Kruk SA

WSE:KRU

Earnings Call Transcript 2023-Q2

[Michal Zasepa, executive]

Hello. Good morning, good afternoon. My name is Michal Zasepa. I'm a Board member of KRUK and I'm happy to walk you through the Q2 results that we made public yesterday evening. I will be referring to the presentation that is available on our upside. And also, I will share it with you on teams that should hopefully be visible already. Please, during the -- my presentation and after a ask question through chat on teams. And I will go back to those questions after my presentation and answer them.

So let's start. This is, again, a big pleasure for me because KRUK has just posted the best results in its history, in its 25 years of history. Our net profit for this first 6 months of this year is PLN 528 million. That compares to PLN 36 million of net profit for the first year where we were a publicly listed company 12 years ago. So it's a decent track record of growth, I think. Net profit is one thing, but also underlying cash was very strong. We had over PLN 1.5 billion of recoveries satisfying or very satisfying results across all our markets, no sign of deterioration of negative macro impact, maybe some positives were coming through as some tax releases -- refunds happened, for example, in Poland and probably also helped us.

But overall, we see a strong consumer employed consumer and despite high inflation depressed GDP growth we enjoy strong recoveries across all the markets that we are in. And as a result, we also see a very strong cash EBITDA that exceeded PLN 1.070 billion for the 6 months. In this environment of high interest costs, we don't see an increase in the market, the supply of NPLs, but we do see a decrease of competition.

And this is very positive for KRUK we closed PLN 1.2 billion of investments in new portfolios, and there is more coming -- we made available information. And in July, we already won two additional portfolios in Spain, significant portfolios and the pipeline for the next months of 2023 is quite strong. So it may be that in 2023, we will have a record high investments in debt purchase, even though last year was already very high at PLN 2.3 billion.

We continue to be highly profitable on ROE, as you see here. It's trending down as our very profitable [ bet ] book depreciates over time. But it's still much above the average in the industry. Our assets go up according to -- in line with the growth of investments, and we achieved this growth at still quite moderate leverage level, which reached about 2x net debt to cash EBITDA. As I mentioned, it's a special year for us in KRUK, we celebrate 25 years history. Just to remind you, from PLN 3,000 of startup capital to roughly PLN 8.6 billion of market cap. Currently, it's a good story of 25 years of mostly organic growth and a lot of good decisions aimed at building shareholding value.

We are today more international than last quarter. If you look at split of investments, over 3/4 of our investments come now already outside of Poland. And close to 60% of our recovery is coming outside of Poland. We continue to focus on technology development, greater automation. This is something will be important for us for the next many years to come. And we believe we're just at the beginning of this journey that will lead to higher return on investments to greater flexibility and higher cost efficiencies. We are proud to be one of the best rated company in the industry, least leveraged one probably one of the most profitable one and quite balanced in terms of, for example, mix of male and women and managers, which works very well for us.

Now if you look at split of the recoveries, you see here, Poland contributed over 40%, increasing share of Italian and Spanish recoveries that trend should continue as we continue to buy more in those two countries. Overall, as I said, recoveries were excellent for the 6 months and for the second quarter, and we expect them to be strong in the coming months. A very good situation on the investment front. We do see lower competition we are able to buy portfolios at higher margins than last year. And this is eventually an effect, we think, of coming to a more reasonable situation where competitors are pricing these portfolios with a more long-term view and there is less hot money in the industry and some of our competitors, as you may know, are more limited now with heavy leverage on their balance sheets.

We benefit from the situation. I think this situation is much better for KRUK, debt situation with 0 interest rates in Eurozone during which period, we saw very high competition. And often, we couldn't -- we were not able to be competitive enough to win portfolio. So even without increase of the market, we are now able to buy significantly more portfolio because competition is lower. And as you will see in further slides, our market shares on some of the markets is quite high, and it wouldn't be possible, A, because of the competition. But B, because we continue to show more effectiveness and debt is translated into our pricing models and allow us to offer to the bank's higher price and makes us more competitive.

If you look at revenues, they are quite healthy. You see another quarter of a strong and sizable positive revaluation, which shows you that we continue on this strong recovery path. You see a growth of expenses, which is led by inflation of salaries. In the region in which we operate, 12% was the growth of salaries year-to-year, which is above the average for which we raised the salaries by and you see a significant increase in operating expense, which are mostly legal costs, which is a good thing. It means we see potential to make good profit investment expenses to the legal process.

Financial costs grew very significantly, more than 50% year-on-year. But less than you would expect if you compare the interest rate increase and the growth of the debt on the balance sheet. And the reasons for that is that we have successfully hedged a significant portion of our debt swapped Polish Zloty denominated debt to fixed Europe instrument becoming more stable becoming less sensitive for future changes of interest rate, but also lowering the costs because Euribor fixed-rate euro-denominated fixed instruments are significantly less expensive than the -- than our P&L Zloty Debt. And we have a better match between our assets between our euro-denominated assets and liabilities.

The company is very well funded. If you look at the equity, we are planning to pay out the dividend at the end of September, as you may remember, -- we also have improved our access to debt funding. We successfully closed negotiations with a number of banks funding us so far. They agreed to extend some of the lines that they have, and we have successfully placed two issues of bonds -- unsecured bonds to Polish retail investors. And that was quite well received, we see big demand, and we are planning to be more often present on this market in the coming quarters. We also may think about an issue of unsecured bonds to Polish investors sometime over fall of this year.

If you look at Slide #8, this is a more detailed description of what we're working on in the technology development. The most important is the digitalization of our collection process, both amicable and legal that should allow us to speed up the process that should allow us to be more productive to also need somewhat less people to do certain functions. It doesn't mean that we necessarily will have less people as we grow but we'll need to grow the amount of people less, achieving higher productivity because of these automations that we introduced.

As an example, I can tell you in Q2 alone, 30,000 of users across 3 countries, Poland, Italy and Romania, activated the e-Kruk Accounts and started to self-manage the repayment of the indebtedness. We think this is the beginning of several years program that will lead KRUK to become a much more technologically advanced and automated company. And we see there's a big opportunity an element of our competitive advantage. If we do it right, and this is our plan. Now take a look at Slide #10. That's a summary of segment results. As you see here, PLN 1.2 billion of investments came in biggest part from Italy, we're very happy with these investments.

They wouldn't be possible in the previous years because of the competition. Spain contributed about PLN 200 million, please expect it to be significantly more after we book these two additional tenders that we already won again -- this is a significant change in competitive situation, which is showing strength of our competitive situation in position in those two markets. And also, I'm happy to tell you that in Q2 in Poland, we were much more successful in buying portfolios than in Q1, the market opened up, accepted our higher returns. So it also bodes well for the future.

Romania remained also a stronghold for KRUK, a relatively small investment, but it was also relatively small value of investments on the primary market, but the market share, as you will see in a second remained quite good. If you look at EBITDA, a very solid result across the 4 main markets of Poland, Romania, Italy and Spain. Cash EBITDA also record high. You can see significant increases on each and every of these markets. And now a deep dive across each of those markets, Poland, the market is solid, supply was quite strong.

You see here PLN 4.5 billion versus PLN 7 billion for the full year 2022. So hopefully, this year will show even growth versus last year in that market in unsecured consumer segment, we had over 30% market share, which is satisfactory and hopefully, we'll keep our increases in the following quarters. The results for Poland were very good -- you can -- you can see here, we added about PLN 200 million of new investments, recoveries were strongest ever. And those 2 quarters in Poland were spectacularly good, I must say.

Hence, revaluation is quite high as you see here also you can see quite good results on Wonga in terms of EBITDA overall profitability of that business is quite high. At over 30%. Romania, we kept the strong position of the leader on that market with about 49% in the primary sales of unsecured consumer debt, there was one big transaction sale of insurance assets, low nominal value, not so high value of the investments somebody else bought this portfolio overall, the market -- the market is stable, but the size, as you see here, this PLN 300 million remains not so big. The results were very good. We added another PLN 100 million of investments.

The recoveries were very good at PLN 155 million that again led us recognize significant positive revaluation, record high EBITDA, as you see here and also our highest profitability of portfolio over 40%. If you look at Italy, also relatively good market, although if you look at nominal especially, but also the value of investments that is less than 50% of the last year. Supply in debt market, we bought whatever we thought was worth it and allowed us, and for the first time, possibly now in our history, we had as much as 50% market share, which shows the long way we have gone in Italy and shows also somewhat lower competitive pressure that we see.

Results were very good. We added another close to PLN 200 million of portfolio. Our balance sheet grew in Italy to PLN 1.8 billion. It was another positive quarter in terms of positive revaluation and also good EBITDA and cash EBITDA, as you see here. So if you look at this graph, you can see 9 positive quarters showing we are going up with our recovery expectations and we are able to move the recovery curves up and follow these paths. So that's something we expected, and that's something which is happening.

And finally, Spain, about PLN 7.5 million (sic) PLN 7.5 billion of nominal was sold on debt market and about PLN 500 million of unsecured consumer portfolios was the price -- market price for these portfolios. KRUK took a big chunk of that, about 90% -- sorry, 39% was our share in unsecured consumer debt from primary market, again, it wouldn't be possible if it was not for our increased competitiveness in terms of efficiency of the process and lower competition on that market and likely we'll keep that strong position or aid maybe even improve it after we bought one -- the two additional big portfolios in July.

So again, this is for us a very good time in Spain where after several years of hard work, we can see the fruits of debt development and the market position, high interest rates, relative weakness of our competitors helps us to establish a firmer position on debt market. And you see here that we added another PLN 661 million. We had some positive revaluation on our assets. And we had good results on EBITDA and cash EBITDA with satisfying profitability comparable to what we have in Italy. Other assets performed very well in terms of cash EBITDA. Recoveries also, we're happy with the level of expenditures here of PLN 60 million here coming from Czech and Slovakia. We paid an extra VAT, which is mostly a one-off and that mostly is the reason for low EBITDA for that quarter. And also, we are happy with the results of our cash loan business, Wonga, as you see here, grew significant EBITDA year-on-year. NOVUM remain highly profitable, although the results are somewhat worse than last year. So nothing to worry about here. We realize our plan.

A few words about funding. You -- as I mentioned, we are in a quite comfortable situation after we concluded negotiations with banks funding us. We also are quite positive on the Polish bond market, the two retail issues that were so successful, also to us that we should be we should be come into that market more frequently. And this is our plan. And we have not yet tested the Polish bond market. In the past several months, we may do it overall. That means that likely we will not tap the Eurobond market this year as we will not have such a need. And it seems that access to funding will not be a limitation for us even if the investments this year will be record high.

Overall, the company is in best shape it's ever been, please take a look at those quarterly numbers for the last 9 quarters. There's a really nice development, I think, on all the major key measures of the business, look at recoveries, gradual growth from PLN 550 over PLN 770 million. Look at revenues, also showing similar trajectories of growth, look growing from PLN 200, PLN 100 to close to PLN 400 million. Net profit a bit more jumpy, but also you can see a trend -- an increasing trend. And cash EBITDA growing nicely from close to PLN 400 to well over PLN 500 million, close to PLN 550 million.

We are in growth phase. We believe we are on the right track to continue to strengthen our position across the 4 main markets. In Europe, we believe there is more of this growth to come in this environment of higher interest rates and relatively weaker competition. we have place on the balance sheet to continue this organic growth and this is our strategy to continue to push our arable and strengthen our position in the next couple of quarters. So we're quite optimistic, focused on further operating improvements and so far this is proving probably the best strategy that we can have. Thank you very much. This concludes my presentation, and I will now look at the questions.

And please ask questions through chat. I'll be very happy now to take them.

[Michal Zasepa, executive]

The first question is, should we expect in H2 to see more investments outside of Poland as it was in H1?

Possibly as Poland is just one of the four big markets that we are in as we just announced that we bought two significant portfolios in Spain. So not withstanding the fact we expect a good supply of portfolios in Poland majority of the investments probably will be coming outside of Poland in H2.

Another question is, are you -- are you we planning to enter any new markets? We are open to this, and we are analyzing a possible entry to any market. Likely, we will not inform the market about it until it happens. But please remember, even if we do it, then the equity story for KRUK in the mid and short term for the next 2, 3, 4 years will be growth of profits on the existing market. Why?

First, because we still see a possibility to increase investments in those markets. Second, if we make an investment today, majority of net profit from debt investments, will not happen and will not be visible accounted in our P&L this year, next year or even in 2 years, but it will be over -- most of it will be over the next 10 years and majority will be between year 5 and 10, so if you're asking, what's the reason why KRUK's profits will be higher in 2025 versus 2023.

The reason is we invested at good returns in 2023, a lot of money and in 2022. That delay in profit recognition at the net profit level has increased or this delay has increased for two reasons. Funding costs are higher. So it takes more time to generate this net profit because we need to pay more for funding. But second, today's process versus the process we had, let's say, 5 years ago is more heavily geared towards legal collection, which means higher upfront legal fees. So again, we need to pay down those fees and the margin EBITDA in this initial period of work on the portfolios is lower. And the big gain and high profitability is achieved only after funding costs and legal costs are paid, which means we are in a slightly more long-term business than in a situation where there was lower interest rates, and we were more relying on any amicable process versus legal process.

And another reason why the new countries likely will not be a growth driver for the profits in the near future is that our experience shows that we -- it takes us some years to develop a profitable position in the new market. So unless we make great M&A, which contributes money immediately, which is not our base case strategy. We prefer to build organically you are likely seeing new markets as potential for distance long-term growth, which is, of course, important but it also tells us don't make a mistake in jumping too quickly to something which is a difficult venture.

Another question is, do you see any changes in recovery trends across the markets?

No. No. The recoveries are strong, and this is what we expect. And other questions we have is to put more color on expected CapEx and especially in IT? Well, this -- the biggest expense that we have in IT, which you may understand as CapEx is our IT team, KRUK employees over 300 IT specialists, and most of the development goes as cost that is incurred monthly. The CapEx, which will be amortized and which we are on the balance sheet will grow definitely, but it will not be very significant, I think, today.

So we're talking about sums of money of about EUR 10 million annually of CapEx, let's say, compared to a significantly higher amount of money that we pay every month in keeping this over 300 people in the IT who do most of the development and the projects that we are working on in the technology development. That likely will increase, but it will not be a very high -- values from what we see today.

Then you ask what's the split between Polish Zloty and Euro funding?

So the policy that we have is that we fund our investments from debt denominated in the same currency. In practice, it means that we draw Polish Zloty bank debt to fund Polish investments. We drove a Euro-denominated bank debt to fund from the revolving line to fund our -- to fund our investments in Europe, but we also may fund the Euro-denominated investments by swapping Polish debt into Euro-debt, which we also do. You can find the split of the Euro-denominated debt I think even in this presentation on Slide 27.

You also asked about the new information about potential changes in Italy for debt collectors. Okay.

There was an article in Italian press a few days ago about a possible change in law, which will call for a right of the debtor to buy back this person's debt with a markup of 20% from the creditor. -- we believe this proposal of law has no chances of becoming a law. Why do we think that? Because this proposal is old. It dates back 2 years. It already was proposed once, and it was at that point rejected. We understand that such proposal would be very negative, would have a very negative effect on the banking industry in Italy, and it will be opposed, we think, by the National Bank of Italy.

And also, it is not congruent. It is in conflict with the NPL directive and a European law, which should be adopted by Italy either this year or at the beginning of next year. But it's a fact that such proposal was officially put for consideration by one Italian MP. We think it will have very little chances of being successful.

You're also asking what level of leverage are you comfortable with?

You can see the level of leverage currently is about 2x net debt to cash EBITDA, we feel very comfortable with this level of leverage. The limiting level of leverage is the level at which we will not be able to repay all of our obligations without refinancing. This level is still far away from us. It's much higher than we are leveraged now, but it is below the cash EBITDA -- net debt to cash EBITDA covenant of 4.0x and it's also lower than this covenant that we have on the net debt to equity of 3.0x in -- so somewhere there, and it is close to the 4.0x minimum covenant of interest cover ratio. That we have. So from that, I'm telling you we could invest PLN 3 billion this year without losing this comfort.

We could continue to invest PLN 3 billion next year in portfolios in the following years, but somewhere there will be getting to our more internal limitation of comfort. In our business plan, we never reach this comfort level, and it is our strategy to be rather moderately leveraged than highly leverage. And this business today has a very low risk of refinancing in our projections. We never assume we will refinance because we keep this leverage at low levels.

You're also asking, Are you -- are we thinking about M&A or forecasting on organic growth? Our strategy, base case strategy is organic growth. We have created a lot of shareholder value because we haven't done much mistakes in M&A. That's one of the reasons, but we did build a very effective organizations that are taking advantage of our culture and way of managing that we copy from country to country. We would like to keep it because it works very well. However, it may be that at some point, we'll make a decision to buy a business, because we will see that this is a good business that we will believe we would be able to integrate and the market will be so competitive that it will take us 7 years to build it in this country.

This situation has not happened yet. We realize it may happen from -- at some point in the future, but that's not something we would plan and we would still start from the preference why do we need to buy it? Maybe it's better to build it ourselves and not pay and have a goodwill on our balance sheet.

Your -- another person, Peter, you're asking if you understood correctly that in Spain, we paid 1% of nominal volume for corporate NPLs?

No. I think that's mistaken. We didn't buy any corporate NPLs in Spain this year. The portfolios we bought, if you ask about Spain, were only consumer unsecured portfolios. And IRRs on those portfolios were among highest we secured this year, and they were high-teen percent unlevered.

Do you have any other questions? Because I think I answered all of the ones I see here. If not, then thank you very much for your interest in KRUK. I hope to see many of you on the road shows the company plans over the third and fourth quarter, and I wish you good health and good investment decision. Thank you very much. Goodbye.