KRUK Spólka Akcyjna (KRU) Earnings Call Transcript & Summary

Good afternoon. My name is Michal Zasepa. I'm CFO at KRUK, and it's my pleasure to host the communication for the second quarter and first half results of 2025. You should see on the screen the presentation, which is also available on our website. Please give me several minutes to present. And in the meantime, ask questions via chat Teams application here, and I will refer to those questions, answer them after the presentation. So let's start. This was a very good six months for the company. We earned PLN 584 million of net profit. Compared to our expectations and budgeting, this is better than what we planned. Still, it's 3% less than last year, but please remember, there was an extraordinary high base for the last year. So this is nothing to worry if you are asking yourself the questions, are we on a path to grow net profit this year? Yes, we are. Recoveries overall were very good. And there were markets where they were better. There were markets where they were somewhat less than very good. But overall, we are on plan and the trend is positive. In all of the markets, we were profitable in Q2, and it looks like we will be in the following quarters. Underlying cash position of the business is very strong. Cash EBITDA is at the record high PLN 1.3 billion for the six months. We continue to have a very good return on equity. You can see 22% for those past six months. Our assets are steadily growing 18% year-on-year, reaching close to PLN 11 billion. Our leverage is contained at 2.5x at the end of June. It should somewhat go up as we increase investments in debt purchase in the following quarters, but it doesn't look like we are reaching anywhere near this internal limit of 3.0 this year. Investments were more or less on plan, about PLN 800 million for the six months, and I sustain our expectation that this year, the investment should be around PLN 2.5 billion saw this -- given what we see in the markets. If you look at the split of recoveries, Poland represented 41% and Poland had superb results of recoveries. Romania was at 18%, and it was a result achieved with the negative effect of weakening Romanian currency, Romanian leu weakens towards euro at between 2% to 3%, which resulted in lower recoveries, lower revenue, but also lower EBITDA for that business in this particular quarter and the difference -- the impact was a little more than PLN 30 million. So it was substantial. Despite this fact, the Romanian business, as you see on further slides, performed very well, but it would be even better if it wasn't for the weakening of the currency. This risk is inherent as we're not hedging our position because it's not profitable for us to do that in the longer term. So please remember this situation can occur from time to time. Overall recoveries were 8% above the accounting curve, and they were -- therefore, there was some room for positive revaluation in some of the markets. In terms of outlays for new portfolios, Poland took the biggest share as the biggest market and where we had good competitive position, 46%. In Romania, as I will explain later, we also kept a very strong position, but the market supply wasn't that big. Italy was quite good, although our market share wasn't that high, but there is new portfolios coming likely on the market, and we think we'll be able to buy more in the following quarters. In Spain, because we had risks regarding to the external legal environment, we became -- we stayed cautious and we invest quite selectively. So there wasn't much of investments in that market. Overall, we're quite pleased with both recoveries and investments, and we're on the way to achieve about PLN 2.5 billion investments for the full year. If you look at the P&L, as I said, on the bottom line, we're satisfied here. We are where we plan to be or we're a bit ahead of that in terms of revenues. If you look at those past six months, we have lower revenues from Spain that we expected because of the consequences of the negative changes in the legal system of Spain. However, this situation seems to be more contained down and stabilizing. On the other hand, we have better-than-planned revenues from Poland, Romania and roughly on plan in Italy. So again, two of the strong markets are compensating one of the weaker markets, but this weaker market, Spain is becoming stable. And as you see, despite the slowdown in revenues, improved profitability much this last quarter. The operating and administrative expenses grew by 13%, mostly because we grow salaries with the market, especially in Poland and Romania, but also in addition because we are undergoing this digital transformation, which means additional costs of people, some additional cost of CapEx that goes into higher amortization at some point and some extra expenses, which are expensing the P&L related to this development. And if you look at the financial costs, they grew, but they grew scale of the funding on the balance sheet -- and one other element worth mentioning is income tax. We had a release of provision for deferred taxations in the Q2 for a considerable amount of about PLN 37 million. This is the outcome of the flows in the company and planned flows in the next couple of quarters. There was more bond funding coming to the company. There was less investments in Spain. And as a result, we did not need to make transfers from our investment companies to the mother company that would be tax and there will be less of them than we planned. And as a result, we released this provision for deferred taxation. Taxation in the following quarters of this year should go up, but likely for the full year, we'll have an effective tax rate of single digits, mid-single digits. The group is very well capitalized. We enjoy very good and diversified access to debt funding. You may have seen that we successfully placed on the Polish wholesale market a 7-year unsecured bond at competitive terms, and we followed with issue of 6-year bond, unsecured bond toward the Polish retailers, achieving a margin of below 3%, 2.7% to be exact. Then in July, we also communicated to the market that we enlarged our revolving credit facility by EUR 70 million. So we are good in terms of funding for the full year. We don't exclude further bond issues, but they are -- it's not given that we would have any need for them at this situation. And the cost of funding has been going down. This is very good. But please remember also that if the global cost of funding goes down, likely there will be more pressure on prices of the portfolios. Those prices will go up, the IRRs will be under pressure to be [indiscernible] this is correlated. And this is what -- to some degree, we see, the market is competitive, but it's reasonably competitive. Now let's take a look at the segment analysis. You see here that Poland brought over 40% of the investments, as you see here. So those three markets will represent a great majority of the investment this year. We will continue to be selective in Spain until we see that all of this uncertainty goes away and we can return to significant investments on that market. But still -- that's still not ahead, and we don't know when exactly that will come. You see here that the business is profitable everywhere. And actually in the six months of this year, the results grew every -- in every -- each and every [ pedantic ] segment. Please also take a look at cash EBITDA, which was very strong in Poland, very strong in Romania, very strong in Italy, but also strong in Spain despite the weakness you saw on the results. Polish market was good, stable supply for many portfolios, comparable size to what we saw in the six months of previous year. In this market, KRUK, we secured about 1/3 of the market, which likely means we were #1. Polish business performed very well. The recovery strength allowed us to once again recognize a significant positive revaluation. There is nothing that we see identified as regulatory or consumer-related risks. So we expect following very good quarters in the near future. Romania, the market was relatively small. As you can see here in that market, we took great majority of the deals with almost 80% market share. We hope there will be bigger supply in the second half of the year. And the business itself performed again extremely well. Please bear in mind here, we look at the Polish zloty and the results would be about PLN 30-something million better on revenue and EBITDA if it wasn't for the weakening of Romanian leu towards euro. And even with this negative effect, the profitability of the business remains quite high on all metrics. And again, here, we don't identify any major issues going forward. In Italy, the market was relatively big, but similar in size to what it was last year. We had a relatively modest market share. That's the outcome of competitive game, but we think we will improve in terms of new outlets for portfolios in the second half of the year and there are several very interesting portfolios offered on the market. The business provided very good results. You see here improving profitability, strong EBITDA. There was significant legal costs here that are included in this EBITDA, but overall results grew. If you look at EBITDA, that was the highest results in any quarter since Q3. And also the trend of recoveries was strong enough for us to decide to recognize upside of this PLN 31 million of positive revaluation. So again, positive trend. And last, out of those four big markets, Spain, the market was good, but we were selective and we did not invest much. You can see here that in the six months, we invested only PLN 47 million, which is fine. We have a big portfolio to manage and we concentrate on internal work to improve it. It looks like this legal situation is stabilizing. July was a relatively good month. Until July, the second quarter, the recoveries were very close to the accounting target and some portfolios were beneath and their accounting target, some portfolios were above it. We decided to decrease the evaluation of those that were belief. And therefore, you see a relatively small negative revaluation of those three portfolios. At this point and after July, I'm moderately optimistic about the future, meaning I don't know yet whether this completes the weakness of the Spanish market, but it looks like we are at the bottom at this point and the likelihood of another negative revaluation is much lower today than what we thought, what I thought three months ago. So it's a moderate optimism. And you can see it's a significant turnaround in terms of profitability, but it should be better given how much assets we have and this EBITDA should be going up significantly if things are going in the right direction. And this is -- we do what we can to improve the situation internally and be ready for the [Technical Difficulty] in Spain to kick off again and start producing these cases as fast as it should. And last, the other markets, which includes Czech Republic, Slovakia, Germany and France. And just as a reminder, we are in process of exiting Czech Republic, Slovakia and Germany. In second quarter of this year, we sold a part of our Czech portfolios, and we had insignificant a few million zloty gain on that. We invest only in the French market and the results overall for all of the segments are good. As you see here, profitability is quite good and EBITDA as well. Our cash flow business performed well, another good quarter for [Technical Difficulty] and -- so in summary, the second quarter of this year was a very good quarter for the group. We are on track in terms of our expectations to grow the net profit. This year, we are on track in terms of deploying about PLN 2.5 billion of portfolio purchases, less than planned in Spain, but more than planned in some other markets. Recoveries overall are on plan situation in Spain has stabilized, it looks like after July data. We are focused on undergoing in the third quarter of digital transformation. It's going well. The costs are lower. [Audio Gap] Presentation. I will be very happy to take your questions.

Okay. I see some of the questions. The first question is that the price of portfolios, purchase portfolios have been up strongly in Poland, around 20% of nominal, Romania, Italy, 10% of nominal. Does it imply the IRRs are likely to be falling in the future? Is the competition growing a lot? Or are the portfolios of different quality in the past? So overall, please remember you cannot draw good conclusions from observing the price to nominal because the change in the quality of portfolios is much bigger than the underlying change in the IRR. So the first and most important reason is there is different quality of portfolios that we happen to buy, and this is the most important reason for the change of the price to nominal. However, yes, the competition is stronger, somewhat stronger than last year. And it may mean that there will be or there is somewhat bigger pressure on IRRs. But we're talking about 1 percentage points or 1.5 percentage points difference. And whether this will be true for the full year, we'll see. So yes, there is some pressure, but it's not represented well by this measure that you mentioned. And please remember that we give an information about what is the expected profitability of our all annual purchases once a year in our annual report. There we show you the gross return that we expect. But overall, the investments we made were in line plus/minus 1, 1.5 percentage points to what we expected. Another question. Can you update us on the situation in court in Spain as well as your first assessments on the new law implementation? So this is a mixed picture. We -- in the second quarter, we did see some deterioration of payments, likely mostly because of this external legal situation and this new law implementation. We don't see further deterioration in July. So we see a relatively stable situation. We don't see any improvement yet. So the situation is that we've taken the hit in our accounting curve. We had this PLN 10 million loss this second quarter and much more PLN 140 million over PLN 140 million in December. And it seems that this is enough for -- to address the problem. However, the question is when the situation will improve, when will we see accelerated pace of legal cases from Spanish courts. And we don't know yet. So it's a situation where possibly this risks become symmetric with a possibility of upside of improvement, but we don't know when exactly and how much of that improvement will appear. So what we do is that we concentrate on improving the process internally, which is independent of the external situation. Another comment may be that a scenario where we would see a significant deterioration as a result of this new law implementation, it still did not materialize. So we saw some deterioration, but it wasn't very, very [indiscernible]. Another question. What's your outlook for the operating cost versus recoveries revenues dynamics in medium and long term? Do you expect the cost dynamics to become significantly lower than this of revenues due to AI automation et cetera? So overall, you should, in the long term, see that we have lower operating costs. Lower operating costs, which is salaries costs mostly, but more costs on the investments in IT, which is CapEx and then amortization. So in the longer term, we likely will have less man intensive, labor-intensive process, much more automated process, which means we'll have bigger IT costs, but lower employee costs. However, another big component of our cost is legal costs, which are subject to regulation, whatever the regulator says we should pay to the court or to the bank. So -- and this is -- we don't know how this will change. And how much these costs will be will depend on given that they are stable in terms of price list, they will be dependent on how much we buy and how we manage the process. So when we buy a lot of portfolios and they will be subject to quick legal process, you will see a significant increase of this cost. So therefore, we also separate here the court fees because if you calculate this cost recoveries and you are talking and you are thinking about automation, the effectiveness, you should really take out the legal costs, which is direct cost which is a direct cost or regulated cost of going to the legal process. So this part will not change the automation. This may change due to how much we buy, what we buy and what's the regulation. The labor part in the longer term will change also as a result of this transformation -- digital transformation program that we are engaged in. But please remember, the horizon for the full effect of that is a few years from now. So there will be some, of course, things that will improve year-to-year, but the big effects of our implementation of our new IT infrastructure will come after 2029. I see no further questions. Thank you very much for your interest and time, and I wish you health and hope to see you at one of the conferences coming up here.

Excuse me, I think we have three other questions.

Okay. I don't see them. I refresh and I see them. Thank you, Bart. So before we say goodbye, I have another three questions. Could you please update us on the digital CapEx initiative? When could we expect some significant gains cases FTE, are you trying to implement some AI features to increase product stability? So once again, a part of our strategy is the digital transformation program, which we call New Horizon, which calls for a rebuilding of our main IT operating system and it calls as a result for a much more automated process, which faster lead time, which also will allow us to do much more testing and choosing the most optimal enroute for collection process. This new system, which also will allow us also to employ AI whenever wherever it will be productive. This is a 5 years program, which we started this year in 2025. So the gains and there are significant gains in the total program, which is estimated to cost KRUK for those 5 years, PLN 500 million, has an IRR of over 20%. But the gains come, as I said, after 2029 when this system will be fully available for operations. Of course, it will be available in some increments, but the full effect will only come after this time. So we expect significant gains in productivity, but we'll need to wait for a few years. Another question. Do I understand correctly that after exiting smaller markets, you would be expanding or concentrating on French market now? Are you confident already about the French market? Yes. So the expansion strategy is focused on the big markets. The big markets will give us opportunity to grow significantly. Exiting the small markets where even if we're very successful, we can only earn that much and that much is a few percent of our total net profit today. That's why we're exiting Slovakia, Czech Republic and Germany despite the fact that all of those markets are currently profitable. And that's why we're looking to expand or we are in process of expanding into France. And as we mentioned in our strategy, we also will look at other big markets. One of them is U.K., one of them is U.S. And in addition, we'll look for growth opportunities in these four big markets that we are currently present, Poland, Romania, Italy and Spain. Another question. Courts costs have materially declined in Q2. You referred to accelerated referral of that cases for judicial collection. What does this exactly mean? Is this a one-off benefit? How should we think about the court costs for the remainder of the year and beyond? So it was the case in Spain and possibly was in the market, but especially in Spain, we accelerated the transfer of legal of cases to legal process anticipating this new law that came into force and made the legal process in Spain a bit more demanding, difficult that law came into force in April. Therefore, there will be less legal costs from Spain in the second half of 2025 and there were already less in second quarter. So yes, there is a significant cost portion where these costs were already incurred and there will be less coming forward. So overall, for that reason, there should be somewhat less legal costs in the second half of the year. But we don't know how much exactly because some of that will depend on how much we buy and how many of these cases should already be sent to legal process this year. So I expect some decrease, but not so much decrease of the legal fees in 2024. And I don't see that as one-off benefit. I see that as an element of the process where we optimize when is the best time for us to send the legal cases. As seen with all of our P&L, please remember that you should look also at the longer horizon than one quarter. In one quarter, you will have certain effects which will happen one in several quarters. And that's revaluation that's also legal fees that's deferred taxation, all of those elements should be looked upon for -- in a horizon of, I think, at least four quarters, not one quarter. And it's natural for us to have certain peaks and downs in the cost position. I don't see other questions. Can you?

Yes...

Aren't you interested in the BNPL market as potential new [ neck ] of your business? We are potentially interested on the BNPL market. We don't see this as a big opportunity in the markets where we are present. My view on the BNPL NPL market is, that it's a big market in countries, which allow the creditors to charge debtors an additional collection fees, which creates a big space for the margin, for the BNPL debt collector and also for the originator like Klarna. But the law does not allow this additional collection fees to be passed on the debtor in none of our big markets. Therefore, the potential for mortgage for the margin is much smaller. That's also, I think, the reason why BNPL will not be so strong in those markets or at least the NPL market for BNPL will not be. We take a look -- we observe how this market develops in Poland. We see some of our competitors doing that business, but we also see relatively high prices for this portfolio. So we don't think it's a business of very high margin in Poland, Romania, Spain or Italy at this point. If this changes, we'll be very interested to go into it, but we will see it just as another type of seller. And so it doesn't need huge expansion on our side. But from my perspective, BNPL market is a big business for debt collection companies, for example, in Germany, but it's not in Poland. Any news on U.S. and U.K.? No, there is no news other than we are traveling to this market, and we are just learning it and trying to develop an attitude and plan how to think of them and how to enter them in the future, but there is no business as of today. It's a learning phase. Just a follow-up question regarding BNPL, the investor meant being a BNPL debt provider, not NPL servicer? Well, we don't do it today. We are, at this point, not developing such service. If it would be the case, it would rather be Wonga, our cash non entity, but Wonga is currently not considering becoming BNPL. It has certain product proposition, which is a limit of credit, but it's something different than BNPL. So not at this point. Another question. When do you expect to pay 15% effective corporate income tax? The guidance we have for the effect of the Pillar 2 global taxation is that the earliest possible time when we could be required to pay 15% tax under this regime will be 2027. So I advise investors in their forecast to assume that from the 2027 and later, we have an effective tax rate of at least 15%, maybe better assume 19%, which is the statutory corporate income tax in Poland. However, there is some uncertainty what exactly will happen. At this point, we don't even have enough -- high enough revenues to qualify for this tax. So that's why it's uncertain. At this point, we know that there is certain possibilities to take advantage of so-called safe harbor when you meet this criteria, but this criteria, for example,[indiscernible] that you cannot be in more than six countries, you may be exempt from this tax for the period of five years. So there is some uncertainty regarding how and exactly when this Pillar 2 will affect us. But I think it's prudent to assume it will be from 2027. Once again, thank you very much for your interest and for your questions. I appreciate them. There's one more. Trade payables have meaningfully declined, and this has resulted in some weakness in cash generation. What is the underlying reason? Is it related to any earn-out mechanism just slowing up portfolio purchases? I would help -- I'll ask IR to help me, but I would think that the reasons you're referring to is that we have a provision for dividend payments, which is our liability to be paid out in -- at the end of September 2025, and this is the whole issue. If IR, you think looking at this question that there is another reason, then please raise your hand.

No, we agree with you Michal.

Okay. I'll give you 30 seconds to see if there are any other questions as they appear from time to time, and I'm refreshing the screen. Okay. It looks like there is no further questions. Once again, thank you very much, and hope to see you in one of the conferences. Have a good afternoon.