KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Third Quarter 2022 Results Call, and thank you for your patience. My name is Daisy, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand the call over to your host, Marta Wasilewska from Wood & Co, to begin. So Marta, please go ahead.

Good afternoon, everybody. My name is Marta Wasilewska, and I represent Wood & Company, the host of this call. Thank you for finding the time to join us and to Michal Zasepa, CFO of KRUK. And now without any delay, Michal, floor is yours.

Thank you, Marta, and good afternoon. Thank you for your time and interest in hearing commentary to our third quarter results for the KRUK Group. I will use the presentation, which is available on our website on last quarter results, and I'll be telling you this slide, I'm looking at when I comment the results. I'm not -- now looking at Slide #3, and I'm happy to tell you that this is a record-time KRUK. If you look at net profit, we have PLN 677 million earned in 3 quarters, which promises that this year will most likely be the record year in terms of net profit for the business. We also have the first ever results. in terms of cash EBITDA and the best 3 quarters we've ever had in terms of purchases of new portfolios and recoveries from these portfolios. This, we've been achieving at a relatively modest indebtedness, 1.8x net-debt-to-cash-EBITDA achieving, I believe, quite decent return on equity at 26% this year. So if you look at the business today, by all means, this is the best time we've ever been in the company. Looking at the back book, the base for our current profitability for liquidity comfort, we continue to say we see no difficulties in recovering on any markets. We, at this point, see no effect of possible macro slowdowns, which, of course, makes us very, very happy at this point as you -- we all read news about the effect of inflation and changing consumer sentiment. So far, that has no effect on us. On the other hand, if you look at the new books, the front books, we are in process of significant further investments in portfolios this year. This PLN 1.3 billion of portfolios we have bought is already significantly lower by a few hundred million zlotys than what we have already won. And the end results for this year will most likely be record results for our history. I am comparing that to the last year, investments of over PLN 1.7 billion. So no, we don't know for sure, but it looks like it's quite probable we'll be beating that number. And the question is, will we invest below PLN 2 billion this year of newly purchased portfolios, or we will be able to beat this PLN 2 billion this year. So this situation looks good, although, of course, we are -- we have entered a time of increased costs by increasing by inflation and higher cost of debt because of higher interest rate. And this is something we will need to face and try to think how to build greater potential on revenues to offset these significant cost trends that are already visible and will be visible in the future in the subsequent quarters. I look now at Slide #4, where you have some other important achievements we've had. Just to remind you, we are a dividend-paying company. This year, we paid close to PLN 250 million, roughly 35% of our profits. And historically, we already returned close to PLN 1 billion in dividends or buyback. And we are likely to continue to stick to the dividend policy we introduced last year, which is at least 30% of profit shall be paid out to shareholders. Another important element of our focus this year is a technological development, digitalization and going more into digital and online world and you see 3 measures which are examples of that. Already for over 40% of amicable recoveries are done through online payment. That's a nice increase over the past couple of quarters and years. We also have an increasing number of our customers using our Internet platforms to agree with us on the settlement repayment rather than meet us at home or talk to us on telephone. And most of these agreements today, even if they are signed in a physical meeting, it's signed actually without the use of paper, which also means less costs and less time. This technological development is about speeding up the process and also making better-informed decisions, what process, what communication to use versus an individual customers to get better results. If you look below, there are also a few things we want to raise your attention to. We are now a bit more vocal about our ESG achievements. One of these achievements, we're quite proud of, that without any actions, we are a very well balanced company in terms of gender. 63% of our top managers are women at the KRUK Group, which is quite unique if I compare us to the other companies I know. We were just elected to join the blue-chip index in the -- on the Polish Stock Exchange. And from next Monday, I believe, will be part of the WIG 20, which also marks our 12 years as a publicly listed company we are today among those top 20 publicly listed companies in that country. Looking further, if you look now at business, on Slide #6, you share -- you see that we are moving towards a greater share of the business coming from Western Europe. If you look at recoveries, where overall were very good for third quarter, for the 3 quarters of this year, only somewhere below 50% came from Poland. And you see an increasing share of Italy and Spain. If you look below, the share of new investments shows the trend for the recoveries that will be followed at some point by recoveries. Poland and Romania contributed below 40% of the new investments, whereas Spain and Italy provided over 60% of the investment. And that is reflecting our growing confidence in our ability to make money in Italy and Spain and also our ability to collect more and more effectively and as a result, our ability to place more competitive pricing in those 2 markets, which allows us to win more portfolios. Overall, on those 2 most important measures, we're happy with the results on every market that we've beat our operating plan goals on all of them, the markets in consumer unsecured, actually in other asset classes as well. And we significantly beat the planned investment level for the 3 quarters. And as I said, the Q4 looks quite promising, and it has a high chance to end as a record-high year for our investment this year. Although the competition is strong, nothing is given for free. So of course, there are still a few possibilities, which are uncertain. We'll see how we do, how well we do on those several auctions of our portfolios we are facing in the next several weeks. On Slide #7, I'll also tell you that if you look at the 3 quarter results and this PLN 677 million, please expect that our Q4 will be stable, but rather will be one of the weakest quarters in terms of net profit for reasons which are planned for us and have to do with recognition of revaluation and some other costs. And this is something we were expecting and we planned. In terms of revenue, because of stronger recoveries, you see also a good trend on revenues supported by revaluation. This revaluation for this quarter is relatively modest compared to other quarters. It's somewhat over PLN 60 million. But the remaining potential for future evaluation remains, still is quite significant, and you -- most likely, you will see it in the next couple of years as it continues to be revealed in our P&L. The revaluation for the Q3 is predominantly based on the uplift of recoveries for the next 3 quarters as 70% is concerned with the next 6 months, asset values here. If you look at the costs, you can see they are growing, unfortunately, quite fast. Compared to last year, the increase on operating and administrative cost was 23%, which is at higher pace than the revenues. And this has 2 main reasons. First of all, we are buying a lot of portfolios, and this requires increased amount of work and also legal costs. So it's well substantiated reason to have higher costs, and it's a positive. But there's also negative coming from inflation and major financial costs. We need to catch up with the labor market and the fast increase in salaries, especially in Poland, but also in Romania and in Czech Republic to a less degree, but also to some degree in Spain and Italy, and also some of the other operating costs are increasing together with inflation. So this is some challenge for us because we cannot just increase prices to our customers and increase the cash flow and recoveries. We do have certain protection and against inflation on the longer-term horizon as in most of the countries, except for Romania, the volume -- the nominal value of the debt that we're pursuing is increasing in time with the interest, late payment interest and this late payment interest is correlated to the value of interest rate in a given country. So for example, in Poland, this late interest is currently about 12%. But that means possible more recoveries in a few years, not today and the cost are increasing today. So offsetting this, we need to find more ways to optimize cost, to [ automate ] costs, invest more in IT to eventually see less people cost on our P&L or extract more value from the back book or -- rather and increased somewhat the expected returns on the newly booked -- newly bought portfolios. And this is all of the areas we will be pursuing. If you look at the finance cost, there is also a significant increase coming from 2 facts. One is an increase of the value of the debt as we increase the spend on purchased portfolios, and other increase in the interest rates in Poland and also in Eurozone. This is something we are mitigating by also signing hedging transactions. We have hedged significantly Polish zloty debt, swapping it to euro fixed rate instruments. And at this point, rate majority, about 80% of our Polish zloty debt is already swapped, which greatly -- which will greatly affect the cost of funding for Poland in the following quarters. And we are also thinking about hedging some part of our unhedged Euribor exposure. Currently, the Euribor exposure is not hedged in KRUK at all. Likely in Q4, we will make such a transaction to hedge it partly. In doing this, we will also limit FX exposure. We will use with the base instrument to have the coverage for the hedge. So that will be done very prudently and that will also reduce this uncertainty about the future impact of possible further increases of interest rates on our business. The business is well funded. I'm looking now at Slide #8. It's -- if you look at the covenants of net debt to equity or cash EBITDA to debt, these are relatively low. If you look at the interest coverage ratio, the covenant, which says how many times is cash EBITDA greater than the current service of interest, this ratio is comfortable at 10.4x with a minimum covenant at 4, but this ratio has significantly gone down over the past year due to increases of interest rates. It used to be 16, now it's -- at this time, 10.5. So this is, today, the first binding covenant that we have, and that's also a reason why we want to hedge partly our exposure on EURIBOR to prevent a situation of a negative effect of significant future increases of EURIBOR on the business. So far, we continue to be well funded. We have over or close to PLN 1 billion of unused capacity on our bank in mind to continue to buy by portfolios. I'm also happy that in times of somewhat worse access to debt funding on Polish bonds, we were able to convince several banks to increase their exposures in KRUK. Those discussions lasted a few months, and most of them ended sometime in September, and now we're better prepared to continue to invest. In the environment, that looks to be quite good. I mean, there already is some trends of increasing IRRs on the market, more in Italy and Spain and maybe to some degree in Romania, less so yet in Poland, but I think the Polish market will also follow suit at some point. On Slide #9, I'm drawing your attention to the fact we are increasingly focused on automation, online solutions, cloud-based solutions. The name of the game is to do things more quickly, more cost-effectively, but also more intelligently having -- using more data to have better, more effective communication with indebted customers. And that's something we will be investing in our resources, money, brains. That will require likely some additional costs or investments in CapEx. Some of that is well-planned and on the way already. Some of that is now only ideas to be verified, tested in the next couple of quarters. But clearly, we see this is an area of further possible significant optimization and possibly also a competitive advantage. And we strengthened our organization this year to tackle these opportunities. If you look at now at Slide 11, that's the structure of our revenues per main markets. You see here that one of the -- in one -- first time in a few years, Italy and Spain are making over 50% of the investments. That likely will continue in the next -- in the future as we are able to get there to a higher -- higher market showed that before. Recoveries, as I said, we're on plan on every market. Out of the PLN 6 billion of investment, you can see that less than half comes from Poland. Close to half comes already from other markets. If you look at the EBITDA, all of the countries are contributing positively with the exception of Spain, but this is the history of the corporate portfolio as we wrote down in another quarter #2, which I treat as a one-off event. And Q3 proved there is no further problems in that asset cost. Now a closer look at Poland, Slide 12. Expenditures on portfolios are somewhat disappointing and this is due to the 2 facts. We have increased our expectations for returns because of the increased cost of funding in Poland. But secondly, Polish market remains to be quite competitive. This may partly be the reason for our very high market share last year. Some of our competitors probably were more motivated than us to buy portfolios this year. But that reflects a very high -- this reality of very high competitiveness. I think that will ease in the future. When exactly, I don't know, maybe already this quarter, maybe the first quarter of next year. We're not so concerned. We have a very good book of portfolios of PLN 2.6 billion. There are still several nice opportunities in Q4. Let's see how the year ends. Overall, this has been a very good quarter for Poland for the debt management business, but also for Wonga, as I will tell you in a minute. If you look at Romania, a similar level of investment, but this time, we're quite happy with this PLN 250 million that, that means we are -- we continue to be a dominant player. And there -- we're very happy with recoveries as well. They were so good that they allowed us to, again, recognize a positive evaluation, although this time more modest than in previous quarters. This business remains to be very highly tractable. You can see this measure of portfolio profitability at high 47%. And the Q4 -- the prospects for Q4 looks quite promising in terms of new books. So we'd like to add a few midsized portfolios to this PLN 250 million. Italy, a very good year in terms of the new expenditures over PLN 400 million and still a few interesting transactions on horizon. Very good recoveries, both on unsecured consumer, which represents 85%, 90% of the business and on the remaining corporate portfolios, another quarter of positive revaluation and nice PLN 11 million, as you see here a quite good profitability of 29%. Spain, good quarter, PLN 153 million of investments, totaling close to PLN 400 million, and there are a few interesting opportunities still possible for this year, which we are pursuing a modest positive revaluation from a consumer unsecured of PLN 4 million. We see a growing trend of profitability on that business and are happy to continue to invest more. And the other markets on Slide 16. Very good quarter if you look at recoveries. Modest investments, that's the downside. We didn't find more opportunities to buy. There are very good profitability for the Q3. If you look at Wonga, the 3 quarters for this year were very good for the business. We doubled EBITDA. This year looks to be the record year for the company. The big challenge ahead is the change of the legislation that is very likely to happen from the beginning of next year. The company has a plan. It's in process of implementation of new product offering under the new legislation, which cuts the limits for noninterest costs. The new year will be a test how well this product are accepted by customers where the competitive -- where the competition will be. So we come prepared as best as we can into somewhat turbulent uncertain 2023. But I believe we have one of the best teams on that market, and we have a loyal clientele of several -- of more than 50,000 or 60,000 clients. So I think we have good potential to also continue the business in more difficult conditions. Looking at consolidated profit and loss account, please take a look at Slide #19 and you see the full results for Q3. Please expect Q4 to be a bit more modest in terms of net profitability as I mentioned. Please expect the effective taxation rate for this year to be in single -- low single digits as a result of high investment in that portfolio and therefore, lower than planned transfers of funds from these investment companies that we operate to [ match ] the company, and that's directly means lower tax to be paid. Overall, the situation is very good, is stable and offering us a good ground to continue to grow the business in 2023. I will now look at Slide 23, when you have the updated estimated remaining collection curve. You can see that the total PLN 12 billion. You see here that 70% of the change of the forecast concerned the next 6 months, which means the tail, the long tail of this curve remains slightly to be modified positively in the next years as we continue in this trend of recoveries. If you look at Slide #24, you can see here this PLN 1 billion of available credit facilities to be used for better portfolio purchases. You can see a relatively good level of flexibility on the cash flow coming from the fact that there is not so many redemption on bonds coming up in '23 or '24. So it looks like we are in a good situation in what may be a market that offers us more opportunities to buy at higher IRRs in the next quarters. If you are interested in what we do in managing our ESG, we are now happy to show you more of the initiatives. That's on Slide 26. I will not cover that in this call. But I invite you to read through that. And on Slide 27, I want to tell you that we became more active in meeting international investors after summer. I was happy to meet over 50 people in few locations in the U.S., in London actually, Wood accompanied me on most of those meetings, and I'm happy to -- I was happy to see good interest to meet and people to consider to -- mostly to buy our stock again as many of these investors have invested in us in many years, some sold their shares. I think predominant majority made good money on the stock. So overall, this is a very good situation. We are prepared, I think, for good times or more difficult times. We are aware of uncertainty coming from higher inflation, our interest rates. We are somewhat under pressure of increasing financial and operating cost because of interest rate or inflation, but we believe we still have possibilities to grow the revenues from the back book and also to invest at increasing IRRs in the future, which also will be a factor that will contribute to revenue growth. So we are in good shape and expect a solid Q4 at this point. Thank you for listening. And operator, please help us now with the questions.

[Operator Instructions] We have no questions in the queue, so I'll hand back over for any closing remarks.

Thank you very much for your time and listening to the commentary. We will just continue to do what we do. We have no intentions to change the strategy. Oh, one remark on the buyback proposal that we have asked our shareholders to vote on next Wednesday. This is a tool that -- is not a tool that we want to implement or use immediately. This is a right to do a buyback program, which always have to be approved by Supervisory Board in a special situation where the company has excess funds to use for such program and the share price is significantly undervalued. We used to have such tool already for several years, the right to use this to have expired. We propose to investors to renew on terms similar to previously outlined. The shareholders will decide whether this tool should be something we have for some best times. Thank you very much for listening and all the best. Stay healthy, and I wish you all luck in your investment decision.

Michal, I do apologize. We have now since had a registered question.

Very well.

It reads, "Are you in a position to provide any 2023 outlook now?"

2023 outlook is -- I can tell you that in terms of investments, we are preparing for another good year. If the investments this year will be somewhere maybe around below PLN 2 billion, this could be a target that we'll be setting for ourselves for the following year. This may be a year with at least as good profitability on the bottom line as this year. A lot depends on how much would buy this year and what the net results will be eventually for this year. I'm not sure how able we will be to show growth because of the inflationary pressure and financial cost pressures. Again, this in some scenarios, it will be possible if the back book or front book will perform even better. But it will be a year in which we will consolidate our position further on the Spanish and Italian market, work on further improvement of profitability on those 2 markets and build potential to grow profitability, net profit in the mid- to long-term horizon. So even if the inflation and interest rates will mean somewhat less or slower growth of profit in the near future. 2023, for example, that may be, I think, offset with good investments in the longer potential. I'm not, today, prepared to give you a more precise outlook because we have not yet finished our budgeting process. So I will be able probably to be a bit -- to give you a bit more color after we release the Q4 numbers and the budget is approved by our Supervisory Board, and we know what the plan is for next year. But overall, it looks like anyway, it should be a good year for us, 2023.

We have had another question registered. It reads, "Do you see any funding issues emerging for your competitors in some of the countries of your operations? Do you expect increasing unemployment going forward??

Increasing unemployment. I think a base case, most likely scenario is no. This is my view from the observations of the key markets that we have. In Poland, in Romania, in Czech Republic, the market, the labor market remains very tight. So it would need to be a really significant change of macroeconomic outlook for this to change. I expect some increase in unemployment, but that may actually be good for the economy as today, Polish economy, in my view, is constrained with inadequate supply of labor. Of course, there is a scenario where things get very bad and that we'll see a significant improvement -- significant growth of unemployment. But I don't think it's a scenario that has high probability today. In terms of access to funding of our competitors, this is interesting because I think this may be the issue for 2023. You may know -- you may see that KRUK is leveraged at the level of roughly 50% of what many of our competitors are, which means they are much closer to covenants that we are. If interest rates in Eurozone will move up above 3%. I think some of those -- or some of our competitors at some point may be very close to those covenants and may be constrained in further expansion of their balance sheets. So that will be good times. I think that could be good times for KRUK with relatively low level of indebtedness. So I think the money will be available for the quality companies, only not all of the companies. For covenants or cash flow reasons, we'll be able to tap it and that's a good situation for a company which is relatively low leverage like KRUK.

Great. This is all the questions we have today. So I'd like to thank everyone for joining the call. You may now disconnect your lines, and have a lovely day.

Thank you very much. Goodbye.