KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Hello, again. Let's start. It's my pleasure to welcome you to 2020 results of KRUK Group. My name is Michal Zasepa, I'm the CFO of the company. We finished 2020, a difficult year, maybe the most difficult year in our history. But we finished it with profit and with a very good cash EBITDA with very strong cash flow and very low level of leverage. So I think we are -- we can say we won this uneven work with the pandemic situation. And we are prepared now to go back to growing. And the business as last quarter was very good for KRUK and the beginning of this year is also very good. I will, of course, concentrate mostly on 2020, but this is the history. And I think -- and we, as a management team, think the future is quite promising for KRUK. You see here on the Slide 3, we had a very bad Q1. But then later, we were profitable. The profitability was slow, and I will explain how to, in my view, interpret these results. But the good information is that throughout the year starting from May, we saw an increasing trend of recoveries versus our original budget. And at the end of the year, in December, we already regained full strength. We were 100% of the operational pre-COVID plan. And we continue this path making this 100% of the plan in the beginning of this year. Hence, we believe we have good grounds to see significant improvement of results in 2020 and '21. 2020 was a year of relatively weak investments level. In total, we invested PLN 456 million, but look at Q4. Q4 was really solid in terms of investments and we think it's a good prognostic for 2021. We have ample of place for growth. As you see the indebtedness level is quite low. We have a lot of money available in credit lines, which are unutilized and ability to also sell bonds on the Polish market experienced for the past couple of months shows. So when you look at 2020 results, you compare them to 2019. Let me maybe show it better on P&L. You see a significant decrease, 70% decrease of net profit. Why did that happen? First and foremost, because of the decrease of revenues, decrease of revenues as a result of lower than planned recoveries, but also because of our negative revaluation. So the change of the forecast for future recoveries. Debt alone decreased the debt purchase revenues by 14% or about PLN 160 million. We made, I think, a very good effort at optimizing costs, cost savings throughout the year versus our budget. We saved about PLN 77 million. You don't see the decrease of costs comparing 2020 with 2019 results. This is because we were growing cost of salary are -- especially in Poland, are many on a growing trend. So like-for-like, you need to add a good 5%, 6% to them. We continue to invest money in the legal process in several jurisdictions. And also, what you see here in the costs in 2020 as a one-off cost of writing of goodwill for the Spanish servicing business for PLN 25 million. Overall, if it wasn't for the cost savings we have done, the results this year would be about PLN 57 million, not PLN 81 million. Another important element, the decreased profitability in 2020 is taxation. 2020 was a year where we saw a significant surplus of cash being generated in our investment companies. This is because we invested less than planned. On the other hand, our needs for cash being spent or transferred to shareholders in the mother company, KRUK SA, did not change much as you may remember, we decided to transfer money to shareholders through a buyback program in 2020. We also recommended a significant dividend in '21. We are about to -- we are planning to buy back over PLN 1 billion of bonds outstanding and due in 2021, '22. And as a result we assumed that we'll increase the level of transfers of cash from those investment companies for the next 3 years as our accounting will also say. And therefore, we needed to increase the level of provision for deferred taxation. It would still be an increase even if it wasn't for COVID, we did plan in the budget, the taxation of about PLN 50 million, but it is significantly more a good PLN 17 million more because of a different cash flow profile that we are planning now. So the gross profit, as you may see, is about PLN 200 million. The net profit ends up being only the PLN 81 million. But look at cash EBITDA, that's shows the strength and healthiness, health of the business, 10% growth in a relatively difficult year. On Slide 5, you see a quite detailed description of how our recoveries were versus operating plan, versus budget throughout the year. As I said, the main message is we are back to 100% capability in Q4 in December, especially the performance was very good towards the end of the year for unsecured consumer portfolios. We suffered in corporate portfolios. We were far from the budget. This is mostly because of the changed regulations and lower effectiveness of the legal process in -- throughout Europe, but that has already been accounted for in our books. So we don't see significant risks, other risks in the corporate secured business going forward, although that changes quarter-to-quarter quite. And this uncertainty, of course, remains. And I see upside in 2021 on unsecured consumer books. And I will tell you about that referring to each of the markets in a moment. We're happy after this year, we are able to recommend to our shareholders. I think what is quite rich proposal for dividend, PLN 8 per share, and that's a record high dividend the company paid. This dividend level is something which is not compromising our growth prospects. We are capitalized so well that we can afford both to have a significant dividend and also a quite ambitious target for profitability growth in 2021. This proposal reflects the preference that we heard from few key largest shareholders of KRUK Group and the management board approves that this recommendation is good for the business. A few words about how we changed operationally in 2020. This was a transformational year for us, not only because we prove to ourselves, we can very well work in remote mode until now and through most of 2020, about 95% of our employees are working remotely, and that works really well. So we're happy and proud that our employees prove to be very effective in the settings under work ethics, and KRUK culture proved to be doing very well in these more difficult circumstances. On the other hand, we did several changes to the organizational structure. As you may remember, we strengthened the management board. There is 2 new people on the Board and we have 1 very experienced KRUK manager promoted to be Head of operations. We have a new guy on the block, Mr. Adam Lodygowski, who is a PhD engineer, now responsible for IT and modeling of our pricing decisions in buying portfolios. So we feel this team can now -- can even bring more value to the company and help it grow in the future. On the other hand, we made a number of improvements in the business, in analytics, in operations that -- and we see fruits of those efforts now in recoveries and also precision and competitiveness of our pricing decisions in the past couple of months. So we -- and I think that we're entering 2021 with a very solid standing in terms of operations on each and every one of our markets. This slide shows something which is important to us, although it's hard to translate that into numbers. But I'd like you to understand how we evolve. We have updated our mission, vision and values to reflect better current KRUK reality. You may remember throughout the years that we are very proud of our amicable approach and we often use the phrase: We help people repay the debts. This is all true. The amicable process is very important to us. But we see that the collection process that we are involved in throughout all of the markets is much longer, and it's more and more often involving the legal process. This is changing environment, ecosystem, also legal systems. For example, in Poland, the prescription time has been significantly shortened that pushes us to stop collecting amicably and go legal. All these changes means more of our cash, significantly more in the future will be coming from legal process than amicable, even though amicable process will usually be the starting point for some that we can come back to when the customer wants to settle instead of us continuing the legal process. Therefore, we define ourselves as a debt collection company, which acts to safeguard the social and legal norms, requiring all of us to pay debt, but we always respect the people that we interact. And this rule, the respect is something that we want to strongly hold on to, that gives us the certainty that what we are doing in our processes, but also in interaction with all of the stakeholders in the business is the right thing to do. We also define our vision, not as we used to before a certain financial target, but a certain qualities that we want to strive. And these qualities are values that we want to be adherent to that we want to live. These values are below on this slide. People who are congruent with these values and share the need to progress even if we already are successful and mean the Toyota-inspired management method, which calls for continuous improvement. And when we all will be congruent with these 3, we believe financial success will follow and will continue. We are more and more both in corporate and social responsibility projects and actions. I encourage you to go through this slide to make your own judgment. But I think we are doing a number of very important things, and we are planning to do more in the future. Now a commentary to our segments of business. This summary slide shows you that we were quite successful in investing in Poland in 2020. You see here level of investment despite a significant drop of the market, which you will see in a second, was higher than 2019. Q4 was a really good quarter for our investments in Poland. And Q1, although it's usually the weak quarter of the year also will bring better-than-expected results. Recoveries, overall, were a little more than last year. As you saw, some 7% below our operating target. Very good unsecured, close to the target overall and significantly low on the secured part. The value of portfolio has dropped from 2.2 to 2.0 as a result of small investments, but we hope to improve that this year. Purchase debt continued to be dominating part of the business in terms of share of revenue. EBITDA, as you see here was produced by 2 countries, Poland and Romania, where Italy and Spain still suffered and caused this negative number here. But the good information is we believe we are entering 2021 with a clean sheet. We believe we have very good chances to be profitable in all of our business lines in 2021. Poland market dropped quite dramatically by more than 50% year-to-year. As you see in terms of volume of results. Even more we're happy, we landed at 35% market share, and we are determined to be strong in Poland to improve our operation, pricing capabilities to fight for every important portfolio despite this -- with the largest competitors in Europe. We are a playground. Poland is a playground for top 5, 6 debt collection companies who are the major players in our markets as well. If you look at our results for the full year, Poland, excluding Wonga, the profitability is quite decent, results of investments are quite good. Recoveries were strong. We see an upside here. We see the trend, which is coming from October and November, which shows a strong trajectory, significantly above accounting curve. We recognized positive revaluation in Q4. We will be cautious to watch for COVID situation in Poland, where we just have a strict lockdown introduced, planned to be introduced on Saturday. So we will be cautious and -- but all the other signals that we get are positive. So we are quite a bit about Poland. Romania, also significant decrease of the market. And maybe last more comment to Poland. We see quite significant number of portfolios. The market will grow in Poland, and we want to be an important part of that. So Poland will be, I think, our sweet spot and the place where we'll make a lot of investments in 2021. Romania has seen a big drop of the market value because of COVID. We were the dominant player with 43% of that market. We think -- I think we will see an increase of the market in 2021, definitely. Will we get to the level of 2019? I'm not sure. Probably not. We don't see so many portfolios. Now the banks are still quite cautious to selling them. So the more important it will be for us to have a high share of whatever is sold on the market. We are going to be quite competitive there. Results are very good. Despite the fact that probably first time in many years, we saw negative revaluation. We were hit hardly by a legislation introduced in April lasting to, I believe, August that forbid us to collect in legal process on certain categories of cases. Good information is this legislation was temporary. And after that, we smoothly brought recoveries back to the pre-COVID level. And December, January, February are all very good months, which means there is an upside on the bank book in Romania, please expect some positive revaluation throughout 2021. Again, we are cautious about the COVID effect. We will be cautious about that in Q1, impacts so far, no good signs in recoveries. Italy, a market, which was a little intransparent for us in 2020. On the one hand, we were very cautious. We haven't bought anything. On the other hand, and there were portfolios that were sold mostly to local players. In this uncertain time, the banks were less transparent about how they sold portfolios. It's not that we feel that we lost many opportunities. We were on the -- we wanted to be on the safe side and not to invest in many portfolios in a country, which was one of the hardest hit during the COVID times, but the fact is the market was relatively big comparable in volume at least to the one in previous year, and we haven't invested anything. That is going to change in 2020, we want to be more present on that market, especially that the results for the portfolios bought throughout the past 2 years are quite positive. They are on plan. 2020 results were that to be planned. We needed to write-down the value of the assets by PLN 96 million, still look at cash EBITDA, a significant growth versus 2019. Why? It's a natural consequence of heavy investments in the legal process in 2019, which started to bring results and decrease of the legal costs in 2020. So you may see Italy as a country where the bank book has been invested in heavily throughout the past couple of years, and the next couple of years should see a natural growth of profitability because of these actions and investments in legal process. We are positive on Italy. We want to continue, wanting to grow in the countries. We see positive trend despite these negative revaluations, which were mostly caused by COVID. We believe our operations are stable, are still increasing their effectiveness, the results of the portfolios we bought in the past couple of years are improving. There may be even an opportunity to for positive revaluation somewhere maybe at the end of 2021, if things are going according to operating plan. The other markets being Spain, Czech Republic and Slovakia. As Spain saw a decrease of the market, you see that here on the retail portfolio of which we bought 1 significant portfolio. Czech and Slovakia was relatively -- also decreased as you see here from 2.2% to 1.1%. So both those markets saw a decreased supply. And the results were so-so or actually bad in terms of profitability. The investments was mostly Spain and a few small investments in Czech and Slovakia. Recoveries in Spain were significantly below plan, but very good improvement at the end of the year in Q4. 2 sides of the coin: unsecured business having nice improvement in Italy, the secured -- the corporate unsecured business that we also have noting disappointing results. We wrote it down. Also in Q4, hopefully, we will not see more surprises, although you never know at those corporate assets. In terms of the most important part, the unsecured consumer debt, I also think this is a positive situation coming into 2021. We invested heavily in legal process in 2020. So this EBITDA is so negative also because we spent a few million euro on legal process. That should result in improvement in recoveries and profitability in '21, '22, '23. And this is what we are counting on. We also want to continue to buy to grow scale. We are a little subscale in -- especially in Spain, this figure includes also the other assets. And hopefully, they will be a good market for that. Czech and Slovakia, good business, we were not hit hardly by COVID, but decreased supply of portfolios, we hope to buy back, go back to more significant purchases this year. Wonga, had also a headwind because of the regulations, because of COVID and the credit policy that will be decided to be much more straight. Therefore, we have not realized for budget. But we grew. We grew from PLN 170 million to close to PLN 190 million in terms of the balance sheet value of assets. And EBITDA was positive PLN 16 million versus a loss in 2019. It's much less than we planned for, but it's a business which is making money, and we think it will be making much more money this year than in 2020. NOVUM and ERIF, small businesses profitable, suffered somewhat. We want to see them grow this year. One more thing, if you read our financial statements, you will see change of some of the important names in our revenue, in profit and loss account. This was enforced by us, by our auditor under IFRS #9, our auditor convinced us that we need to change some of the names. We need to name the revenues as interest income. It has correction to this interest income, which is -- disposition, expected credit losses, and this expected credit losses, if you look at the [ slight ] slide and the slide last label here, expected credit losses from the purchased debt portfolios include revision of recovery projections, which is the revaluation and deviation from actual recoveries. So there's delta between the actual and planned according to accounting curve level of recoveries. If you look at this, you can understand the following. In KRUK, we have 3 main lines operative, say contract revenue, which is the interest income. So when we buy portfolio, the interest income is derived from the discounted cash flow from this first initial projection. Then comes life, we revised these projections, cash flow differ from the plan. And these 2 corrections are seen in the line, revision of recovery projections, which is this revaluation, which is -- which for 2020 was PLN 205 million. And this deviation of actual recoveries from accounting plan, which was PLN 234 million. So it's a fair observation that overall in 2020 despite very negative effect of COVID, we still had a positive correction of interest income of PLN 30 million. But please remember, in our conservative accounting method and practice, we usually have significant positive difference as in 2019, and we had this deviation of over PLN 100 million. And also, we usually have significant positive revaluation. In 2019, it was PLN 80 million. So the difference between those 2 tells you really the impact of COVID on our profit and on our revenues in 2020. I've mentioned to you that we're leveraged at a relatively low level, and that gives us opportunity to grow the share, also to share profit with the shareholders. You can see here, we have still over PLN 1 billion of available credit lines. Our issues of bonds in the Polish markets were very successful, actually, surprisingly high level of demand, which encourages us to tap on that market again when we need. So we are ready to grow. Of course, we're cautious of COVID. We will be watching closely how this pandemic evolves. So far, there's nothing tangible that we see as negative in terms of planned negative -- legislation. We also don't see negative sentiment in consumer behavior. So fingers crossed 2021, despite still this pandemic situation is looking quite positive. What does it mean? Well, for us, it means that if you look at the results of 2021, this year should be better in our expectations than 2019. Thank you very much for listening, and I invite you to ask any questions, please.

I have first question, how much of the investments in Q4 was Poland? And Poland was most of these investments. I don't recall the exact number now. But if you look -- if we look at the investments in Q4, there were PLN 344 million, definitely more than half, maybe even 70% or 60-something percent was Poland. If that's important for you, please contact our IR for details. Second question, how do you see the investment pipeline in your respective markets? Poland is strong. We see it because we already bought a few portfolios in Poland this year, and that's unexpected. We budgeted less in January and February. So we have visibility until the half of the year only, maybe, but it's looking very good. And even more importantly or equally importantly, I think we're more competitive in Poland for the past 6 months that we were because of some of the improvements in the process, also some better methods in pricing, in analytics that we have worked on for the past 1.5 years and that were introduced throughout 2020. So I expect Poland will be definitely the country where we'll invest a significant amount of money. In other markets, Romania will -- doesn't look like it's going to provide a lot of big opportunities, but if we can get there to well over 50% of the market share, it still can be significant purchases of well over PLN 100 million or maybe even PLN 200 million a year. If you look at the other countries, yes, we have appetite for more portfolios in Italy and Spain. In total, when you ask me what's your appetite, we would be budgeting somewhere above the level of 2019 investments, which were over PLN 700 million. So somewhere between PLN 800 million and PLN 900 million of investments would be our appetite at the time of budgeting at the close of the year. And the beginning of this year is very good. And another question, how has collection started so far in 2021? Very well. Both January and February were good. February we're good in all of the markets. Each single market has made its operating plan. I don't know, of course, the full results for March. But so far, the margin is going quite well. And another question. On Slide 24, how are collection developing so far this year compared to the 25 -- PLN 205 million projection adjustment? They are above. They are above. They are significantly above the accounting curve and this accounting curve includes this PLN 205 million. So please expect if you will see an increased value of this different deviation between the actual and planned recoveries. On the revaluation, we'll see. I think we are in a period where we still should be a little cautious about the COVID pandemic and its impact on our recoveries in the future. But so far, it's positive, yes. Do you have any other questions? If not then thank you very much for your interest and time. I wish you health for you, for your close one. Please be careful with COVID and hope to see you and talk to you throughout 2021. Good bye.