KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Okay, another approach. Michal is with us together. Michal, we are on Slide #3.

Thank you, I don't see presentation, but I'll be talking from my head here. So ladies and gentlemen, once again, sorry for the interruptions. The results of 2024 are the best results the company has had in its history. The net profit is over EUR 1 billion, close to EUR 1.1 billion. So it's a growth year still. It's a disappointing result, taking into account where we were after 3 quarters and our expectations that were higher, about EUR 100 million net profit higher, yet 3, 4, 5 months ago. The difference comes from the fact that despite overall the performance on our portfolios was very good, despite the fact that we had record high -- almost record high investments in this year we did -- we did face increased problem in Spain with legal collection or with hybrid collections after or during the legal process, which led us to about PLN 50 million lower-than-expected recoveries. And in our assessment that future recoveries will be lower than planned and at following negative revaluation that came into the Q4 result. Now looking at the situation, the company is in very good shape overall despite the Spanish problems, as I mentioned, we've overall achieved close to 100% of our operating target of recoveries. We have excellent results in all other 3 markets, and I draw your attention to excellent results in Italy, where we had over PLN 260 million of EBITDA as usually or almost as always, we had very good results in Poland and Romania. And in addition, our cash lending business Wonga and Novum in total contributed over PLN 100 million the EBITDA for 2024. Now looking at this result, you may see this miss on the results from Spain. On the other hand, you may see a plus -- a positive contribution for a release of provision of the tax asset, deferred taxation, this is an area where we can have significant variations quarter-to-quarter and especially when we change the business case for forecasting the next 3 years of planned tax transfers from investment companies to KRUK S.A. and that happened because we have a new plan, which is budget, we plan there are less tax transfers than we did half a year ago. And therefore, we were by accounting rules required to decrease the provision for tax asset debt, it's an area where also you can expect some changes. So most likely and Q4 and Q2 and some smaller changes in Q1 and Q3 where we don't have any plan. Now looking at the business. Of course, the issue to discuss is a situation in Spain. Now we have made very significant investments in Spain over the past couple of years. We've been present there since 2016 on the portfolios that we bought and worked on until '22. The performance is very solid. All the portfolios of a few -- from a few Spanish banks that we bought starting from end of 2022 and throughout entire 2023 after several months of very positive recoveries in any in amicable process, we encountered a significantly lower than plan recoveries on legal stream and on the hybrid stream, which is amicable process after the court in Spain makes a so-called admission decision, which means we will assist them with the case further due to [indiscernible] executions, although we are not there yet, and now why is that? We identified three reasons. One reason is that overall, the number of legal cases in Spain has significantly grown as we also described the situation of the Spanish -- on the slide about Spain. And apparently, capacity of Spanish legal system has not absorbed this increase, it has actually worsened because of strikes in the Spanish courts that lasted several months in 2023, but also later, we don't see that this improvement came as -- this improvement came. So we see a deterioration of speed of pace at which Spanish court process their cases. And it has to do both with capacity and the amount -- number of cases that is going into the Spanish legal system. Now the second -- I'll go back to the situation, but let me first explain 3 reasons that we identified that are responsible for the problem that we have in the past. So that was the first one. It's an overall market situation. Second of all is that likely the banking portfolio benchmark that we use to evaluate the price portfolios and given that back in end of 2022, we mostly until then bought consumer finance companies and a few banking portfolios, this benchmark that we use is not precise enough. So there is a risk and the investment risk that materialized that says, well, the history on which you price these portfolios is not fully representative of the reality of -- that we see. Why? Because these cases that you bought are different than the cases that you booked before and therefore have a variation. And that's, unfortunately, from time to time, is a situation, especially if we go into different asset classes of different -- different cases from different banks that we bought before. So it is unfortunately a reality of the Spanish situation. which is painful, especially that in Spain, the banking portfolios are big, and there's a few of them offered on the market. So usually, that process goes much more smoother in Poland, in Romania, in Italy, we would buy many more portfolios, smaller in sizes. Some of them would have better performance than planned, some of them worse. Here in that situation, unfortunately, the risk is negative for all the 3 major purchases that we made. Now is this a strategic problem for group and for group Spain? It is a big problem, but it's not strategic. So we believe we still will earn on those portfolios a double-digit IRR return. The curve will be flatter than we thought. But we believe we bought those portfolios at adequate margin that would allow us to earn still above average cost of capital even after the problem that we already identified. The other questions that you are likely asking yourselves, how conservative were we in this revaluation and what's ahead in Spain for us. So my view is that this PLN 145 million of the negative revaluation that you see in Q4 is adequate for what we see currently. And in that sense, I don't expect -- I don't have information today, especially after December and February that we should treat this revaluation differently. However, there's 2 uncertainties that are still ahead. First is that Spanish regulator see that the legal system in Spain is inefficient, introduced a regulatory change, which means that from April 2025, 2025, a new additional step is required before sending a case, any case to legal process, which is a confirmation that mediation procedure has been conducted versus the debtor. This is an additional step, which means the legal process is being extended. And the law is not very precise about how court should decide whether this mediation process was effective or not and what is enough to prove to the court that it was affected. This means that we have some uncertainty about how will the courts treat this new law. And secondly, because of that new law, the whole market, we expect is accelerating sending the legal cases through the legal process in Spain now before this new law comes into force, which is in April. As a result, likely there will be a new backlog of cases getting into the legal system in Spain, which may even cause longer delay than we see them now. Just give me 10 seconds, I'll try to connect to my computer to be able to see the presentation. Okay. Unfortunately, no, I don't even -- I'm not even able to do this. It seems like there is some Microsoft breakdown here and also does not work. Anyway, I'll go without the presentation. So overall, the situation at which we are -- as we have cut to the bone to -- versus what we see now, this revaluation is conservative in a way that we said we will not get this money. We will never get this money. We just lowered the recovery curve. This is an accounting forecast I'm referring to now. This is in contrast to the operating plans, which also was decreased, but mostly it was delayed. So yes, we have lowered our expectations for recoveries this year, but we think we will recover most of this loss in the future years. So it's a more -- of course, it's a more optimistic scenario. Reality will tell where -- which curve is materialized. There is still some risk that because of these changes in the legislation that I described, this new law is called MASC. It will cause some further delays. And we may find out in July, I don't expect anything for Q1, but maybe in Q2, maybe in Q4, where also we expect significant increase of recoveries from legal system in Spain according to the current curves. Maybe if that doesn't happen, then we will need to make additional negative revaluation. Although this is maybe -- I have no reason at this point to believe that such risk will materialize. But I want to show transparently that -- the uncertainty because of this legal situation is there. In any case, this is a situation where we believe in midterm and long term, definitely, we will turn around these portfolios. We know that when a court makes a decision, it is a decision that we can expect that we expect it's a positive decision. So it's not a problem with the cases. It's a problem how the legal process works versus particular cases. So this is about Spain. Other markets, the performance is excellent. We don't see any reasons here to be negative and any reasons not to expect further positive revaluations on the Polish, Romanian books and hopefully also we'll be seeing some positive revaluations in 2025 for -- on the Italian book. If you look at 2024, of course, you see a significant increase of indebtedness of the company, some growth of about -- some growth of -- I think, healthy growth of cash EBITDA. But you see here that profits do not grow as fast as the debt has grown. This is because there is a relatively long payback period for the portfolios we're buying. Currently, this cash flow payback is between 5 and 6 years, closer to 6 years. So we are growing the barge base which will result in greater profitability in the future. But looking at the near future, we are expecting this year to allow us to grow at a low double-digit pace in terms of profit and also about 10% in terms of recoveries. Leverage, we believe that this level of leverage should be sustained or decreased in the future. We may go up if you look at net debt to cash EBITDA to maybe 2.8, maybe 2.9, but definite but in the longer-term horizon, which is a few quarters or a year or 2 years, you should see that net debt level leveling off and then decreasing versus, for example, this EBITDA, cash EBITDA measure. This year, as we pointed out also commenting our strategy, we are expecting about PLN 2.5 billion of investment. This is what we -- this is roughly what we're budgeting. So it's a decline versus last year, but it is still a level of investment that allows us to grow our balance sheet and in the future, our profits. Other than that, situation is stable. We have concluded a very long tax audit with Polish authorities. It lasted 2 years. It resulted in a few million zloty of additional tax a year in total PLN 20-plus million, which is well above -- well within the provision we made over last year, the matter is closed and we have a clean level record for the period between 2018, until '23, which is very positive because we shouldn't be expecting any more issues on taxation for this period of time. Just to remind you, global, this additional tax legislation is an issue. Likely will start to account for the tax from 2027, pay this tax after several months only in 2029, but 2027 is may be the first year where this tax is already the burden is visible in the P&L unless the law changes. And here, the situation is dynamic because at the current situation, American companies are clearly preferentially treated as U.S. have withdrawn from global and Europeans have not. So I believe there are reasons why this law should change not to give preferential treatments to EU companies also in our industries. But we don't know when and what exactly would change in this legislation. I think this is the most important comment part of the commentary. Maybe I'll just add access to funding is very good. Polish debt market is very strong. You may observe that we made a few very successful issues to Polish retail investors. I expect also Polish institutional investors will be happy to buy our bonds if we decide to do it. So access to funding is good. Overall, the priority for the management is now, first, digital transformation, make most of the resources that we put in this project; and second, improve the situation in Spain. In order to do that, we already strengthened the team and we'll be watching closely how -- what can we improve in the operating process, what can we learn from what we've done and of course, look cautiously at new investments for some time and try to adapt as best as we can to this new legal situation after this legislation comes in April with this additional legal step. So I will pause on that and welcome now your questions. I will not see them. So I will ask Babka to read that to me.

Okay. Michal, first question is about revaluations in Spain. Do you expect to repeat or to make some further revaluations in Spain this year?

My expectation is my most current plan, which is budget, which calls for 0 revaluation in Spain this year. But I told you that there is uncertainty coming from this legislation and this uncertainty in the short term of 2025 is on the down side. So there is a risk that sometimes in May or in June or some other months, rather in the second half of the year, we will see that we will -- we are not getting as many -- as many recoveries from legal process, and that will result in the necessity to further decrease the evaluation of the asset. But this is a possibility. It's not planned. It's not something I expect, I can tell you that I expect good recovery in February in Spain.

Another question regarding revaluation on other markets, on the rest of the markets, do you expect the positive or negative revaluations in Poland, Romania and Italy?

Significant positive revaluation as planned, as planned in our long-term business plans from Poland and Romania. So nothing changes here.

Another question is related to Wonga. Could you please give us some more information regarding the plans for our loan business?

Yes. So we had a very successful year in 2024 for Wonga that's the best plan in company's history, the company has 2 important initiatives in 2025 and beyond that. First initiative is to do more business in short term, meaning 1, 2 months loans, which under -- in Poland, which under current legislation is more profitable than the installment loans that today may make up over 80% or 90% of the business of the Wonga. And Wonga has launched a marketing campaign to do that, and we'll be trying to be more present in this more economically attractive age of the market. And second project that we are launching in Wonga is to start to sell Wonga loans in the second half of 2025 in Romania. It will be a startup basically, but we already have a business plan. We join forces them, taking synergies between group and Wonga and this team has just been now recruited and will start to work some time in Q2 in 2025. And of course, the horizon is in the next 3, 4 years to have a good profitable business in Romania.

Okay. We have last question regarding our investment plans. How do you see investments in 2025, especially in Spain?

Well, of course, of course, Spain is a sensitive area now after December. So on the one hand, we have a budget for investments in Spain, which calls for about EUR 100 million of investments. On the other hand, every case of new investments space will be looked upon 3, 4x, and we will not shy away from deciding not to invest if we will believe this is still risky or that the local management should rather concentrate on improving the quality of the back book performance rather than getting new stuff. So I would say Spain is a question mark, how much we will invest. We -- I'm not saying we will not invest. I'm saying -- we will only invest in things that we will say will make sense in terms of risk, but also priorities for our operations in Spain and the priority today, #1, #2, #3 is the back book. What we have, we have the PLN 1.8 billion worth of back book on the balance sheet. It's a lot of money, and it should produce a lot of cash in the future, and this is our most important priority. Of course, we've learned already the valuation process, the pricing, whatever the new portfolios will come, we will price them with the knowledge we have now. So automatically, we updated our pricing benchmark and we will be placing this. But this is the second priority or our third priority this year.

Okay. That was the last question. So I think we can move to the summary of the presentation.

So summing up, we -- despite this hiccup, let's call it, in Spain, we are optimistic about 2025, optimistic about implementing our strategy for the next 4 years. As you remember -- as you may remember, we tend to continue to grow our option new warrant option program calls for at least of 12% growth per year on the gross profit. Add to that, about 4.3% dividend yield that we have and you had about, say, 15-plus percent growth a year, a combined total return for shareholders for the business. So this is our plan we plan to achieve it on the markets on which we are present plus France that will be gradually growing, we are now concentrating on digital transformation, which will bear fruit only in a few years, but we believe it's strategically a process that can increase our competitive advantage in the longer term. And in the really long term, we will be looking at what is the right moment and what is the right approach to possibly entering U.K. or the U.S., but this is not like to be the share. So overall, we are concentrated we were fully aware of the problem in Spain and will be concentrated on solving this as well. Thank you very much, for listening for your time and once again, apologies for the technical problems that we encountered.

Thank you for your attendance, and have a great day.

Thank you. Goodbye.