KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Good afternoon. My name is Michal Zasepa, and I will present results for 6 months of 2024 for the KRUK group. Thank you for taking time to seeing this presentation. I'm now making available the presentation. This presentation is also available on our website and I will refer to the slides that you will see. You also have an option for Q&A. Please ask questions throughout the presentation. I will come back to them after I finish the presentation and respond to your questions. This is my pleasure to say this is the best 6 months in the history of the company. We have earned PLN 603 million. This is a 14% increase year-on-year. This is better than expected when we were making budget plans for 2024. And this is more or less in line what we expected when we also talked to you about after Q1. So we are on plan likely to have another record year in terms of net profit for the entire 2024. The cash EBITDA was record high. You can see here, 11% increase the recoveries, overall consolidated level were on plan 16%, significantly beating the active accounting forecast as expected. The investment in new portfolios were PLN 900 million. This is a decrease versus last year as expected. We -- this year, we're targeting about PLN 2.5 billion of investments and we are on a good track to achieve that. EPS is also growing nicely. You see here a 14% growth. In Q2, we paid out another dividend, PLN 18 per share. Return on equity remains very high, one of the highest in the industry at 26%. So the company is in the growth phase and we are expecting this trend to continue. If you look at our leverage, it's well contained. We still have enough space to continue to grow. Looking at some of the highlights. We continue to be currently the highest market company in our industry in the world, even though we are lowest valued in our history on price to earnings ratio. As I said, another dividend, now the total PLN 1.5 billion all accumulated dividends paid by the company in the history, which is a nice addition to the share price growth that we've had. We continue to be stronger at growth now more than 60% of our investments are in countries other than Poland and close to that in terms of recoveries. We will talk more in the future about how we transform the company in terms of technology. This will be a main pillar for our growth strategy for the next 4 years and I'll come back to that. This year also, we got a few awards from the capital market. So thank you for your trust that I mentioned here. So overall, this has been a very good period for us. If we look closer at recoveries, you can see here split, Poland gave us about 40%, while Romania about 20%, 40% something came from other countries and the share is, of course, increasing following the investments. If you see how these recoveries matched our active accounting forecast, it was another beat of 13% versus the accounting plan, which is as expected by us. I will tell about it later. We had very good results in three big countries, our three big markets, which is Poland, Romania and Italy, and we were below plan in Spain. In terms of investment, it's a relatively slow 6 months given that this PLN 900 million is less than 50% of this PLN 2.5 billion, which remains our target. But this is as expected and we think getting to PLN 2.5 billion is quite realistic target, although, of course, and there are still many transactions we will need to win in the second half of this year. The market overall is somewhat more competitive than it was last year, but still it's a relatively good environment, we continue to invest money, expecting [indiscernible] IFR, which is as expected. If you look at some most important elements of our P&L revenues were supported by another quarter of significant positive revaluation overall for the company. OpEx is growing fast 20% growth year-on-year. If you look into detail, there is a significant growth in legal fees and card fees. This is as expected and it follows the large investments that we made in 2023, partly '22 and other years, this growth requires sending many thousands of cases through legal process and we expense it fully through the P&L. And please expect that this relatively higher level of court fees and legal fees will continue for Q3 and Q4. And if you look at salaries, which is the most important cost element in our business, they grew by 10%, which is also as expected, actually, it's a little below the budget but this growth is mostly coming from salary growth as we continue to be in tight labor market, especially in Poland and Romania but also we grow somewhat the base of our employees following the big investments we made in portfolios in 2023. There is also a significant growth of financial costs, which comes from growth of scale of funding. We are comfortable here in terms of access to debt. We were quite successful in obtaining new funding from the banks and we still expect new additional funding from banking loans to be completed in second half of this year, which limits our appetite for bond issues, although we do not exclude that we will go to the bond market in the second half of this year. But that will depend on the specific situation and how much the banks will increase and how much money we'll need for new portfolios. A few words more about technology. There's three main areas where we want the technology to change. The first is lead time understood as let's make technology work so we can accelerate the cash flow by processing certain functions in the collection, certain parts of collection process faster. And this is possible and we'll be doing efforts, making efforts to achieve that. Second is, let's personalize more or hyperpersonalized or communication with the customer and therefore, be more effective in our work and this will be also made possible through better technology and more iterations, more testing which communication strategy is best. And third pillar is let's respond to customer needs and let's create more easy ways for the customers to serve their debts themselves without interaction with human. This change -- these three pillars will be driving the change in the next couple of years. We will be investing increasing amounts of money into this technology but we will be expecting to make a good return on this investments. This project and this strategy will spend over 4 years and we'll talk more details about it by the end of this year when we will also present to the market, our strategy for the next 4 years. If you look at the results per segment, you see here that 20 -- 6 months of 2024, we mostly invested in Poland here, PLN 354 million following in Italy and relatively a little in Romania and about PLN 117 Spain. That picture satisfactory but it will change much for the second part of the year, likely. We see a lot of potential to add investments in Poland. We know that we will add significant portfolio in Spain already and we are looking forward to investing significantly more in second half of the year in Romania. We don't expect to make some big investments in Italy. Again, so this situation looks good. And as I said, even though competition is somewhat higher, we are able to deploy money at very decent IRR. If you look at cash EBITDA, the results overall shows good growth everywhere including Spain. If you look at EBITDA, three markets performed excellent, which is Poland, Romania and Italy. And because we had negative revaluation and also a significant increase in legal fees in Spain, the EBITDA dropped for 6 months of this year compared to last year, more detailed about it in a few slides. Overall, if you look at this picture, once again, the total result is in line with our ambitions and plans that we updated after first quarter. This is better than the budget but in line with what we putting our plans sometime in May and June, which bodes well for the full year. Now a few words of commentary about each of the markets. If you look at Poland, the market was relatively stable. Please remember, this big supply in 2023 was partly a one-off secondary market transactions without that the market is more or as comparable. In that market, we invested to have about 35% or 40% market share, if you look at unsecured retail debt only. So we likely are the leader on that market, and we see more potential in the second half of this year. If you look at the Polish results, as I mentioned, recoveries were excellent. They grew quarter-to- quarter, exceeded significantly our active forecast and somewhat our operating plans. Therefore, you can see another quarter of very strong revaluation and good results on the portfolio and profitability. If you look at Romania, the market was relatively modest in size for the first 6 months. Still, we remain a very active buyer with PLN 170 million deployed, which gave us about 15% market share for the 6 months. We expect more supply in 2 -- in the second half of this year. Q2 in Romania was another excellent quarter for results, for recoveries. Hence, another positive revaluation and hence, a very good profitability that you see here. Both Poland and Romania show no signs of weakness going forward. Italy, you can see here a relatively good supply of portfolios in our space of consumer unsecured we had about 35% market share, which is quite satisfactory for us. It probably gives us a market-leading position and we're very proud that this possibly was the best quarter in terms of profitability in our history in Italy, PLN 71 million of EBITDA, the largest in this horizon, you see here on this slide, positive revaluation, decent profitability. And again, a trend that does not show any sign of weakness. In terms of Spanish market, the supply was not -- was somewhat contained modest in the first 6 months but that already changed with some big portfolios coming on market in July and we were quite successful on this supply here. For the 6 months, we had 31% share, which, again, is possibly #1 position in consumer unsecured retail. We are not satisfied with the results for Q2. Obviously, we had a loss on EBITDA. We treated as an accident and materialization of risk that happens from time to time but not something that changes our view on the very good perspective we have on the Spanish market. Now what happened in detail is that some time ago, we bought for the first time one big banking portfolio. And this portfolio was performing initially for the first couple or several months above plan but for the past couple of months performed below plan. And based on that performance, we made a decision to write it down. The more concrete reasons for that is that we had an outside problem with the provider of direct debit service. So the service was not provided to us for more than 45 days, which negatively affected amicable process but also resulted in those cases, many thousands of cases not being sent as planned to the legal process and delay was cost. That was one reason for the problem. And this problem is dealt with already we have a different provider now. Second problem is that we saw that banks -- not the banks, but the court in Spain were slower in sending us cash than before. For some reason, it may be a still some effect of strikes that already were closed many months ago, but for some reason, might have somewhat affected the functioning of course, or some other reasons. The fact is the value of the money that the court were supposed to send us significantly increased a few time increase we saw in the past couple of months. So hopefully, that will change and improve in the next couple of months. And third reason is portfolio-related reason. That was the first transactions with this bank and big transactions. The characteristics of these portfolios are somewhat different somewhat -- somewhat less favorable to us than we expected, and therefore, the curve is different and there is less money now than we have expected and this risk happens from time to time. Only in this situation, it happened for a big portfolio and you see the results. So once again, we don't see this as a fundamental problem. It is, of course, a problem. It's a problem for making the budget of EBITDA for spend this year but it does not change our review almost at all about the future profitability of the business. This portfolio even after the write-down is still yielding a good [ 15% ] of IRR and hopefully, we will still be able to improve our profitability overall in Spain, and we'll see much more often positive revaluation in the future than not. One more comment, negative revaluation per portfolio is something common in the business. Every year, we have some portfolios in every market that we write down and of course, many and more we increased the revaluation. Only in this situation, the review was concerning a very big portfolio and that's why you see it here. On the other hand, there's many other portfolios in Spain that overall are overperforming and we'll rode them up this quarter and will be possibly continuing to do so in the next couple of quarters and years. If you look at other markets, which comprise Germany, Czech, Slovakia and France, the performance is very good. You see here the first signs of the French business is going well because it represents a significant portion of the growth. The results actually doubled year-to-year and quarter-to-quarter, if you look at EBITDA. So we continue to plan our efforts, to plan our entry into France market by the end of this year and we will agree a business case and then we will be able to present it to the market. So far, the results are very encouraging. Wonga and Novum, our cash loan businesses had another good quarter. You see here a modest increase in profitability on both businesses. So we're satisfied with this result. In summary, this was a very good -- it was a very good 6 months. It was a good quarter. Of course, the results for the second quarter is worse than the first quarter but this was expected. The first quarter was extraordinary good. Please look at these results in -- from the perspective of more than 1 quarter, ideally a year, 12 to 4 quarters. These 6 months tells us we are well on plan to deliver our targets -- target growth of profit for the full year. Of course, we don't know how much we'll fully invest what the recoveries will be, but we see that July was on planned already and we don't see any significant weaknesses in this first couple of weeks of August. We're well funded. We see a good supply of portfolios. So things look good here. If you look at funding, we continue to be modestly leveraged. We, as I said, have very good access to that funding coming from banks. If we need additional money, we may enter the bond market, if you look at the bond redemptions, the situation looks also very comfortable from our point of view. So it's one of the best period for us in excess of that and if we need it, we would use it. And another comment I want to make is about regulation. As you may know, 2024 is a year where NPL directive is being implemented locally within EU countries. Things are going well. Here, this directive has been already implemented in majority of the countries that we're in with neutral effect on us. We're still effect -- we're still expecting it to be implemented in Poland, Italy and Spain. And at this point, we expect this to be neutral. So there is no news on this front, which is good. We are not aware of any other debt collection loss that could affect the value of bank book at this point. And one other thing I want to point your attention to is something we also mentioned in our report for Q2 is a tax regulation, which is Pan-European. It's called Globe or Pillar 2, and it's a Law that will be implemented in Europe soon by -- coordinated by OECD countries. This law tells that if you are a big business and big business is defined as a business with annual consolidated revenue in excess of EUR 750 million. And if your effective tax rate as calculated in your financial consolidated statements is lower than 15%. Then looking at each of your companies in all countries you need to pay more up to this 15% to have this minimal effective taxation rate. However, if you operate in less than 6 jurisdictions or up to 6 jurisdictions, you have a safe harbor law not to be bound by this law for another 5 years. Now this law does not concern us now because we don't qualify it because so far, our revenue is below EUR 750 million. But if we look in the future, likely in the future, we will cross this threshold and we will be obliged to look at this law. We will likely have an option of taking advantage of the safe harbor. So it's a possibility that even if we grow nicely, then we will not be obliged to pay this tax for another 7 years or so, but there is uncertainty. How the business will be, what do exactly will be because it has not been yet passed in Poland. We know the directive. We know the draft. We have certain concerns that the draft is not very clear. For example, we don't see in this Polish draft, a clear statement that if we pay tax on our securitization vehicles when we transfer the money, from the Polish entity or international entity to KRUK to pay the dividend or repay the bonds and we pay the tax that we can compensate this tax under this new regime law. We don't see that. So that's why we ask questions and we through associations we participate in talks with the government. We hope -- we expect and hope that those things will be clarified. But I'm mentioning it because it's a very far-reaching regulation that is really changing the landscape for many businesses, many big businesses, and we may qualify for that. Right now, we don't expect to pay this tax, but this situation may change and we may have more clarity in the future, and then we'll be able to tell you. So my advice at this point is please make sure in your model in terminal value, you have this 19% corporate income tax in group because this law increases the chances that in mid to long term, this will be the case. So this is my summary. Overall, we're quite optimistic about the business committed to the business and hopeful that this will be another very good year for KRUK. Thank you for listening. And now I'll look at questions and try to answer them as best as I can.

The first question says, do you see negative trends in recoveries as per -- especially after July and August? And overall, no. Though, we see positive trends in Poland, Romania, Italy has continued. We are still somewhat below operating plan in Spain but as expected after this review in general. Another question. How do you see your competitive position taking into account difficulties by peers? You sold the market shares, which show we are #1 in all those 4 countries, most likely, I don't have full picture but market share between 30% and 50% is indicating we're #1. So -- and then I look at the IRR that we expect from this capital deployed and it's quite good. So our competitive situation is strong. Still, I would say, we see some more money chasing portfolios than last year. So despite the fact that some of our peers are less active, there is other capital that comes in and fills in the gap. So there is no significant gap and we need to make hard -- work hard to get good IRRs and lose some portfolios which are traded in our view at relatively lower than IRR. So overall competition somewhat increases. Another question. When will we know your strategy? What should we expect? So we commit to communicate a new strategy by the end of this year. This new strategy to give you some hint will likely say we plan within the next 4 to 5 years, invest about between PLN 12 billion and PLN 15 billion portfolio. So doubling the business because this is how much we invested so far for the past 25 years and we want to invest similar amount of money in the next 4 to 5 years. So it's a significant growth of balance sheet and scale and we need and we want to transform technology in group to be able to do it much more efficiently that we have now that will involve significant investment but expected good payback from these investments in the horizon of 4 years or more. Another question. Could you say anything about the accumulated performance on the Spanish portfolio since acquisition? Yes. So overall, we started buying in what, 2020, '15, '16. Overall, this performance is good. There is maybe one midsized portfolio that yields a relatively low return and the remaining ones are double digits, mid-teens or more. There are some portfolios yielding today. And I'm talking now about our best estimate operating plan which is more ambitious than active accounting forgers. So some portfolios would be yielding even more high teens or over 20%. So overall, this performance is good and increasing and improving and this one banking portfolio that we rolled down is more of an exception of the road but still after being written down, it's still mid-level 10% IRR. So it's quite okay. Can you say anything about the provider you had -- sorry, I need to see more in Spain. And if there is any chance to get compensation for this issue? I mean -- I don't know if we can get any compensation for that. To give you a bit more detail about that. We struggled for the first couple of years in Spain to get quality direct debit service as some of the banks were unwilling to provide it with that. Likely, this was because of the industry, that the Spanish industry or banks had bad opinion about the industry and direct debit is like granting a credit line. And that therefore, we had the service provided by fintech by a less reliable company than the banks. Now the situation change, we are much bigger. We had a good competitive offering now for the direct debt service and this service is not provided by a reputable Spanish bank. So I think this problem will not appear in the future. Another question. Have you seen any improvements in the throughput from Spanish banks in start of Q3? I'm not exactly sure what do you mean if you say you mean throughput, meaning supply of portfolios, then I would say, it was already -- the improvement was already seen. We saw some big portfolios and we succeeded in securing them already in the beginning of Q3 and there may be some more coming in Q3 or Q4. But it's another specificity of the Spanish portfolio market is that those portfolios tend to be not many in terms of numbers and relatively big, which makes it more tricky. For example, when we have a problem -- temporary problem with one of those portfolios. But overall, after Q3, likely you will see a good level of investments in Spain that will say, which is quite satisfactory for the full year. So we probably will be increasing our investments more in other countries and other countries, I mean, Poland and Romania. Is there any opportunity for -- I'm sorry, I just lost sight of the questions -- I see them again. Okay. Is there any opportunity for us to expand -- enter into countries out of Europe? Well, of course, it's an option. But looking at the market now, I would say, there is still plenty of things we can achieve in those 4 countries and the restaurants, which is quite an encouraging. Beyond that, we don't have any concrete plans, but I want to mention there's two big markets that we like and we are not present in. It's U.K. and the U.S. and likely at some point, we'll take a look beyond that. Of course, there is possibilities but we have no view of those non-European markets at this point. Could you elaborate more on technological transformation and [indiscernible] cost as expected? We will elaborate on that but please be patient. We will be able to tell more detail when we talk about the strategy in the second part of this year, somewhat towards the Q4, we'll be able to tell you more and more concrete details about that. That is in the making down. Another question is group planning and bond issue and when? So we don't know when the next bond issue will be. As I told you, we're quite happy with increased funding from the banks. Possibly, there will be more money coming from banks still in Q3. And depending on how much and what we will need, we'll decide about the debt issue. So it may be that will not be a frequent issuer of bonds in the next 2 quarters. In the longer term, I think, yes, but this is undecided at this point. So we'll see how reality falls and react. Another question. You have mentioned the growing OpEx cost and number of employees. You're also investing in IT and automation. Will there be a time that you'll be able to reduce headcount on IT investments? Could you comment on the new market expansion? Let's take those two. So if you look at the growth of the balance sheet, which is an approximation of how much work we have and the growth of FTEs, you can see that the growth of FTEs is much smaller than the growth of balance sheet of business. In the future, in this next 4 years, likely this will be even more visible. So we think we'll be able to grow the asset base by 100% to double it. But likely will need maybe 20% growth of FTEs to achieve that. And the answer will be technology automation of processes. We will be doing much more technology and technological processes. So I don't think the number of IT personnel will decrease but I think we'll be able to make use of these resources that we have in a much more effective way once this transformation is completed. And another question was a new market expansion. So you have purchased portfolios in France, so we expect more investments that are already in second half of 2024. As you may remember, we have bought one forward flow agreement 2 years agreement from BNP Pariba Group. This investment is going very well. You see this already in results in other markets. We may decide to buy another portfolio this year. It will not be very significant and we see some other potentials too. As planned in the second half of this year, likely towards the end of the year, we will decide on the business case, how to enter French market and possibly at a similar time, a strategy we'll be able to confirm it. What we plan to do but all things today encourage us to continue our work on the French market. You also asked, shall we assume the Q2 profitability understand about the French market as a good guide for third and fourth quarter? Possibly, possibly. Of course, it's -- there is Slovakia, Czech, and German assets there combined but the French market is rather accelerating while those others are more stagnant. Digital transformation means considerably increased R&D expenses in the next quarters? Yes, likely starting from 2025, possibly a lot of them will be capitalized, but we don't have the details of that yet. And that's also that we will be able to tell you more concretely when we communicate about the strategy towards the end of this year. Again, this transformation should have a very high NPV and could return on increased recoveries and then decreased cost or accelerated recoveries. I think I covered all of the questions. I'll just wait a moment to see if nothing else pops out. Yes, I think I covered all of them. Well, thank you very much for your time and interest in our company. Hopefully, we'll be able to meet me or my IR team down the road. And if you need any further assistance, have questions, please always remember to contact us. You have our contact details here on the presentation. Thank you, and have a good day.