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Kruk SA
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Kruk SA
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Earnings Call Transcript

Earnings Call Transcript
2021-Q1

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Operator

Hello, and welcome to today's conference. My name is Laura, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to your host, Marta Jezewska to begin. Marta, please go ahead.

M
Marta Jezewska-Wasilewska
analyst

Good morning, good afternoon. My name is Marta Jezewska-Wasilewska, and I represent Wood & Company. We'll be the host of today's call. Today's call is to discuss a fantastic record-high first quarter results of KRUK, our largest debt director in Poland. And the call will be run by Michal Zasepa, CFO at KRUK. Michal, over to you.

M
Michal Zasepa
executive

Thank you very much, Marta, and good morning, good afternoon. Thank you very much for being here on this call. It's my pleasure to walk you through Q1 2021 results, especially that these are the record results we've ever had. The second best is PLN 110 million of net profit quarterly, but that was long ago, back in 2019, and we are back with a record, it seems.

I will be using the presentation, which is available at our website, Q1 2021 results, and I will refer to the slides there. I'm now looking at Slide #3, a snapshot of our results, a record-high net profit. Why is this net profit so high? And the answer is default. First, excellent recoveries. Excellent recoveries that I will be telling you in a few moments on each and every market, which is also a new situation. And second reason is a new investment starting from Q4 and good performance on those investments in Q1. Those 2 elements are responsible for this very good net profit that you see.

The cash EBITDA, also a very good result. You will see a good control of costs, high recoveries, of course, very good EBITDA. Based on these very good results, very strong cash flows, the management proposed to shareholders to increase the dividend to PLN 11 per share. The shareholders will decide on that in the next couple of weeks at the upcoming AGM.

The purchases at PLN 160 million were very good. We did not plan on such high investments, and this is -- it seems a beginning of a good trend because we see a relatively strong pipeline, and we are ready to go back to investing on every single market that we're covering. So it may be a good year in terms of our investments. You may remember at the year-end, we were telling you that we budgeted over PLN 800 million for this year, which seems modest at this time. And we are targeting PLN 1 billion-plus investment this year. Maybe we will have an update, positive update of them -- of that in a quarter or 2. But today, we see this as reasonable and achievable. Of course, we are still relatively far from it after Q1, but there's a lot of portfolios being offered on the market in Q2.

So overall, a very good result. Of course, these results are achieved in the environment of pandemic and in -- we made decisions about booking revaluations for Poland at the end of March, that was peak of the pandemic situation in Poland. Of course, we were concerned how the situation will affect us, is there some risks that we don't see today and may be seen tomorrow. So there is some caution also in these results in our relatively conservative review of future recovery curves for our Polish and Romanian, the unsecured lines. And so far, no [indiscernible]. March results, also April results show that there is no additional risks.

Although we don't know exactly how this good performance, especially in Poland, on the Polish retail side, can be explained by factors such as our improvement of operations, which definitely has been the case. But also very strong sentiment, very strong too within debtors and the payment behavior. Maybe during the lockdown, people were more willingly paying money and repaying their debts. Maybe that will change once we all start to consume and spend more money, we don't know that. And then we'll find out in the next couple of months. So far, it's been very good results. And results on recoveries were above our expectations, especially in March. And also, this trend was continued in April.

At the end of Q1, we still are a lowly leveraged company, as you see here on the Slide 3, which means we have appetite to grow. We have place to grow, and we're planning to grow. And today, also, we announced a new issue of bonds on the Polish market, targeted to retail investors, and that probably is not our last issue this year.

On Slide 4, there is some more detail about our results, but I think I covered most of those points. Our goal now -- to Slide #7. And just a reminder, we have an anniversary, a 10-years anniversary of being a publicly listed company. Thank you very much to those investors who've stayed with us for those 10 years. We promise we'll continue to deliver as much as we can achieve in the future.

The past was not that bad. If you look at Slide #8, we've always been above the indexes. And it seems that there is now an additional momentum for growth starting, so bear with us.

I'm now looking at Slide #11, a summary of the group results. And again, it's very positive for me and the Board to say we were profitable on operating level in every single country that we operate on. And this is -- that hasn't been that often in the past 2 years that I could say it. I hope I will be able to repeat that once again in the next quarter, but this is what it looks like today. Poland and Romania, a very strong performance on the back book. Italy, also an increasing effectiveness on the legal stream, which bodes well for the next couple of quarters.

Spain, which started the year with a hiccup, we had a big snowstorm in the country and Madrid was paralyzed for a week. We did manage -- the company managed this small crisis and ended Q1 on plan. And it's building some surplus over the plan in April and the situation is stable and improving. Also, our small additional businesses, one novel credit information bureau, were all profitable. And the overall result, this PLN 127 million of profit and close to PLN 200 million of EBITDA, which is a great result.

Now looking at Poland alone on Slide 2 (sic) [ 12 ]. We were quite active in investing in Poland, PLN 130 million shows you that in a relatively weak period in terms of supply, we were able to secure quite a few portfolios. We see that we are stronger in Poland than ever before. By this, I mean, over the past couple of quarters, we improved the precision of our scoring statistical models. So we also improved our effectiveness of our operations. And this is visible in our market share in these first months of 2021. Yes, we accept somewhat lower IRRs than in 2020, but this is a market situation where our competitors are well funded. The recoveries are strong. Risk is relatively lower than last year's, which time to play a little more boldly, and this is what we do. So Poland is strategically for us, a market where we want to be strong, and we aim at achieving a higher market share than this 20%, 25% that we usually have in the past years. And we believe we have now tools, in terms of our operating effectiveness, to achieve it and to have Poland as a strongly growing market in the next couple of quarters or maybe even years. And the beginning of that, I think, is quite successful. And we see quite a few more portfolios we could target in Poland this year.

The performance on the unsecured book was excellent. You see that there was about PLN 13 million of positive revaluation on the unsecured, some PLN 7 million negative on the secured part. This PLN 13 million is a rough conservative figure. But bear in mind, we made this decision on the 30th of March, where unfortunately, the death toll in Poland in the peak of the pandemic puts a heavy toll, even now where we were going. Today, the situation looks much better. Recoveries are continuing to be strong. So if that situation repeats in May and June, please expect very good results in Poland -- in Polish business in Q2.

Romania, a different situation in terms of supply, quite a few transactions were on the market. And it looks like this year, it will not be a very strong supplier of portfolios in Romania. This has to do with still this negative effect of the taxation law on banks trying to sell their portfolio. This law is not going to change this year, we think, maybe that will be changed next year. So it will be a difficult time to buy much more portfolio. Still, this PLN 20 million is quite insignificant. Yes, we have plans to go much more -- much above this figure, but Romania unlikely will not be the main driver of our investment this year.

On the other hand, our bank book in Romania is performing superb. You may remember, we suffered a lot in Romania last year. Our recoveries dropped by over 25% as a result of change in the law. That is gone. The law was brought back to what it was before pandemic. From Q4 part of Q3, we see quite strong recoveries, and we see that trend being continued in March and April. So again, please expect very good results overall. On Romania, you see here PLN 15 million of positive revaluation of the retail book, minus PLN 3 million on the secured part. Again, if these trends continue, it's quite likely that you will see positive revaluation and a very good EBITDA in the following quarters in Romania, despite the fact that we don't put much more investment in that market, which I hope is temporary and in a few quarters will change.

In Italy, we are hungry for new investments because we haven't bought anything for 2 years. But more importantly, we are ready to absorb the investments. Why? Because we have a relatively long track record of achieving or overachieving our targets in legal collections, the latter part of the panel that we needed to say. We know what we are doing, and we are ready to continue to invest. The Q1 was very good in this respect. We see a good acceleration on the legal process. That led to increased legal costs in Italy in Q1 '21. Despite that, you still see decent results in EBITDA, PLN 12 million, and good prospects to see good recoveries and much better profitability than in the past.

In that circumstances, and looking how our expectations for recoveries for the books -- for the portfolio that we bought over the past years are slowly starting to go up. We are ready to go back to buying portfolios. And there are some portfolios that we are targeting, so please expect us to start to buy portfolios in Italy this year. Again, this is a situation where Italy seems to be on a very good road to more stable profitability, and Q1 is a very good step in that direction.

Other markets, including Czech Republic, Slovakia, Germany and Spain, we're performing on plan or somewhat above plan. As I mentioned, the most important part of that group, Spain underperformed in Spain -- in January for the weather reasons, but then regrouped and caught up the shortfall in February and March and finished the quarter on plan, which is a very good sign. We see also a very stable situation there. We're happy with the portfolio we bought at the end of the last year. And as you may know, we secured -- we won auction for another portfolio back a few weeks ago. So we are growing path in Spain, and we had a stable team, improving results. So there is also more optimism in KRUK Spain, and it is a profitable business on EBITDA level, which is very good.

Czech Republic, Slovakia, Germany, good recoveries. The PLN 10 million investments related to Czech Republic and Slovakia only, we hope to invest more in the next couple of months on that market. And we are just managing our sets in a runoff mode in Germany. So as you see, the first quarter in many, that got no negative surprises, only positive news, which makes us very happy.

Also, the other markets, the other business lines performed well. Wonga, seen here, brought close to PLN 10 million of EBITDA, double the results from last year despite the fact that it didn't grow revenues, and we hope to increase the size of the business in the next couple of months, which is not so easy because in pandemic times lockdown, the demand for consumer finally dropped in Poland. But now we see some revival over the past 10 days where the lockdown was decreased. So hopefully, that means that Wonga will have -- it will be a little more easy for Wonga to continue to grow. But the business is already profitable.

Also very good performance from the secondary cash loan business, NOVUM, and decent performance in the credit information bureau, although a certain decrease of profitability due to market reasons.

Now if you look at the P&L, my summary would be a very good start in recoveries. I expect that this is -- that this is just the beginning. In order to reach PLN 1 billion, we need to invest over PLN 840 million more, and that will be our target this or maybe a little bit more recoveries and excellent trend. Hopefully, we will not see a drop. But the fact is we are not positive if some of these March or April recoveries are not some positive effect of the lockdown where people were very eager, willing to pay that when they did not consume much. This is unknown, but this is something we'll find out in a few months. So far, it's all good.

Purchased debt portfolios. Revenues were increased by this PLN 18 million revaluation. Please expect more in the next couple of quarters. Why? Because you see that the deviation from actual recoveries, the accounting plan was quite significant and positive, as much as high as PLN 89 million in Q1. And this is something, of course, which is a trade-off between the revaluation, the revision of the forecast. And that shows this strong -- and this shows the strong trend of recoveries.

The company is very well capitalized. You see on Slide #22 that we are indebted at only 1x to net debt to equity. 1x to net to debt EBITDA -- net debt to EBITDA, so that gives us quite a lot of room. And of course, we want to use this leverage to space -- to drive returns for shareholders. So the plan for this year is to continue on this trend, maximize the market opportunities in Poland, Romania, cautiously, but more broadly, come back to investing in Spain and Italy.

Thank you very much for listening. And I invite you to ask questions.

Operator

[Operator Instructions] So we have a question from Richard Wood from Higher Ground.

R
Richard Wood
analyst

Thanks for a good set of results, that's all very exciting to last year. I had -- something surprised me in the last few months, and I just wanted to know why you did something. You bought back your own shares a few months ago. And you made it clear that, that was -- you weren't going to pay a dividend, but you're going to do this instead.

But nobody, except for the very small shareholders, got any benefit from that. We participated but didn't get anything at all. And that seemed to be quite unshareholder-friendly for anybody except retail. You've consistently done a very good job of keeping in touch with institutional shareholders. So I wondered whether you were forced to do that by the regulator or why you did that. Because we effectively just missed out on a dividend, which the smaller guys got.

M
Michal Zasepa
executive

Okay. Richard, thank you for that question. We have bought -- we have run this buyback program as a specific project for 2020 in the pandemic situation. That was a preference of some of the bigger shareholders in the KRUK Group. And the idea was to make this as an alternative to dividend where we have offered investors to buy back the shares at a very significant premium to the current market share.

Now if I remember correctly, 91% of all the shareholders of KRUK participated in this program, which means all the big shareholders, all the big institutional shareholders of KRUK participated in this program and benefited from it. Because we were buying shares at PLN 350. At the time, I'm not exactly sure what it was, but maybe the share price was PLN 160 or PLN 170 at that time.

So the shareholders who participated in this program, of course, benefit largely. Now these shares will be rebid, and this is the only thing we can do legally, do those based on this agreement with the shareholders. Now I'm sorry to hear you have not participated as a shareholder in that. We were, and I was surprised that as much as 9% of shareholders of KRUK did not participate in that. We made sure that we communicated quite widely and engaged shareholders several weeks to participate. Still, it seems we were not effective to many of them. Now before...

R
Richard Wood
analyst

No, sorry, exactly my point. Sorry, sorry for interrupting you. No, we did participate, but I was under the impression small retail got a much better success rates in than [indiscernible] than the institutions [indiscernible] which is effectively paying a larger dividend to -- it's like paying shareholder A a bigger dividend than paying shareholder B. That was my point. And I didn't want to take up the whole call with it.

M
Michal Zasepa
executive

All right. Okay. Then just to explain on that, there was some privilege for the very small shareholders holding 50, 30 shares, not to have [indiscernible] the Polish retail investors and community that this program was aimed only at satisfying the big institutional shareholders. To some extent, fewer people, 100 people, maybe got a slightly better deal for the very relatively small amount of money.

Other than that, I think all of the institutional investors benefited from this program. All in all, we will be paying much more likely only the dividends in the future, not the buybacks, because I don't like the situation where as much as 9% of the shareholders did not get something that they should have.

Operator

[Operator Instructions] So we now have a question from Radim Kramule from Erste Asset Management.

R
Radim Kramule
analyst

Can you maybe just try to bring some more color on your P&L and it's PLN 130 million net income for the first quarter? Because when I'm looking at last year, basically, the run rate was around PLN 50 million per quarter. So how much of this is, let's say, is some kind of one-off incurred in these numbers? Or what could actually be the recurring net income that can one assume for the rest of the year for KRUK? It would further be helpful for me to understand this almost tripling of full quarter results, yes.

M
Michal Zasepa
executive

So trying to answer this question. There is no one-off in these results that would make these results look much worse. On the other hand, there is an accelerator of results, which comes from the fact that after pandemic, after [indiscernible], the recoveries in KRUK are significantly above the accounting recovery forecast.

So look at the composition of the revenues because it is the revenues that are the most important driver for the current and future performance of KRUK and its profitability. Now in 2020, the revenues were under the heavy negative effect of changes in the law and our negative revisions of the forecast. So we incurred significant losses. So in that sense, they were decreased.

Now not only you don't have this effect in 2021, but we're also starting the year with a relatively low base of accounting revenues, and the recoveries are very strong and they actually accelerated. Why they accelerated? Because we have introduced several improvements to our processes because the consumer is stronger than we anticipated. And also because we have bought, in the last 2 quarters, more than we expected and more than overall on average in 2020.

Now what it means for the results of this year, future year, I don't know exactly. But the fact is with this strong results in the first quarter, we are definitely going in the direction of the best results in the history of this business in 2021. It's too early to say what it means exactly, but it's a very solid result in terms of cash flow. And there is not a single important element that I could say it's a one-off, it will not repeat.

Of course, as we will be recognizing positive evaluations, you will see certain trends of the results leveling off. But this is not something which will happen in 1 quarter. That will last several quarters, maybe even a few years. So I think we are at this point where we are discovering that the business has more potential to grow than we would still think half a year ago, not to mention a year ago.

R
Radim Kramule
analyst

I see. I see. So theoretically, the whole 2020 is a low base year comparing to, let's say, the current trends.

M
Michal Zasepa
executive

Yes. Yes. Well, you can say that 2020 was a year where there was a few negative significant effects and it's not a good base to grow results. I encourage you also to look through the details of the proposed option program, which was announced and made public a few days ago on our website. This -- in this program, the Supervisory Board proposes to shareholders that KRUK management is remunerated in this option program as long as we grow at least by 15% EPS starting 2021, but from the base of 2019. 2020 is not taken into account, but 2019, 15% increase calls or PLN 370 million of profit.

So this is the threshold that supervisory set for KRUK management to say if you want the bonus, if you want to take part in this option plan, you need to deliver in 2021 at least around PLN 370 million. And then on the top of this PLN 370 million, additional 15% every year. This is our -- and this is something, of course, we want to make happen and maybe beat it.

R
Radim Kramule
analyst

Okay. Fair enough. So PLN 370 million should be the, let's say, at least a target for the whole year based on the option you have?

M
Michal Zasepa
executive

Yes, that's right. Roughly about that, it's maybe PLN 360-something million.

R
Radim Kramule
analyst

It's helpful. And definitely, if you might comment on, let's say, your planned purchase. Because I remember probably a year ago or maybe during 2020, you were kind of saying that the crisis usually creates a good opportunity to buy into attractive portfolios. But it seems to me that also due to the different part of the pandemic, this is not really the case because you also mentioned during the presentation that IRRs are, let's say, lower than what you were maybe hoping for, or...

M
Michal Zasepa
executive

Yes, that's right. So it's not -- the market situation we are now, it's not a situation of heavy prices that created a big problem with the banks now and they are desperate to sell and there is so much supply and only limited demand, which means there will be very good IRRs and plenty to buy.

This is a situation where banks are not under so big pressure to sell because the NPL increase wasn't so big so far and where most of our competitors are in relatively good shape. They are more leveraged than KRUK, but they also didn't have very difficult time in this 2020 crisis. So it's more like back to business pre-pandemic. We are all well funded, this is now top 6, top 7 European players. We are all eager to buy because we haven't bought so much in 2020. So the IRRS, the recoveries are good. So the IRRs are somewhat lower than in 2020.

They're still reasonable, but it's not El Dorado. It's not -- and we don't see, at least yet, any very significant influx of portfolios on the market. There is much more supply than in 2020, but I would say it's pre-COVID, it's 2019 levels, not something extra. So in that sense, the crisis did not really create that much turbulence in 2021 as we might have expected back a year ago.

R
Radim Kramule
analyst

May be last question also related to this topic. So how come you're relatively confident that you can manage to purchase around PLN 1 billion worth of portfolios when you're also suggesting that the banks are not, let's say, in a position that they will be pushed to dispose of these portfolios? So where do you think the supply is coming? Or do you really believe that the COVID has held back the banks, that they were not offering the portfolios?

M
Michal Zasepa
executive

This PLN 1 billion of investments is, of course, an ambitious target, but it's possible to be realized in 3 or -- in 4 main markets. Poland increased our investment level and we see very good results so far in our competitiveness on the Polish market. We don't need supply to grow. We need to have a higher market share, and this is likely from what we're seeing now.

Plus, good investments in Romania, not very high, but PLN 100 million, PLN 150 million, maybe very positive scenario closer to PLN 200 million. And a few investments in Italy and Spain, but one investment in Spain may be as much as PLN 100 million. Those are relatively large portfolios in those markets.

So if you group those 4 markets, did something for Czech Republic and Slovakia, you may already be close to PLN 1 billion without the market growing at all.

Operator

[Operator Instructions] We currently have no further questions. So I will now hand back over to the host.

M
Michal Zasepa
executive

Thank you very much for your time and listening to -- about KRUK results. I hope to see you, talk to you on some conferences. Please expect that KRUK has started a good year. Thank you very much. Stay healthy. Bye.

Operator

So this concludes today's call. Thank you for joining. You may now disconnect your lines.

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