Kruk SA

WSE:KRU

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to KRUK First Quarter 2018 Results Conference Call.

I'll now hand over to Marta Jezewska-Wasilewska from WOOD & Company. Ma'am, please go ahead.

[Marta Jezewska-Wasilewska, analyst]

Good afternoon. My name is Marta Jezewska-Wasilewska, and I represent WOOD & Company. Today, we have the pleasure to host the call for KRUK that will present key highlights of its 1 -- first quarter results publication. KRUK will be represented by CFO, Mr. Michal Zasepa. Sir?

[Michal Zasepa, executive]

Thank you, Marta, and good afternoon. It's my pleasure to lead you through the highlights of Q1 results. I'll be using the presentation available on our website and directing you to the slide numbers that I'm commenting.

I'm starting from Slide 3. PLN 98 million of net profit. I think this is a good start of the year. A result which is a few million Polish zloty better than what we budgeted, which put us on the plan to achieve this year targets with strong recoveries across a number of countries and positive EBITDA in all of our geographies.

And in Q1, we invested close to PLN 118 million which is a good result given that first quarter usually is somewhat weaker in terms of supplier portfolios than average. And what's a positive news for us is that we are able, for another quarter, to make these investments at expected higher IRR than the average expectations we had for the past 2 years.

On Slide #4, we are giving you some more of the details. Cash recoveries were 18% year-on-year. We had a record for recoveries for Poland. And very good also results we've recorded in Romania, although, these recoveries were negatively affected by devaluation of Romanian currency versus zloty for over PLN 2.2 million. What's also very positive is that for the first quarter, we've made our operating plan exactly 100% for Italy. And as I mentioned and you see here at the bottom of Slide 4, not only Poland and Romania naturally had good positive EBITDA, but also Italy came out of rut in Q1.

I'm now looking at Slide 5. I'd like to highlight that the company is in a very stable position in terms of access to debt funding and liquidity. Being conservative over the past 2 years pays off now as it's easier for us to issue debt to enlarge our debt facilities with the banks as we are today possibly the lowest leveraged company in the debt purchasing market among the top European players. There is also a piece of news on Wonga, our new potential acquisition of a consumer lending business in Poland. We received, as expected, antimonopoly clearance, and we are now working diligently on closing this transaction, and that should happen within the next few weeks.

Despite the fact that we are buying Wonga from our equity and despite the fact that this new business will require us to support them in funding, extending their balance sheet this year, we decided to recommend to shareholders same level of dividend as last year, PLN 5 per share, which will be voted by shareholders in the upcoming shareholders' meeting.

On Slide #6, I'm happy to share with you more information per segment. This is the first time we're sharing information on EBITDA revaluation recoveries per geographic segment. And I hope this information will be more meaningful for you, and it will be easier for you to develop an informed view on the company's performance.

Looking at -- from the left, Poland had a very good start. Although PLN 60 million investments in Q1 is not so much, but this is typical for that quarter, and these investments were made at relatively high attractive IRRs, as I said, better than what we've previously noted on average for the past 2 years, which marks another quarter where we see a change of lower competitiveness of the Polish market.

Recoveries in Poland were on plan despite the fact that for the past couple of months there was some problems within the Polish bailiff network due to changes in the law. We managed that situation very well, and in March, recoveries from legal stream in Poland came quite strong, and we hope this trend will continue in the future. Polish assets at the end of Q1 were PLN 1.9 billion, so well over 40% of our total book. As you see, there was a positive revaluation of these -- on these assets, about PLN 12 million. That's relatively low. You can expect at least as much or better revaluations in the future if we continue to go along our operating targets for recoveries.

The portfolio's profitability was on average about 32%, which is high and stable. We contributed PLN 92 million in EBITDA for that market. Poland is also a market where we expect strong market opportunities for 2019. This has to do not only with the lower competitiveness of the market which should allow us to have a strong market share but also from the fact that changes in the legislation in the past 2 years, in our view, will encourage banks to sell portfolios at earlier stage of their delinquency, allowing us to invest more money at similar returns. Debt with nominal value of portfolios being stable could mean market size growth. And this is our hypothesis for this year. If that is what will happen, we will be able to have a strong year of investments in portfolios in Poland this year and in the following few years.

Romania, also positive news. In the first quarter alone, we invested more than 50% of last year investment, so strong quarter, and this is just this quarter. The market continued to supply as expected this proposed negative legislation capping the recoveries. As you may remember, it was deemed unconstitutional. There is no further news on that. The market continues to sell portfolios, and we plan to be, again, this year, the main player on that market.

Our assets are about PLN 900 million, so this is our second largest market and the most profitable market. If you look at portfolio profitability, it's over 40%. And there also was positive revaluation that we made at this quarter, PLN 19 million. This would have been much better if it wasn't for the fact that in first quarter of this year, Polish currency devalued by 2.2% versus Polish zloty, which went fully from our P&L on 2 main positions. One is revaluation concerning FX change, which is about PLN 13 million; and the other position is financial costs, which is about PLN 8 million. So in Q1, in total, the Romanian business suffered about PLN 20 million loss due to negative FX changes. There also was some postponement in recoveries from corporate portfolios which -- where the main results were the EBITDA for Romania was only about PLN 50 million.

Italy, our third most important market, had a good quarter. There was no investments in this quarter as we continue to be very cautious on new investments and we wait for the results of the legal recoveries on the book that we have and for amicable and legal recoveries from 1 big portfolio we bought in the second half of last year. The recoveries, however, increased significantly as planned versus last quarter. They were PLN 41 million, and they were exactly on plan, 100%. What's also important, they were exactly on plan both on amicable and on legal.

This is a very positive information. However, please bear in mind, it does not mean that the risk of the assets in Italy is very different and now much lower than it used to be 3 months ago. It's good that we made this first check and we made our plan in Q1 but the operating and accounting forecast for recoveries in Italy is going up steeply every month, and we still have a relatively higher risk than in the old countries of not making this one. So there is no bad news. It's good news. But please, don't treat it as a guarantee that the rest of the year is done. It's not done. It's far from it. Every month, we need to prove that these assumptions are realistic. We prove it now for the first 3 months of the year and, therefore, we continue to be cautious on new investments.

Other markets, which is mostly Spain but also Czech and Slovak business and some assets in Germany, also had an uplift, as you see. And relatively good profitability from the balance sheet of 23% and contributed about PLN 7 million of EBITDA.

On Slide #8, you can see more details about the debt purchase business. There's 2 important new disclosure information -- pieces of information which has times money and discount rate or gross IRR that we now revealed for our investments on 2017 and 2019 for the first time. The definition is that this is the return expectation that we had at the point of making investment decisions. So it has not been updated.

After some time, it's exactly the figures that were in the investment documents when we were making all of those purchases in 2017 and '18, respectively. What it shows is that we've been investing for those 2 years, expecting on average about 9x -- I'm sorry, 1.9x cash return -- gross cash return. So expected recoveries divided by price paid, excluding operating costs. And that translated in 24%, and respectively, 22% of a discounted gross return, discount rate or gross IRR for 2017 and '18.

We observed that there was a more favorable competitive situation in the markets where we are which started in the second half of 2019. And especially from Q4 2018 but also in Q1 2019, our expected returns increased versus the average that you see here from 2017, '18 which is very positive. Why is that? There is less competition it seems for debt purchased portfolios both in Poland and Romania. For Italy and Spain, it could also be the case although we have not been so active on those markets, as you see, for the past 6 months.

On the costs, you can see that the relation of costs as a percentage of recoveries nicely decreased to 26%. Part of that is delaying or unnatural changes in the level of legal costs. There was less legal costs that we incurred in Spain and Poland. But some of them is also savings of operating costs in Poland which we've been observing, thanks to optimization of the process of amicable and legal, which is a very positive outcome for us.

On Slide #9, you'll see details of the servicing business. The results for Q1 were below budget. That was disappointing for us, mostly because there was not as much new business as planned in our Italian and Spanish operations. The local teams, because those businesses are managed locally, are working on improving these prospects.

ERIF and NOVUM, Slide #10, relatively stable business. We don't expect those 2 lines to grow significantly this year but they remain highly profitable, cash-generative businesses.

On the financial situation of the company -- I'm now looking at the balance sheet, we remain to be a lowly leveraged company. The net interest bearing debt-to-equity at the end of March 2019 was 1.3 and 2.3 from debt to EBITDA -- cash EBITDA. Once again, that's possibly one of the lowest, if not the lowest, position among the big debt purchasers in Europe. That's a comfortable situation to be in, especially in the market where some of our competitors are hungry for liquidity or near their covenants.

So overall, good start. Good first 6 months -- good first 3 months of the year, and still somewhat increased risks in the new markets, but it's definitely a positive outlook for Poland and also for Romania which should allow us to keep a good investment level and good profitability. And looking at the year, our budget is to deliver 10% growth, and that's our target for this year.

And I think that's the summary. So I'll be very happy now to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Simon Moog (sic) [ Jon Moog ] from Private Investor (sic) [ Lizard Investors ].

[Jonathan Moog, analyst]

This is Jon Moog from Lizard Investors. Just a couple of questions for you guys. You guys talked -- can you expand a little bit about what's happening in Poland and why you think the market's getting a bit less competitive and more attractive from a return perspective?

[Michal Zasepa, executive]

Sure. There is 2 reasons for that. First of all, there is less competitors. As you may remember, Poland suffered from GetBack, a company which had a fraudulent base business and which took well over 50% of the market share in NPL buying between '15 and '17. That company is gone and that market space is now open to reasonable and honest competitors.

Second, because of GetBack, there has been a crisis of trust to smaller debt purchasers. And some of our competitors have much worse access to debt and equity than they used to have before. So that's local problems of the competition, and it's relative very positive now for us. And second is a good supply of portfolios. The legislation introduced in Poland over the past 2 years encourages banks to sell portfolios earlier because if they don't do it, these loans -- these debts will prescribe and will no longer be subject to legal debt collection process, which means the banks will need to write them down to 0.

And now they need to act much quicker than in the past 15 years. So that, plus some other smaller changes, which makes the debt collection process, especially in legal, more difficult or costly for the banks, we believe will make them sell more or at least earlier on. So there should be a bigger market and there is less people to be able to buy it and in a situation where we believe we are the most efficient operations on the Polish market in amicable, legal. Last year, we had 40% market share. For the past -- previous years, maybe we had 12%, 15%. That opens up just an opportunity which is, for us, it's like doubling the market.

[Jonathan Moog, analyst]

Okay. So you think not only is it getting more attractive but you theoretically could put a lot more capital to work in Poland over the next couple of years, yes?

[Michal Zasepa, executive]

Yes. However, keep in mind, that already started to happen in '18 where we invested over PLN 100 million. But now we say, okay, we should be able to invest this year, at least as much, maybe a little better, more than that, but at much better expected returns.

[Jonathan Moog, analyst]

Okay. Great. And are you -- great. And I just wasn't quite clear about what I heard about the Romania legislation, yes, and we've been following that a bit. It sounds like that risk is no longer a risk given the court's ruling. Is that right? Is that risk totally off the table at this point?

[Michal Zasepa, executive]

This is my expectation. However, still until today, we have not received a description of the verdict. I'm not sure what the English word for that is, but it's an analysis of the court decision. So before we know it, we just know it's unconstitutional. It's no longer being processed by legislation authorities in Romania. So the deal is off. But is it off forever? We don't know because maybe we'll know better when we read this, the summary of the verdict.

[Jonathan Moog, analyst]

Okay. And one other question, I guess, about Poland. The mortgage is -- are you guys -- do you feel fairly well insulated from any mortgage like transitional issues related to currency on the mortgage side still, if that issue were to arise and cause some mortgage problems in Poland?

[Michal Zasepa, executive]

So there is this still unresolved issue that there is -- that many, I don't remember now the exact number, billions of nominal mortgage loans denominated in Swiss francs. And until it's clear where the legislation goes, the owners of this portfolio, the banks, have uncertainty. Do they have the right number in their books for that? Now we are -- we have been indifferent to that. We have been buying mortgage NPLs on small, midsized scale, PLN 50 million, PLN 100 million, PLN 150 million a year. This business continues and it's unrelated to the Swiss franc, I would see this as an opportunity if there is a legislation that eventually is passed in Poland and it means that the risk is gone but the banks want to sell these problematic assets, that there may be additional supply that we can participate in.

We are not interested to take the FX risk but we're very happy to talk to anybody to do the debt collection work on that portfolios. But that has been hanging in there, that has been around for a couple of years. There's no resolution. We don't plan on actually seeing some big supply of mortgage portfolios on the Polish market. However, the usual business is that we would plan to invest this year, for example, in mortgage portfolios, not Swiss franc, between say PLN 50 million to PLN 100 million.

[Jonathan Moog, analyst]

Yes. And last question, given the outlook for investments for you guys, do you think you'll be able to put enough money to work to kind of start to use some of the balance sheet that you talked about, that balance sheet advantage you talked about? And if there isn't enough opportunity to put money to work, have you guys considered a share buyback?

[Michal Zasepa, executive]

Yes. So we -- of course, we have certain targets for the investments this year. It's very difficult to predict the exact number given the uncertainty about competition, competitive situation and the actual supply, our win rate. The base case says we will invest over PLN 1 billion this year. Last year, it was PLN 1.4 billion. Why less than last year? Possibly because we'll invest less in Italy and Spain this year than last year. If we have better investment risk management control in Italy and Spain sometime this year or next year, we can accelerate investments there.

Until then, we'll be hesitant to put much money to work in those geographies. However, this year, we are likely to become soon an owner of this consumer finance business in Poland which we believe has very good potential to grow and another at least PLN 100 million should go into expanding their balance sheet this year in Poland. All in all, when we look at this, we say we would like to pay the dividend as recommended by the Board to shareholders, PLN 5 per share so roughly PLN 95 million. Keep our capacity, as this is mostly for new investment, some of that for supporting the consumer finance business, Wonga, but not to buy back shares this year.

[Operator]

[Operator Instructions] Our next question comes from Marta Jezewska-Wasilewska from WOOD & Company.

[Marta Jezewska-Wasilewska, analyst]

I just have a question about Italy and how the situation looks like in April because you mentioned that the first quarter was operationally stable and you saw no negative surprises. And the first quarter looks like to be the run rate and budgeted. Can we get any kind of flavor whether you stay on track in April along with your budget assumptions in Italy?

[Michal Zasepa, executive]

Unfortunately, I cannot give you a precise information because I will know by May 5 around that what are the total recoveries. The Italian recoveries are quite heavily relying on the last days of the month, and we are only having exact measures of these because some of those payments are coming with delay through the banks. They're reporting to us what they've noticed, the so-called [ camyari ] payments. At this point, I can tell you there is no negative information I have, but I am far from knowing what April will be like.

[Operator]

[Operator Instructions] We have no further questions. Dear speaker, back to you for the conclusion.

[Michal Zasepa, executive]

So in summary, there was a good first quarter of the year. We see increasing possibility to invest in Poland and Romania on better than historically IRRs. We remain cautious on new investments in Italy and Spain, waiting for more history of especially legal recoveries there but the first quarter was good for those markets. We're in the business in long term. So at some point, we'll be able to tell you we have all markets under good control. We can accelerate the amount of investments and continue on the path of making this ambitious PLN 700 million net profit target real in the next 5 years.

Thank you very much for listening and your time.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.