KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Good morning, if you're dialing from the U.S. My name is Michal Zasepa. I'm CFO at KRUK, and it's my pleasure to host today's call in which the Board of KRUK will present the strategy for 2025 and 2029. It's my pleasure to host today the full Board of KRUK S.A. And I'll take this opportunity and ask my colleagues to introduce to you before we start the proper presentation. Ula, please go ahead.

Good afternoon or good morning, everybody. My name is Urszula Okarma, I'm 23 years with KRUK. I'm responsible for product and investment strategy and also responsible for key support functions such as legal support, GDPR, compliance, nonfinancial risks, ESG, HR. That's all.

That's it. Back to you.

Welcome, everybody. Adam Lodygowski, I'm Chief Data and Technology Officer here at KRUK. I'm with the company for more than 4 years now. I've got a technical background, primarily in the investment banking area. At KRUK Group, I'm responsible for the portfolio evaluation, statistical model development, including AI, technology, cybersecurity and data governance. And jointly with Piotr Kowalewski, so our CEO, we are currently sponsors for the entire digital transformation program, which is called New Horizon, and you'll hear about it in a moment. So welcome.

Thank you. And Piotr.

Welcome. My name is Piotr Kowalewski. I've been working at KRUK for 21 years from 2004 and COO, responsible for operations and strategy on the retail business, enthusiast of lean approach, [indiscernible], PDCA, improvements, improvements and that's all I mention, we work hand-in-hand business in IT in an agile way on our transformation.

Thank you very much. I will just add, I've been working with this great company for 20 years almost since 2025, and I'm CFO and also responsible for the cash lending business into KRUK. And Piotr, back to you, the Founder and CEO.

Good afternoon. My name is Piotr Krupa. As Michal said, I'm the founder, shareholders and happy CEO of KRUK Group. I started 27 years ago right after the graduating from law school with just EUR 400 equity. And today, we are a much higher company, much bigger company. And it will be our pleasure -- my pleasure as well together with the Board, present to you the new strategy and also summarize of the implementation of our company strategy for the years 2018, 2024. This period has been one of the dynamic growth and significant achievements for the entire group, which we can now proudly celebrate together with our shareholders. One of the key goals we set for this time was the achievement net profit around PLN 700 million by 2024. Thanks to consistency, commitment and the hard work for our entire team, we reached this target much earlier already in 2021. Cumulative net profit of KRUK Group between 2019 and 2024 amounts to nearly PLN 4 billion. Michal said more detail in his -- tell you more details about this, on his highlights. During this period, we invested over PLN 11 billion in that portfolio. None of this success would have been possible without the dedication and professionalism of our KRUK Group employees. And they are at the heart of our organization, and I would like to take this opportunity to thank each and every one of them for their contribution to building our collective success. Congratulations to you all. I'm proud that together, we are developing the KRUK company, turning challenges into opportunities and creating value of -- value for our shareholders, creating value of our shareholders. Thank you very much, Michal. Give more detail for our shareholders' information, please.

Thank you. So in the first part of this presentation, we are summarizing what we've achieved in this previous strategic period that ended in 2024. And you see on this slide our history of profits in this past couple of years. It has been outstanding in terms of growth, if you look at the longer-term history of the company and also very high return on equity for all of our shareholders. So we're very happy with it that we delivered much more than we promised to you back 4.5 years ago, announcing the strategy for '19, 2024, and telling you our goal is to reach EUR 700 million. We've done it with a significant surplus, and we've done it earlier than promised. We have made, we believe, very good investments and especially large investments in the past 3 years, totaling on average well above PLN 2.5 billion for the past 3 years. And just to remind you, with our cash flow profile with our accounting, majority of net profit from these investments, we will see deferred 4, 5 and more years later. So this is one of the reasons why we have stable and good prospects ahead of us, the good investments that we made in this previous strategic period as we are witnessing strong recoveries across our main countries. In this time of the past strategic period, we have built a very strong base in our core business, which is purchasing, investing in unsecured consumer debt, mostly from big European banks on 4 of our main markets, Poland, Romania, Italy and Spain. We have grew the value of our assets by over 100%, totaling close to PLN 10 billion at the end of the third quarter of 2024. And we became a market leader in investing in consumer unsecured portfolios in all of those 4 markets. Before that, we were a market leader in Poland and Romania. Today, we are a market leader in each and every of those 4 countries. We also were not afraid to cut some businesses and stop investing in businesses with limited potential for growth. We saw it at profit our credit information here in Poland, and we also halted our investments in new portfolios in Czech Slovakia, Germany, looking for an exit in the midterm from this market. So we, for years, had a concentrated strategy on work on what we know best and what gives us the best potential with optimizing the return for shareholders. We have also unlocked in this historical period 2 additional potentials one was the diversification and acquisition of a cash lending business in Poland, [ Ma ], which at that time, we bought from [ ships ] of a bankrupt U.K. company, but with sound balance sheet and with professional, highly ethical and professional team of people managing the business here in Poland. And with these people, we grew that business very nicely, as you see here, the balance sheet grew over 100% and EBITDA from around 0 or it's a small negative, was at over EUR 70 million for 3 quarters for this year. And in addition, we also promised to look for additional markets to enter. We have researched the French market. And today, we will be able to tell you, yes, France is becoming our new market, market will develop in the next couple of years. Doing that and achieving this, I think, remarkable financial success, we did very carefully in terms of our liquidity risks and leverage risks. We operate it using, as always, our guided -- our golden rule of liquidity management, which means we issue debt without the intention of being forced to refinance it. So at the point, when we issue a new bond, for example, we know that we should have assets that should repay this bond, when it's due without the need to refinance and tap to the bond market again. This is a conservative rule that kept us safe through this rough period, where many of our competitors suffered because of what happened to interest rates, their leverage. And as you see here, we contain the leverage to moderate level. However, it's fair to admit the leverage level have increased over the strategy period, and we will tell you later that we put certain ceiling above which we don't want to go above, and this is the reality we are in. So what was the result of all of that for shareholders? You can see here that over this past strategy period, shareholders received a return of over 230%, coming mostly from share price increase and partly from dividends or buyback and payouts. This is, I think, a decent return. However, this return was achieved in very unfavorable, I would say, stock market conditions for KRUK because our relative valuation on price earnings dropped by a very significant factor. We were traded at over 12x price earnings back in 2018, we are today priced at 7x current earnings, so much less than before. Still the return was delivered. So where are we in the beginning of 2025 in terms of our market position and compared to the peers. As I told you, we are starting this new strategy with a very strong spending in our core markets for consumer unsecured investments. Look at the chart at the right hand, this is the market shares in this one niche of NPLs, but the most important niche and that we are operating in. We have a very long history, where we have over 20% market share in Poland and well over 50% market share in Romania. We kept this dominant position or maybe even we improved it, if you look at Poland. But what also makes us also very happy is how strong our position is in Italy and Spain for the past 3 years. So from a newcomer to a market leader is a story for consumer unsecured portfolios for KRUK in Spain and Italy, and those are 2 large European markets that offer us more potential in the future. Of course, we're not doing it -- this for market share. We're doing it to maximize value for shareholders. This picture looks good too, look at the side -- left side of the graph here, in this historical moment, which may be will change in the future. But as of the last 4 quarters of 2024, KRUK's net profit was higher than the combined net profit of our main at 6 new peers trading on stock exchanges across the world. And we were, by far, the most profitable company among those in terms of return on equity. Now let's go to the proper strategy for '25-2029. Piotr, would you like to give an introduction. You're on mute.

Sorry for that. Okay. And dear shareholders and [ analytics ], it's great pleasure to present to you our new strategy, 2025-2029, which outlines the development direction for KRUK entire group in the coming years. This strategy is the result of in-depth analysis, observation of the market trends and our past experience, which has helped us build a solid foundation for future actions. Our priority for this period is to maintain a fast growing net profit growing, which remains one of the pillar of our success. We also plan to significantly increase the scale of investment in unsecured debt portfolio and keep our strong leadership position in the industry and maximizing value for our shareholders, of course. What sets the upcoming years apart is our ambitions to lead KRUK's technological transformation. We would like to explain what does it mean for us. And let us introduce the strategy and more details in numbers, Michal, please continue.

Thank you. Thank you, Piotr. So we start from the subtle things, which is mission, vision and values. We start from it because it does matter for KRUK, how we identify ourselves in the company, how we bond with each other and how we cooperate. And we updated for us and our people, the mission and vision. The mission now says we guide our clients to work and pass out of debt. So we have this positive function. We offer it ethically and effectively, while educating society about responsible financial management. And this mission is something we strive to put into reality every day. And the vision in which we work is we're building a world of financial balance based on mutual trust, where promises and commitments are fully honored. And we are at this important function of making this happen. What was not updated is our values, they stay the same as they were for many years and KRUK is about being respectful to shareholders, but also to one another, to our clients and debted individual to our business partner. It's about collaboration, constructive dialogue and working out solutions. It's about being responsible, accountable for whatever is my job, but also in this complex business complex work looking for pragmatic simple solutions to complex problems and never, never stop to -- look for ways to improve of what we do because we never are satisfied with status quo. This strategy is built from a few pillars, which we name investment excellence as we every day make investment decision, price portfolios need to know where the market is to build the funding. And of course, once we buy -- when we start to work with these hundreds of thousands, thousands of millions of cases, and we strive to be excellent in operations. This excellence in operations will be further improved through analytics and technology, data governance and KRUK's way of working, our method of collaboration that we will expand upon what we mean by that later in this presentation. And of course, the fundamental for that is people, how we talent, do we retain and have in KRUK and also managing the disorganization these processes so that we are not exposed to risks we don't need to be exposed to risk management. Now let's go into each of those areas in more detail. Investment excellence, we plan to invest roughly about PLN 15 billion over the strategy period. Ula, please comment how do you look at that. You are on mute.

Thank you, Michal. I think, Michal you are asking, if this is a realistic ambitious goal. So yes, it looks like ambitious goal because we plan to invest as almost as much as we invest on during entire 27 years history of KRUK, but let's have a look on evolution of our investments. We have on the graph for strategic periods. So we started in 2004. And during first strategic period of time, which ended in 2010, we invested PLN 0.5 billion. Then we jumped to [ PLN 6 billion ], we invested this amount during 2011 to 2018 and during last investment strategic period over PLN 11 million. So how was it possible? This growth reflects not only growing potential to operate on bigger scale, but also our geographical growth in 2015, we entered Italy, we entered Spain before it was set, but during the last 3 years, we obtained market leader position in those 2 countries creating much more higher potential to invest in entire market covered by KRUK right now, adding France. We have a huge market with over 230 million of people and our assumption to invest PLN 15 billion is connected with all current jurisdictions plus a decision to continue investing in France. Last 2 years, we almost touched magic PLN 3 billion of investment. I can remind you that our plan was lower during the last 3 years, we were targeting to invest around PLN 2 billion to PLN 2.5 billion taking into account a better rich pipeline and some unexpected opportunities. We decided to invest more. So we can say in 2023 and 2024, we invested what we plan to invest in 2025. That's why our plan for 2025 is at PLN 2.5 billion and then gradually growing to free, and we plan to end our next strategic period investing over PLN 3 billion. Of course, it's PLN 15 billion. It's not -- it's not our target. The most important is quality of parcels we would like to buy. And also investment excellence it's goes beyond the investment itself. It's important to have good understanding of each market, have good understanding of composition, be present in all tenders and make wise choices to end around this PLN 15 billion of investment, but we've targeted return.

Thank you very much. So this is our assumptions for the front book. We are saying here this assumption is done with relatively conservative outlook for the market. We do not expect a big supply of portfolios. We expect to continue to be a market leader in this niche consumer unsecured portfolios, and we expect to continue to do these investments at high-teen percent IRR level as we've been doing it in '24 and '23. So this is the so-called strong book part of our assumption for the strategy. What about the bank book. And this is explained on Slide 16 at the bottom side. So if you look at what we had in our back book at the end of third quarter of 2024, it was about PLN 10 billion of book value on our balance sheet of portfolios with an estimated recovery, future recovery of PLN 21 billion as evidenced in our financial statements. And what we tell you today in addition is that our ambitious goal for the next 20 years under this strategy is to achieve well above this 2021, additional PLN 8 billion, totaling PLN 29 billion on the back book that we currently have. If we manage to achieve that, then our revenues will be increased by this additional PLN 8 billion over the next 20 years. But a significant part will come in the next 4 years out of this PLN 8 billion. And also, if we deliver on this plan, you can expect that we will be obliged to recognize further positive revaluations on these assets. Mostly, they will be coming from Poland and Romania, but not only also increasingly from the new countries. So if you wondered whether the history of high positive revaluation has ended in KRUK, the answer is most likely not. Most likely the biggest positive revaluations may be still ahead of us. In addition, when we look at this planned new investments, this PLN 15 billion of possible future outlays in new portfolios. This would lead us to a total of about PLN 20 billion or balance sheet at the end of 2029, which would imply about PLN 20 million of cases in our operations. This is, in that sense, in this strategic period, we are talking about more or less doubling the balance sheet of the cases and almost doubling the number of cases. Now a significant change is also planned for operation. [indiscernible] what do we want to achieve in the strategic period in operations for that purchase?

Okay. Thank you, Michal. I'll cover from here. So I will shortly try to tell you about operational excellence, how I understand. And as we have this value, I will now try to keep it simple. If I imagine, if I were to imagine KRUK after transformation KRUK 2030. And I would shortly describe how it looks like in the future. So I would say this. KRUK is a company which is much faster is rotating the invested capital. This is the first bullet. Second, I would say this is the company in which processes. It has doubled the level of automation for self-service. And third, it resulted in just better productivity and efficiency measured by recoverers to FTE. So now I'll try to shortly describe bullet by bullet how we understand those KPIs and those goals we are setting ourselves. So first is lead time. We call it the lead time. This is the time which is passing between the investment expenditure and the time -- by the moment the recoveries cover investment expenditure and direct operating costs. Today, it's roughly around 5 years it take us and we want to be improve them by 20%. So to achieve 4 years, how we want to achieve it by doubling and improving the ratios of our self-service and automation. The self payer, this is the percentage of recoveries coming from our clients directly, which is clients, I mean, person indebted, [indiscernible] and the hybrid legal stage coming from the self-service processes. So currently, we have 15, we plan to have 30. Automation, how I understand it, this is the percentage of documents because in the -- on the legal stage, we [ transmit ] documents between us and the external world. So how many percentage documents are processed fully automatized manner. So also, we setting ourselves a year ago to double the level. And the last is the, I think, the same to us. So we take all the cash collected and we want to be 50% more efficient, when we take all cash collected. And divided by all FTE working on it in the market, plus people working in the headquarter. One comment -- side comment here, we include here the people working on the purchase business. So we exclude our servicing businesses and will exclude our [indiscernible] business, while they contribute on EBITDA level, they don't contribute on their payments level on the purchase. So this is just a simple reason. And of course, when I think about the future, I also see the KRUK operating on somehow 20 million cases, so growing from 12%, 13% right now. And also, we want to achieve it by not growing on FTE so much because we -- today has around 3,500 FTE. And we said we don't want to cross the line of 4,000 people. So we want to be more efficient, buy more automation, and also reduce the cycle lead time, the recoveries. So if I -- how we want to achieve it if we can go, Michal on the next slide, we want to focus on the process reengineering. But maybe I will just try to refer to the one slide Michal was commenting earlier. You've noticed that comparing to our peers, we are today the most efficient company. I mean the ROE. I mean the net profit Michal was showing in one of the tables. And what led us here, I would say.

I will still show it. That was in before presentation for Polish investors, I will still show it.

Yes. You will show it. Okay. So I would say, like what brought us here I would say, first of all, very good processes and second of all, fantastic people. So we have fantastic people and using this opportunity, I would like to say a big thank you for all our employees, who every day works on improvement. So thank you very much. But also when Michal was commenting the values, there is one value about the development and I like the most. There is a wording that we have this inner need of growth and develop ourselves in DCA, even when we achieve success. That's why even though we are successful and effective, we want to put ourselves those targets, which was mentioned in the previous slide. And starting from process reengineering and saying, "Hey, maybe we can still find a better process and better way how we settle the things and start from this point. "We want to reiterate the transformation, which are the focus as a holistic view because transformation is -- okay, one is the process. Second is the tools, but third, most important, also the people who engage and improving this transformation. We spent several last quarters to understand better. Our current disease situation when it comes to technology or future state, what are the gaps, what are the milestones, what are the resources needed and we do plan to invest PLN 0.5 billion over the next 5 years on the IRR expected at least 20% level, most of them coming from CapEx. And we will want to focus on 3 pillars. And Adam, if I can ask you for taking over and comment on the technology part.

Sure. Let me state from that point very clearly that the technological part -- it's not just the responsibility of IT. We have a very strong belief that creating a new ecosystem, new technological and analytical ecosystem for KRUK Group has to be joint venture between business and IT. And this is how we approach this task. Creation of a new -- entirely new technological ecosystem is definitely a challenge. But we look at it, our motivation goes into 2 parallel streams. The first one is pretty obvious and intuitive. We would like to achieve the operational goals that Piotr just has mentioned. And I would like to state it also quite clearly that those goals are not just for the operational team. Those are the goals for the entire organization and equally, people on the technology or IT side, are responsible for achieving those goals as much as the people on the business side. In order to achieve those goals, of course, we need to have a very modern and scalable ecosystem. Our current system is okay, is good, it's strong enough, but we want more and we would like to make sure that we, as an organization, can leverage the most up-to-date technological tools, and we can leverage everything what is being created as of now on the market. Of course, this comes without saying, but we would like to be sure that we can automate fully our processes that our implementation and adaptation of analytical tools is simple and robust and of course, our entire ecosystem is safe, secure and controllable, so to say. Of course, we would like also to make sure that we can leverage all AI-related toolkit because we understand that this is the upcoming future that will definitely help us improve our processes. So this is one motivation that you can read clearly on the slide. There is, however, also with a second motivation. And this motivation is slightly forward-looking. We understand that the change, that this entire societies are undergoing. So effectively, our customers, our clients is very rapid. And we also understand that our current products, our current offerings and form of contact with our clients may quite quickly change because of the upcoming technology. And we want to be ready for that. We want to create the new IT ecosystem that is flexible enough that can accommodate all those needs and that can change equally fast as the -- our reality as of now. So it's not only to achieve the targets that we are setting to ourselves, but also to be able to follow all the changes and make sure that our offerings to our customers and clients is at a very high level. Of course, in order to achieve that in order to leverage the most modern analytical tools, we need to make sure that the information, so data that we have is organized in the right fashion. Up to that point at KRUK Group, we were very diligent about data. We understand that we have roughly 9 million people that we have roughly 12 million cases. And as you already heard, we want to double that number in the upcoming years and the window of the strategy that we're presenting today. If we are going to do so, and we want to be very flexible, quick and we want to adopt all those new analytical tools, we need to enhance the entire government around the data. So we want to make sure that we are approaching it holistically, and we want to make sure that we are creating a new processes that are for the entire KRUK Group, not only in one individual country, but for everybody giving very clear responsibilities and naming very specifically data sewers, data owners and so on. This effectively is going to not only allow us to keep our information and keep everything what is the fuel of our organization in the right order easily accessible, but it will also allow us to be much faster when it comes to implementing new analytical tools. That, of course, includes an AI. The current modern tools are becoming more and more data driven, more and more data heavy and we want to get ready for that. And bottom line, we would like not only to have everything in order. We would not like also to have the most modern tools leveraging our data, but we would like effectively to be very purely data-driven company that were all our decisions are not made based on the intuition, but are made on a very specific analysis and very specific data that we can process quite easily and smoothly. And of course, the third pillar, as you've already heard, is people and how our people are actually working. And here, I'm passing voice to Piotr Kowal to comment on that.

So as you see the pillar on right is we call it KRUK way of working, which I would say it's combining the best from lean and agile. In fact, there are those 2 methodologies have some common routes, but maybe if it's not understandable fully, I would just deliver short definition how I understand. Lean is adding value, eliminating ways for [indiscernible] using people potential. And I would like to admit that we are quite good at it. Our people are fantastic because we've practiced it for many, many years. And so this is the skill competences we will use in process reengineering. And Agile, this is something new for us. We are entering to this world. It's about delivering those great brilliant ideas, much, much faster in the technology ecosystem. So we will be setting a new roles, trips, product owners, chapter leaders, et cetera. And the very important thing here in this agile that we are setting the same goals for business and IT teams together. Jointly, so this is in only agile. So we are taking this journey. Of course, we want to support our employees during this transformation will be a lot of learnings, reskilling, et cetera. I think what I will also tell about people in the part. And also, we aim to establish and be kind of self learning organization, how I understand it. These are the autonomous team, who can very fast identify the problem understand by using lean tools, the root causes of the program, addressing this dedicated measures and very fast deliver that change the idea on the process. So if I were to sum up, remembering from the previous slide, faster, our KPIs and the loans are faster lead time, much more automation and self service, better efficiency, productivity delivered by process reengineering, new technology system, new data and where you're working. So this is our aim and purpose. Thank you very much.