KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Welcome to the KRUK 1H 2021 Results Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to your host, Marta Jezewska to begin. Marta, please go ahead.

Good morning, and good afternoon, everybody. My name is Marta Jezewska-Wasilewska, and I work at Wood & Co. that hosts this results call of KRUK's first half earnings. Thank you for joining us. And now, with no further delay, let me hand over to Michal Zasepa, CFO of KRUK. Michal?

Thank you, Marta. Thank you for joining this call and it is my pleasure to tell you about the great results we've had for Q1 and for Q2 and the first half of the year. I hope you can all look at the presentation of the results, which is available on our website. I will be referring to it, telling you which slide I'm looking at. So indeed, you may ask yourselves what has happened that KRUK has made more money in the first 6 months of 2021 than in any given year in its history, because this is a record. 6 months of this year brought close to PLN400 million of net profit with the second-best annual results being the PLN330 million a few years back. And the answer is that, well, we are a better, more profitable business now than we were before. We are a business which significantly improved its efficiency in collecting on the back book on the portfolios that we have, and we significantly increased our profitability in the foreign markets of Italy and Spain. And those 2 elements together means we no longer are a company that earns PLN300 million a year, but much more. How much more, of course, the rest of this year will tell. But what I would like to tell you today is, please take a look at Slide #7 and 8. And this is new wording of why we believe KRUK is the company worth attention and set for growth in the future and the promise of that growth you already saw in the first 6 of this month. A few points I'd like to raise or mention on this slide, and I ask you to read at your time that in detail. And if you think you should question one of those statements, please call us back, contact me, contact IR team and discuss with us, because we believe every sentence here is a fact. And the first argument here is why KRUK is worth your attention is, we are proficient at what we do. We have a seasoned management team, which causes or brings about these results by improving the effectiveness of the collection process on whatever we own today. And we needed just a few years in each and every one of our countries to deliver that. But once we are on it, we will deliver sooner or later. And we'll not only deliver the profitability, we will keep on increasing this profitability, which is evidenced by performance in Poland this 6 months, but also, of course, on the other markets. We are one of the most experienced debt manager in Europe. We're one of the most experienced debt buyer in Europe having bought over 1,200 portfolios and collecting from them for over 18 years. And now with 6 years of history in Italy and Spain, we can also say, yes, we can add profitably new countries in Western Europe and make them work after some time. Better than words is possibly the financial results, and that's the second point on Slide 7, we have a very good track record. If you look back at longer history, we kept on delivering. Yes, there were times where the profits fell for some reasons, losses in Italy and Spain get back spoiling the market pandemic situation. But if you look at more than 3 years, if you look at 5, 10, 15 years horizon, you will see a trend, which is quite clear. We grow profits at double digits, weekly profitability, high, below, above, average. And we do this as a lower risk than average because we are the least leveraged company in the market if you compare us to other debt purchasers. Still, we have an average of over 20% on return on equity. Slide #8 tells another few things. We think we are set for growth. Why? Because we see that we can still improve our productivity, our ability to dig deeper into this value of the portfolios that we earn, which reflect, reinforces our ability to be more competitive in offering good prices for portfolios to banks in Europe, which, again, offers opportunity to increase market share. So we think even if the market of NPLs will not grow, will still be a growing business because of earning more from what we bought and by increasing our market share. And the proof of that you see in Poland, which in first 6 months of this year showed that KRUK is able to buy a 50% market share in one of the most competitive markets in Europe. More comment on that. Another point is, if you look at the history, many of our shareholders were asking me or Piotr Krupa, what are you referring -- what happens if slowdown in economy comes? What happens if supply of portfolios dries out? What happens if some regulations came? Well, the fact is we've been running that business for 23 years, and we were never hit by a crisis hard enough to show loss in a given year. The fact is we are able to turn around quickly enough to work out to make profits in changing environment. The fact is there was no regulatory, no financial crisis in this history since its inception for the past 20, 30 -- 23 years. And also, there was no reputational or PR crisis that we would have. So looking at that, I dare to say, it's a low or moderate risk business as the history chose, again, run at low risks on the balance sheet if you look at how much we are leveraged to net debt or to equity or to EBITDA. And last but not least, we pride ourselves and trying to change this industry for better in terms of ethics. We pride ourselves at being always very respectful of our -- first of all, customers, but also business partners, and of course, our employees. So you may be approach shareholder to, if you decide to trust in KRUK story. And that's the beginning, which is, I think, for me, very important because I believe we redefine KRUK in this first half of 2020 -- '21 as a business which is outstanding in terms of profitability and have good prospects for growth for the next several years, not this year or this quarter. This is a very solid result that we have. And now I'll explain why I believe so. I will now turn to Slide #4. Recoveries are excellent. They surpassed somewhat our expectation. They surpassed accounting forecast significantly. Hence, there was no other reasonable way, but to increase our forecast and to result positive revaluations. Not only they were good at the total number, but they were also very good if you look deeper into different asset classes. In all of KRUK's countries, in all of KRUK's main business lines, the recoveries from that portfolios were on plan or above plan. I mean, ambitious operating target. And this is a situation which is something new. If you compare it to pandemic period, if you compare it to the long 3, 4 years of building the business from scratching in Italy and Spain, both Spain and Italy, but also the other market delivered on the plan as expected. And that's the most important element of profit building for this year, for next year, as we are a big over PLN4 billion assets worth company, which sees the performance from the back book at a very optimistic color, which should allow us to earn significantly more money than we historically expected and continue to revalue these portfolios up as these trends are likely to continue. On the other hand, of course, we have the new business, new portfolio purchases. And yet again, this is a positive story. We even invested over the 6 months close to PLN650 million across different jurisdictions. And what I can tell you is that the next 6 months should be at least as good as the first half of this year. And if we realize that, of course, we're very well set for further growth because investing well over PLN1 billion this year brings very good prospects for profitability in the next years, of course, if we deliver on the planned recoveries. You see here our ERC, estimating remaining collections at PLN8.5 billion. That has increased over the past quarter significantly. This is still a conservative picture of the, of course, uncertain future. But if you watch closely on the quarterly results, you will see that the portfolios that we collect on has usually much thicker and longer tail than that our careful conservative accounting forecast assumes currently. Now I will go to Slide #10, which shows you the picture of profitability and some key indicators per geography. I mentioned the PLN650 million investment. This is mostly Poland, but we're very happy for Italy and Spain, modest investments in Romania. This is a very good result for us. As I mentioned, we would like to show at least similar performance in the second half of this year. We see further significant potential in Poland. We see more business in Romania in the second half of this year than in the first. We will continue to look portfolios in Italy and Spain, although likely, we will not want to be too fast and to invest too much in too short of a time frame of flame, not to give too much of a challenge to this still growing organizations there. But yet, we are very happy with the several portfolios we bought on these 2 markets in the past 6 months. Outstanding results for investments in Poland, as I mentioned, 15% of the market share. Recoveries, very good results in all of the geographies, and I mean, all including Czech Republic, Slovakia, Germany, Spain, Italy, Romania and Poland. If you look further, very good results on Wonga's revenues and EBITDA. And all businesses are cash generative. All businesses have positive operating profit as if you look at the EBITDA line. And you may remember the times a few years ago were KRUK was earning PLN300 million of net profit. And that was a situation where we were losing a few hundred millions of zloties in foreign markets. Now this situation, hopefully, is not a going to repeat. And just by this fact, we're adding a few hundred million zloties of -- in profit for this year. Closer look at Polish market, Slide 11, a good market, PLN3.5 billion, a nominal value of retail portfolios. KRUK takes half of that. Why were we able to increase our market share so much? If you recall further, the earlier times, KRUK was proud to achieve 30% market share. 25% market share us was a good result already. Why 50% now? Well, we are more competitive because we can collect better on what we buy. And this is -- and this is a result of evolutionary improvement in operating effectiveness that comes from many small improvements in the process, but also in analytical tools, which advise us what to do, when to do and what to expect. And we're very proud of that. Of course, the Polish market remains very competitive. The second half will be very competitive, even more competitive as many of our competitors have not done their investment budgets. But we're positive about Poland. And it's likely this will continue to be our largest market and most profitable business. Poland, indeed, was very profitable in the first half of this year. Look at Slide #12, PLN400 million of cash EBITDA, close to PLN300 million of EBITDA, nice profitability, decent profitability of 34%, PLN54 million of positive revaluation of assets, which assumes -- I'm talking now about the most important unsecured consumer debt, which assumes increasing recoveries for the 6 months mostly, which is a conservative approach to revaluation as it does not include further in time increase in recoveries. What does it mean? It means that if we continue to deliver on the current trend of recoveries likely in the next couple of quarters at least, you will see again positive revaluations. Is this revaluation big? Well, it's big compared to revaluations in the past 18 months in the COVID times. Is it big compared to the upside to the value of the assets? No, it's small. Please note that if you click into the composition of our revenues, you will see that the Q2 results were extraordinary in the fact that it including relatively big positive revaluation and also relatively big revenues from the delta, from the difference between the realized and planned in accounting curve revenues. Now the second, this delta element will decrease now because of this revaluation. If we increase the forecast, the delta between the realized and accounting forecast will decrease logically in the next couple of months, which means with the same performance on recoveries, you will see lower profit in July than you had in June. This is mathematics. This is arithmetic, but it's important to understand because it means that going with this trend of the performance, the profits in Q3 likely will be smaller than in Q2, which is an extraordinary quarter where we do, in a sense, a catch-up of revaluation and book significant revenues from this delta of recoveries. So I'm telling this to tell you, please don't make a yearly forecast by doubling the net profit from the first half. It likely will not achieve that. But still, Q3 and Q4 are to be quite good, profitable quarters. Now, Romania, look at Slide 13, please. You see relatively small market, market which suffers from some legislation, tax agitations, where the banks hold to selling some portfolios because they cannot treat them as tax deductible. This law will not change this year. I hope that will change sometime in 2022. In the meantime, we are looking at smaller markets, and we are making sure we buy as much of these portfolios from the smaller market as possible. First half was relatively weak. Second half, we think we will be able to invest much more. But of course, that will still be investments, which are significantly below of what we invest in Poland this year. So it's a slowdown in investments, but we think it's temporary and will deliver more in the next months to come. In the meantime, if you look at Slide #14, the back book of the Romanian assets is performing in excellent fashion. You see also significant positive revaluation, again, significant compared to previous couple of quarters, but not very significant compared to the potential and -- that we see if we continue to go along this trend of recoveries we see. So if nothing changes, please expect further positive revaluation in the next quarters from Romanian unsecured business. Then Italy, which was very good 6 months for us in terms of our investments, moderate size of the mark, of which we had about 18%. The market is likely to grow significantly several times in the second half of this year. The market is not a constraint for us, our ability to buy in a sense how much do we want to process, how much we can process this. We are very happy. I'm looking at Slide 16 with the investments in the 6 months. They were PLN117 million and more is to come in the next 6 months. The performance on the bank book is very good, somewhat above the plan. And the operating plan, the profitability has improved significantly, you see here, 26%, over 16% a year ago. Where are we in Italy? We are steady on the path to growing profits. Do we see big risks in Italy? No, we see potential to improve results. We don't see significant risk, neither regulation, nor from our back book anymore. So this is, again, a change of the paradigm. We no longer think whether we'll succeed our Italy or not. We think what's to do to succeed in a really meaningful way for the next couple of years. Will we do it overnight, can you expect us to double, triple the investment in Italy? No, we'll do it gradually, evolutionary to have good, stable, repeating and growing business there on a very decent profitability, but we're not in a hurry. We are in a marathon, we are after 5 kilometers only, 6 years has passed, another 10 or another several is ahead of us to build a really big business there, and this is our intention. And there is a market for it. Spain at similar positive history, good market, good purchases, 15% market share, we're quite happy to have bought 3 major portfolios from 3 major financial institutions in Spain. If you look at Slide 18, this is PLN82 million of investments, more to come in the next 6 months. Positive EBITDA, PLN27 million decent profitability also, nice improvement of the past year. And similarly to Italy, the risk is moving to the upside from downside. We don't expect negative surprises from the back book anymore. We see room to improve profitability from the back book, and we are competitive in buying new portfolios in Italy. Again, we want to do it in evolutionary moves. The next couple of years likely will show increasing profitability in -- further increasing profitability in Spain, but will not happen overnight, over a quarter. Going to other markets, other markets now include the Czech Republic, Slovakia and Germany. The performance there is excellent. And you can see profitability is even higher than in Poland for the 6 months of the year. We're very happy with the performance there. But the investment potential there is limited. You can see only PLN13 million was invested in Czech Republic and Slovakia. We are looking at opportunities to increase that above the market with the limitation there. And Wonga business, decent performance. You see increased profitability, PLN14 million of EBITDA. We're happy with the business and we see from July, increasing demand in -- among the Polish consumer. For Wonga loans, we're starting with television marketing campaign, which should additionally boost our sales. So we're positive that not only the 6 months was good, but the second 6 months of this year for Wonga would be even better. Good performance of some other businesses you see on Slide 20, 21. So overall, it's an excellent quarter, where all of the business lines, all of the major business lines delivered or overperformed, where no bad news from regulatory front came and where we really are enjoying that situation and thinking, okay, let's just not stop here, let's just continue because there's growth ahead of us. We have a chance to become a really major player in this market once we succeeded in those 4 big markets in Europe. It's not to say we're ready to jump into another country. There is still plenty of room to grow profits in those 4 countries, 4 main countries where we are. But of course, in time, we'll be looking at some other markets, but definitely not this year. I will now jump to slide with funding. This is Slide #27. You see here that 2021 was a year where we need a significant amount of money. Okay, it's not clearly visible from this slide, but that situation, not only we needed several hundred million zloty for investment, but also we bought back or buying back this year PLN440 million of bonds. We also paid PLN200 million of dividends. All that was funded with internal cash flow and additional issues of bonds. We successfully raised PLN0.5 billion close to that from Polish investors, both retail and corporate and we're very happy with that. We also are successfully talking to banks about enlarging their commitments to KRUK. So I may tell you if we have excellent investment in that portfolio this year, funding will not limit us. And that's very positive. We see that the financial market is looking very favorably at KRUK in Poland, and we have good partners to provide us that instruments. And there is 2 important slides here in the appendix. I'm looking at Slide 29. This is our ERC now shown in more detail -- detailed over the period of 16 years, and you can see -- and you can model now more precisely what our assumptions are. And these assumptions are conservative. Why do I say that? Well, because if you look at Slide #30, which shows the vintage analysis of what has been the performance of the portfolios we bought historically, which have at least 6 years of history to show you at least the 6 years we need to breakeven. You can see the details, the length, the thickness of these curves significantly about the ERC curve. Of course, it's not -- you cannot compare these curves one to one. One is forecast, another is history, but the trend is visible. We are collecting more, and we are collecting longer in time than we historically thought and our accounting curves struggles with catching up with this reality. And therefore, it will most likely need to be revised up and up and up again over the past couple of years. The approach we took so far is we conservatively update the curve for the next 6 months. That's for Poland and Romanian retail and do not change this forecast, this is conservative forecast for the further for longer period of time because of uncertainty that is connected with possible negative changes, which may or may not come. This is the first time we have the disclosure. For those of you who have your own models, this should be very useful to compare this accounting world and historical cash flow world. So if you have questions, how to interpret that, please contact on Tomasz Kaluziak or the IR team or myself to explain. But for me, the main conclusions from Slide 30 compared to 21 is, if things go as they went in the past year, KRUK is sitting on a pot of gold and will be recognizing significant positive revaluation in the next couple of years, not only quarters. Of course, this is provided nothing negative will happen. If you ask again, do we see in the environment in which we are and negative changes, the answer is fortunately, no. There is no negative legislation that we know of that could be significant for us at this point. The trend of recoveries in the beginning of the Q3 is also very positive, so we are in a growth mode. We are thinking what else to improve to have even better results. From my point of view, 2021, it's a certain thing. It would be a very good year for the business. And it's not a one-off year. It's a year on which we would like to continue to build profitability. So this situation looks quite positive. Thank you very much for listening. And now, I would like to ask for your questions, please.

[Operator Instructions] We have no questions registered by the phone lines. [Operator Instructions]

If there are no questions, then thank you very much for your time, listening to this presentation. If you have follow-up questions, don't hesitate to contact us. We're very happy to tell you what we think in detail and keep fingers crossed for Q3 and Q4. Stay healthy. Goodbye.

This concludes today's call. Thank you for joining. You may now disconnect your lines.