. Excellent.

The first question, "could you comment on the competitive landscape and trends you've seen there during the period?" It's difficult to comment on that because there is little transactions. So in loan service, we don't know what the competitive situation will be after COVID because there were little deals. What we see is that there may be more activity from stronger players like KRUK or some of our international competitors, the biggest names you know on the market and less activity from smaller local players. But it's fair to say we will only see in September, October later this year how the competitive situation turns out. Second question, "what would be minimum investments to maintain current level of business? What do you believe there will be increased -- why do you believe there will be increased supply in the third and fourth quarters?" The minimum level of investments to maintain the current business depends also on what kind of profitability we will be buying yet. And this sensitivity is very strong. So at 15% IRR, we would need to invest maybe PLN 900 million during a year. At 20% IRR, that will go down very significantly. Maybe it would be enough to invest PLN 400 million, PLN 450 million, PLN 500 million. What I expect and what we see until now is that we invest much less but at much better IRRs. And that is likely to continue. So even if KRUK ends up investing this year PLN 400 million, but at decent IRRs, we may be able not do lose much of the momentum. And why do we believe there will be increased supply? Well, the first reason is there was very little supply in the first 2 halves -- in the first 2 quarters of this year. So there is a natural lag or stock of portfolios that the banks would like to sell that they didn't sell because of the pandemic. And then the second effect is there will be an increasing credit risk visible in banks. And that means there's a new formation of the wave that, at some point, will turn into more portfolios. But that may not happen this year, of course. Another question, "what size of portfolios do you believe you will be able to acquire with current liquidity and position?" We are investing now in small portfolios, investing a few, over a dozen, PLN 20-something million in investment. But what limits us mostly is the supply. In terms of liquidity, we are able to buy portfolios which are much larger, PLN 100 million, PLN 150 million, PLN 200 million. The question is, what kind of risk will put us in assessment of this portfolio. And it may be that, for example, we'll say, okay, we are able to buy these portfolios in terms of our ability, financial standing, but we believe it's too risky. So we decide only to bid for part of it or find a partner for that. That is more likely in the new markets, Spain and Italy where we perceive this risk to be higher. In Poland and Romania, we believe we are the ones who should to know best, what kind of risk it is. Of course, not -- that does not relate to the COVID situation. But I don't think there will be deals that are too much for us in Poland or Romania. "Do you have any plans to lead some markets like Italy to focus on core markets and save OpEx?" No. We don't. We stand by the current businesses. Of course, we suffered this year a lot. We are in heavy losses, both in Spain and Italy. But what we see is that we don't have any new information that these businesses, their assets should be written down. We see good trajectory of recoveries in the past 2, 3 months, and these businesses should be profitable already in Q3, Q4. And we think there will be good years for those businesses in '21, '22, '23 further because of the crisis. So we believe it would be premature to end the company, to end our adventure in Spain or Italy. We cannot turn -- go back in the past to unmake these loses. However, in terms of portfolios, maybe we will have some positive revaluations from Italy and Spain in the next 2, 3 years, reversing this negative outlook now. Our plan is to continue to work toward profits, and we want to see those profits on those markets already this year in the second half of this year. We answered all your questions. Let's wait another several seconds to see if there are some more. If not, once again, thank you very much for your time. We wish you good health and hope to be in contact with you. If you have more detailed question, please e-mail IR who will be very happy to help you understand our business better.

Thank you very much.

Goodbye.

Goodbye.