Kruk SA

WSE:KRU

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the KRUK First Quarter 2020 Results Call. My name is Bethany, and I'll be coordinating the call today. [Operator Instructions]

I'm now going to hand over to your host, Marta Wasilewska. To begin, Marta, please go ahead.

[Marta Jezewska-Wasilewska, analyst]

Good morning or good afternoon to everybody that decided to participate in KRUK's results call. My name is Marta Jezewska-Wasilewska, and I represent WOOD & Company, that is a moderator of this event.

Without further delay, let me pass the floor to the Management Board of KRUK. We have today with us Mr. Piotr Krupa, CEO of KRUK. And the presentation is going to be coordinated by Michal Zasepa, CFO of the company. Sir?

[Michal Zasepa, executive]

Thank you, Marta. Thank you for dialing to this presentation. I'll be using the presentation that is made available on our website since yesterday.

Let's start. This is an unusual time. The COVID pandemia has its toll on our results. As you see on Slide 3, we don't know yet what is the full effect of this current crisis on us, but we knew enough to say, at least in the mid- to short term, we are expecting a significant decrease in recoveries. We knew the results for April, which were 15% below our operating target, which means our budget. And as a result of that, we rolled it down about 3% of our debt purchase assets totaling PLN 125 million. Once again, this is as much as we could see, closing our books on Polish portfolios in the last days of March on other assets in late April. This is not yet the knowledge that would allow us to have a visibility of a full-scale impact, which remains unknown. The good information, as we are in late May, and we don't see further deterioration of recoveries on our book, which confirms that what we've done in Q1 results, at least looking at today's perspective, was relatively conservative or adequate depending on the market.

If you ask yourselves a question, what was the total effect of the COVID on our results in first quarter, it's more than PLN 125 million. It's more because there's additional PLN 5 million in increased provision for our consumer loan business. And given that our recoveries at the beginning of the year were very good in most of the markets, we probably would have recognized positive revaluation, for example, in Romania, if it wasn't for COVID.

Our -- this pandemia meant that we have halted with the investments, to a large degree, starting from mid-March. This is the result of our policy where we tightened our investment policy because of the unknown of what will happen next and what our recoveries will be on the newly bought books, but also because the market dried up. Sellers and buyers in this uncertain times decided to withdraw with transactions and delay some transactions that were coming on the market. And this situation still remains, although some smaller transactions are going on. We think that it will be not earlier than third or fourth quarter of this year and 2021 when the supply of the portfolios will significantly increase.

In these uncertain times, of course, cash is king. The good information is we have a lot of cash. We have good access to cash. We have strong cash flow generation and relatively low leverage. So today, in the end, I can tell you, we are not worried about our liquidity position. We feel quite secured there.

Still, we realize the impact on pandemia and the crisis will be significant on our results, on our -- this year's profit, definitely, and we took wide measures to save costs. And later in this presentation, you will see that what we identified for Q2 totals, about PLN 41 million, roughly half of that is savings. Half of that is probably delay of cost, but some of that may turn to be cost savings in the second half of this year.

We are very concerned about how to continue to position our business in responsible manner versus our business partner, versus our clients, the indebted customers in these difficult times for everybody. We are adapting to what we think is the most responsible way of managing that situation. This is natural since the empathy in communication with the clients is a backbone of our debt collection approach. We're very sensitive also to how we manage this crisis situation with our employees, giving them comfort in these difficult times. We're also reaching out to support some of the socially important areas here in where operate, for example, a hospital here in Brussels. This is very unusual times, and we think we're taking the right measures to secure KRUK, not only as a business but also as an important part of the society.

Looking at Slide #4, you see summary of the results. The PLN 125 million revaluation meant a loss of PLN 62 million. Never in our history of 21 years we had such situation. Unfortunately, still, this loss comes in a quarter, which was record in terms of our cash flow generation and cash EBITDA, which reached close to PLN 330 million, showing the strength of the business. Our recoveries were very good, and I will comment on that -- in Q1 and especially in the first 2 months of the years, and I will comment on that on a later slide.

On Slide #5, I'll just tell you that the cost savings we have been implementing concern all of the nonessential areas where recognizant to the bond for Q2. They also concern our forecast for legal costs, which are an operating item, which we would like to spend as long as courts start to function well again. So these legal costs are most likely a delay, not a permanent cost savings.

We also made significant reductions in salary costs, but not through layoffs. We don't lay people off in those difficult times, but through freezing hiring. So naturally, there is a turnout at KRUK, and we are becoming a smaller company because every month, there is some of us that decide to leave the company, and we're not replacing these people. And additionally, we reached an agreement with our employees, in Poland, that's all of our employees. In some other companies, it differs. In all of the group, its top management, including the Management Board of KRUK and the Supervisory Board of KRUK who cut their salaries by 25% for the next to 3 months. We will be reviewing the cost savings for new quarters and deciding what's the proper thing to do for Q3 in the coming weeks.

In terms of recoveries, a good measure of the depth of the crisis is our recoveries in April. We say here in the presentation that versus the operating plan, which is our budget. So a forecast back from October 2019, our recoveries were down by 15%, and that's a pretty good measure of the effect of the crisis since in February and in January, we were making 100 or a bit more percent of the plan. We're very happy with our recoveries in Poland, very happy with our recoveries in Romania. Both countries showed surplus versus operating costs, not to mention, of course, significant surplus versus accounting forecast, which is significantly below the operating plan. And what was -- especially in the year to us was very good performance of the Catalin business in the first 2 months. That has changed in March and that has worsened in April net results, you see, this 15%. I will shortly comment on how it looked on -- in more details on individual markets.

I'm now at Slide 6, and I want to reaffirm that we have a stable financial and liquidity position. This comes because of strong cash EBITDA. This comes because of our long-lasting discipline in keeping the business relatively low in leverage and not taking on new debt without means to repay it on our own assets. That pays off. That pays off in this more difficult times. And now on every measure, I think we look good, we look safe. Net debt to cash EBITDA at 2.1, large and growing unutilized available borrowing funding from the banks. Large also sum of money in cash sitting at our accounts shows that the company should not be concerned in the next several months with access to capital.

In terms of dividend payments, we have not made consciously a decision on the recommendation to the shareholders meeting whether to pay or not dividend this year. We're delaying it, hoping that things will improve. And in August, we will be able to show some positive recommendation, but this is uncertain.

Now another important information is that there has been 2 changes in the Management Board at KRUK that is quite an unusual situations, and the Board has been very stable for a very long time. There is 2 changes. One change concerns Agnieszka Kulton, who has been with us 18 years and was heading debt purchase operations. Agnieszka decided to submit her resignation because of health problems. She has been battling with a serious illness for the past 3 years that caused sometimes her absence for several weeks in a year. In that time, we groomed a potential replacement. Her top manager, Piotr Kowalewski, who in her absence was actually acting as a Board member in Agnieszka's responsibility. Agnieszka's decisions came now. This is unrelated to COVID. This is related to her health situation. We are -- of course, we regret that decision, but we understand that we welcome Piotr on board. Piotr Kowalewski was approved yesterday as a new Board member by Supervisory Board. We, as a management team, know Piotr very well. He's been working with us for many years, and he is definitely a good choice to replace Agnieszka.

Another change comes as Iwona Slomska and Piotr Krupa decided that it's good time to change the way how Iwona's area is managed. Iwona is still responsible for marketing, PR, human resources. These areas will be restructured, and a new Board member will not be recruited in place of Iwona. Iwona will be with us until the end of July. It's a professional decision, well thought decision made by Piotr and Iwona. Together, Iwona will continue to support us in everyday decision. And as I mentioned, she'll still continue to be with us for the next couple of weeks.

Now on Slide 7, you have some more details about how COVID impacted us in terms of operations. The revaluation is an obvious thing I've mentioned. But if you look at our processes, the immediate effect that the COVID had on us was that we had to stop our field visits. So a basic, a very important tool that we use for amicable collections and for signing settlements at people's homes, but also sometimes to receive cash payments from them for those who prefer to pay that way. We no longer do it since mid-March in none of the market. That was impossible. However, there are first signs of defreezing of the economy, and we started to visit people again in May in Poland, partly. So maybe about 1/3 of our field force is active now doing field visits. Rest is still calling people. And hopefully, this defreezing will continue and continue also in other countries.

Another difficulty which we needed to confront ourselves with was that our clients had limited ability to send out the money through post office and other payment terms, nor they could transfer or give the cash to our field advisers. That, of course, also had its negative effect.

Another area was legal. An important part of our recoveries were courts stopped functioning for some time. And also bailiff services was rendered in various -- to various degrees. The good information here is that in the most important market in Poland, the legal system in terms of bailiff’s collection was mostly unharmed. But unfortunately, that wasn't the case in Romania, and I would explain in a second where our recoveries suffered. The good thing is that this is most likely temporary. And in the next months, we should see some improvement.

COVID also means some negatives for our cash loan business for Wonga and NOVUM. First of all, we sell less loans. We sell less because we tightened our risk -- discipline risk policies. Also clients in KRUK is quite selective to who it lends money to, and this group of clients we serve are also more reluctant to borrow in this of crisis. And thirdly, there has been a change in Polish legislation. One of the so-called shield legislation introduced a cap on noninterest cost of credit targeted to defend clients against some predatory pricing, as an effect, making this business unprofitable for most of the loan companies and also for Wonga who stopped lending money for certain amounts of time, not to lend at a loss. That is a temporary situation as this legislation will last until March this year, but it means lower sales this year for Wonga.

How we responded was, most of all, we were focused on continuing the business through implementation of remote work everywhere. This has been vastly successful. Very quickly, within a few several days, we managed to secure continuity on the process. We also introduced several new tools, online payments to our clients. We accelerated the development of certain IT tools that allow to be -- us to be more online and more cost effective than before the crisis.

As I mentioned, we also tried to be a responsible member of the society through some social responsible actions, for example, supporting our -- one of the hospitals here in Brussels.

I will now turn to comment to give you some more flavor for each of our markets. I'm on Slide 11, Poland. As you see here in the table, we had relatively low investments of about PLN 50 million. Most of them come still from February, early March. Outlook is that we are valuing some small portfolios, assuming some COVID scenario valuation, but we're waiting with much bigger investments until things will be more visible in terms of future recoveries. So the market is pretty much frozen. Our collections were very good. Actually, we saw some significant benefit of operating improvement in legal process, which are most likely the most important reason why we don't see a significant drop in recoveries from consumer portfolios now.

Back in late March, we needed to make a decision to book our portfolios. We assumed there a drop in recoveries for Q2 only. That has fortunately not happened. So in hindsight, we were too conservative in late March to assess the effect of the crisis. But as I mentioned, the decision to write down the value of our assets concern only Q2 because of the uncertainty we were at that point, but also because if you were to compare our accounting curve to our operating curve, the gap between the 2 is widening in the mid- and long term. So not necessarily, we would need to write down our Polish assets if we see some drop in recoveries, which will not be very significant in the future. Of course, that will mean lower revenues, but it will mean lower positive revaluation or lower delta between the actual and planned recoveries.

We will, of course, assess the situation once again once we know the Q2 data and the new updated trends of recoveries. What's important, we were not able in Q1 to do a thorough assessment case by case of our corporate and mortgage portfolios. What we knew, in particular cases targets we included, but we'll be doing a much more thorough analysis of the impact of COVID on this class -- of these asset classes in July after we know the Q2 results. This is Poland. And as you see, we land with about PLN 31 million of negative revaluation, which is mostly Polish unsecured portfolios only in Q2. The results in April and May are better than planned, which means we'll be regaining some parts of the ride down in Q2.

In Romania, we made the decision knowing what was the recoveries from most of April. We decided to write down a value of about PLN 33 million. This is mostly, again, consumer unsecured portfolios, and it reflects the actual situation, which we saw in April. And this situation is that compared to the average decrease of recoveries versus operating plan of about 15%, we saw a higher drop in Romania coming from amicable and legal. The difference between legal performance in between Poland and Romania is that in Romania, there is a law that had been introduced that says that if you put your employees on hold and you pay only part of their salaries, you -- the bailiff cannot take a part of your salary anymore. In addition, in Romania, a law was introduced that says a bailiff in the COVID crisis time cannot also take part of engineers' salaries. Those 2 effects are temporary. They should last no longer than until 15th of July from what we understand, but they effectively significantly decreased our recoveries from legal stream in Romania for April. And most likely, it will continue in May and June.

Okay. In Romania, we also have well over PLN 100 million worth of secured assets. Again similarly to Polish situation, we only did revaluation for specific cases where we saw the impact. For most of the portfolio, we did not see the impact yet. We will be doing a much more thorough analysis after we see the results in Q2. So there is also some risk that we will say in Q2, this portfolio as an effective prices, this was less. But we have no proof of that positive or negative as of now.

In terms of how we did the revaluation for Q2, we have decreased planned recoveries from amicable and legal stream, not delayed but decreased, in the horizon of the next 3 quarters, so until the end of 2020. Why only until then, not later on? Because the gap between the accounting curve and the operating plan, especially in Romania, is very wide. So from today's or late April perspective, it seems inadequate to make better a write-down at this time given the drop that we observe now in recoveries in April.

I'll now go to Italy. As I mentioned, we were very pleased to see that Italy again performed on our operating plan in January and in February. Also the first weeks of March were quite promising. A drop came in late March and in April. It wasn't a very deep drop. It was similar to this 15% magnitude that we saw for our entire portfolio. Still, we're not sure we see the full effect of the crisis yet. Recoveries in April were supported by a few significant one-off payment from corporate portfolios. They come infrequently, but they come every couple of months. We have -- we will need to see May and June results and be -- to be able to assess the situation. But our drop in recoveries surprisingly was bigger in Romania than we saw in Italy.

We've decided to revalue downward our estimate by about PLN 34 million, and that's a combination of delay of the legal recoveries because we saw that the Italian courts stopping functioning completely and also some decrease, not delay, of our amicable results. Whether this is sufficient or not, we will, of course, assess again in July, looking at Q2 full results. I can tell you that based on what we see in May, we don't see further deterioration, which is a good sign. And we are expecting that the Italian legal infrastructure will be slowly coming back to life, which will allow us to go back to business in terms of legal work recoveries where we plan to send thousands of new cases, which would be building our potential cash flow for the future.

Other markets, which just to remind you, comprise Spain, most of this PLN 440 million, but also Czech Republic, Slovakia and assets in Germany. Spain, unfortunately, was a country where we felt most to the higher degree in crisis. April recoveries were very bad. They were a few times worse than the average of 15%. We think that this was a very specific month, during which a lot of Spanish employees did not receive their salaries from their employers, but also did not receive the money -- the support, the aid from the government, which was delayed by several days and actually came in May. Still, the legal system stopped working. If we were doing -- when we were doing survey among employees, and for example, in Poland, 5% to 10% of our employees were saying, "I will not pay you this month because of COVID." Then in Spain, it was not 5% to 10%, but it was about 30%. So it seems the actual and perceived effect of the crisis was much higher in Spain than, for example, in Poland.

On the positives, you may remember that we made a management change in Spain at the beginning of the year, and we're very happy of that change. We saw a lot of positive changes in the quality of our operations that has happened over the past 2 months. There's a few more changes in -- on top managerial positions. They are made already by the new General Director there. We continue to support this manager work with her day-by-day also despite the situation. And we know that there is upside to what we saw our best operating plan coming from operating improvements on which we're working now.

So yes, we are in a very difficult situation. April was a very bad month for our Spanish business, but we have a high belief in our ability to turn things around. Of course, we'll suffer because of the crisis, but we strongly believe we'll have a better -- or a much better effectiveness in our operations by the year-end and be able to continue to profitably operate on that part.

In Spain, I want you to understand that we also have an exposure on the risk of writing down the goodwill on our servicing business. This business has suffered somewhat over the past few quarters because some of the banks sold the portfolios that were serviced by our service business. It additionally suffered now, in the past couple of months, because the effectiveness of collection has significantly decreased also in servicing business in Spain for the same reason why it happened in purchase business. And as a result, the revenues, which are expressed as percentage provision of the recoveries, commission of the recoveries also suffered. However, with this business, especially under the new management, it has good prospects to continue and to develop because of the crisis. And we already see increased number of clients asking us to work with them, which will, later on this year, translate into more business.

Still, if we continue to be loss making on EBITDA also in Q2, and that is the risk, the auditor may force us to write down all or part of this PLN 45 million of goodwill for accounting reasons, and that is a permanent loss that we will need to be booked, non-cash loss that would need to be booked. And that risk remains for our Q2 audit results.

On the other hand, our German assets, our Czech assets performed quite well. And there is no negative news that I have to share with you, fortunately.

I'll now go to Slide #15, where we describe in more depth this time legislative initiatives that may or have an effect on us. Some of them, I mentioned already. One thing I want to mention is that in Romania, a law was passed several weeks ago by Romanian Parliament, which was questioned by tribunal -- constitutional tribunal. It was also opposed by the government because Romania has a minority government. So there was a law initiatives, which is probably some gain between the opposition party, which has majority in parliament and the government. Anyway, this law would mean that banks -- financial -- any financial companies and KRUK cannot use legal system to ask people to repay over 2020. This law would mean a tremendous negative effect on the banks in Romania, but also will have a very negative effect on our recoveries in this period. We believe this law will not become -- will not be actually implemented. It will be questioned by tribunal. We had some initial decisions of tribunal already. The final decision is expected on 17th of June. Therefore, judging that it's unlikely to happen, we have not included any revaluation from -- on that account in our books.

I now go to Slide #17. Our cash loan business, Wonga, as I mentioned, our cash loan business will be negatively affected by lower sales of loans this year, but also most likely increased provisions for credit losses. That means that the budget for this year, which called for significant profits, most likely will not be realized. Our expectations is if we are breakeven on net profit positive on EBITDA debt growth. But unfortunately, 2020 will be a loss year for that business, and now -- the business plan on coming back to significant profitability in following years, '21, '22. We believe Wonga will defend itself well in the environment up to 2020, where most of Wonga's nonbanking competitors will be very hurt by the crisis more than Wonga. And Wonga will have a less competitive environment in which we will be able to conduct profitable business. It's a fully automated online platform targeted at low-risk customers, which we believe has a good voice in the normal market conditions where these legal restrictions and this crisis environment will subdue.

Just as a summary of the key information. Summing up, we are in a quarter in which we booked a loss, but the business is stable. The business is highly profitable on operating measures, with a low leverage level. We entered the crisis. We booked a loss, which reflected what we saw what was tangible and what was -- and inevitably we believe adequate. By no means, we can tell you there will not be any further write-down in Q2 or further during the year. The outlook for this year's result is bad. We realize that, but we strongly believe that the future of KRUK is very positive because we are one of the, we believe, top debt management companies in Europe, which is in relatively good financial position and which will function in a market of increased supply of NPLs for our servicing business and the purchase business in the following years, '21, '22, '23. Those most likely will be years when we will see more business, and we will be operating probably in a less competitive environment because not all of our peers will be able to go from this crisis well.

Thank you very much for listening, and I'd like to ask for your questions, please.

[Operator]

[Operator Instructions]

[Marta Jezewska-Wasilewska, analyst]

If I could have one question. On the recovery backdrop, you mentioned that recoveries dropped to 85% of the budget. Have you -- can you give us a bit of understanding whether the PLN 125 million or PLN 130 million of revaluations that you made in the first quarter reflected the drop of 15% or fully? Have you exceeded the 15%? Do you have any -- like, assuming it's going to be at this threshold as in April, will you have to be making more revaluations?

[Michal Zasepa, executive]

So the recoveries in -- the actual recoveries in April were, and in May most likely, will be above accounting forecast that we adjusted for -- at the end of the Q1 for all of the markets, more likely. Especially, they will be significantly higher in Poland, which surprised us positively. So my answer would be there is no additional reasons to write down the assets based on April or May recoveries. But please understand that it does not mean we will not be making some write-downs in -- for Q2 because of, for example, change in decreased forecast of recoveries in the future on our secured assets; second, additional decrease of the forecast in the midterm for Poland, Romania or other countries, which will concern recoveries in Q4, Q1, Q2 next year, for example. But the good information is that the April and May recoveries do not give us additional negative information.

If there's no further question, then I want to thank you for your time and attention. We will make sure we continue to manage the business day-to-day, so we can go through this crisis in good shape. I wish you all good health to you and your closed ones. And I hope to also continue to discuss with you and talk to you, if not in physical meeting, then through some remote techniques in the future. Thank you very much. Have a good day.

[Operator]

Thank you for joining the call today. Ladies and gentlemen, you may disconnect your lines.