Kruk SA

WSE:KRU

Earnings Call Transcript 2021-Q3

[Marta Jezewska-Wasilewska, analyst]

I would like to warmly welcome all of you to today's conference call. The purpose of it is to discuss KRUK'S third quarter results. My name is Marta Jezewska-Wasilewska, and I represent WOOD & Company, a host of this call.

And now, with no further delay, let me hand over to Mr. Michal Zasepa, CFO of the company. Michal?

[Michal Zasepa, executive]

Marta, thank you very much. Good afternoon, and thank you very much for joining this call. Thank you for your interest in the company. I'll make the presentation based on the document, which is available on our website. So I'll be referring to the slides and you may follow it on your screens.

This is a very nice moment for me. The results are great. This year, results are excellent. KRUK has earned PLN 565 million in the 9 months of 2021, which is an absolute record. It's PLN 230 million more than in the second-best year 2018. So it's a new era for us, an era in which KRUK flies much higher than ever before. And the good information is that we want to stay at this height, at this altitude for the following years. And we are observing very good trends this year, which may continue in Q4.

The business, this result -- the great result is based on strong fundamentals of our back book recoveries, which, in practice, KRUK has been able to, for another quarter, be profitable in all countries where we operate with increasing and positive contribution from the countries of Italy and Spain. Not only do we see continuous, very strong trend on the recoveries on our back book, but we also have accelerated reinvestments. Over PLN 900 million invested this year, and what some of the analysts say, it will be a record year with maybe as much as PLN 1.5 billion investment, to which we say we try to fight for that result. So we are indeed in a very good situation because such big investments will also be very good for the next couple of years when cash flows from them will be built.

Well, back to high profitability on equity, trailing -- rolling ROE is at 26%. The business outperformed on earnings per share. They are at about PLN 30. So there is money to invest. There's also money to share with the shareholders when we'll be deciding about the next dividend. The business grows in volume nicely. The balance sheet amount of portfolio carried is now at PLN 4.5 billion, a record, and we achieved all that with one of the lowest industry levels of indebtedness. The net debt to cash EBITDA stood at 1.5x at the end of the Q3 and at 0.9x, if you look at net debt to equity, which again means good news because we have a lot of stakes to grow investments if we find good opportunities. And there are opportunities, and especially, we are very happy with what happened in Poland, where we significantly increased our market share and are able to earn more than ever before.

If you look at Slide #4, there is one more important information. I believe it was last week, European Parliament published a Directive of the -- on the credit services on NPLs, which we believe is an important step validating the industry as a very important part of the financial system, which will enable for this industry to be seen as more credible, more transparent and attention will foster the development of the industry, we believe. This is future expectation because this Directive will now need to be implemented within the next 2 years in each of the European Union countries. So of course, there's a lot of details to be resolved on the local levels, but we see that as a very good sign with the legislations on the European level sees our industry as an important element that requires some regulation aimed at enlarging the business.

If you now look at Slide #8, you will see the segment analysis of where the KRUK invested and earned money. You can see that recoveries totaled about PLN 1.6 billion. Overall, we are very happy with this level of recoveries. That was, on the total, 3% above our ambitious operating target and somewhat more above the accounting forecasts when you look at this. The results were still outstanding in Romania and in Poland. They were also very good in Italy and Spain. In Spain, they were very good on the retail business, but they were below or significantly below plan on corporate portfolio, which we decided to write off. There was also some negatives on the corporate portfolio in Romania, which also was written down. But that is a very small problem compared to the big upside we see on the consumer part of the business, representing well over 80% of the total book. So we are not worried about it. We treat this more -- we treat this as a one-off event, which really impacts -- not has impact on the overall outlook for the business.

EBITDA, if you look at this slide, totaled PLN 744 million. And it was Poland that generated more than 50% of the excellent performance of Romanian business over EUR 200 million. And with this very -- what is a very good news as Italy continued its good trend of growth, PLN 77 million of EBITDA. That's a visible third strong engine for KRUK's profitability already.

Spain did okay with PLN 17 million, but it carries over strong PLN 118 million of negative revaluation. If it wasn't for that strange performance, would also be very good. And last but not these, other markets performed very well. If you look at 2020 numbers, they doubled its results PLN 22 million.

If you look at expenditures on debt portfolio, this PLN 900 million came mostly from Poland, over PLN 460 . We're very happy with Romania, where the market is tough. There's not many portfolios to sell, but we still are able to place money there to work with this PLN 180 million and very good level of investments in Italy and Spain, PLN 200 million and PLN 130 million, respectively. Overall, it's a very diversified situation where we no longer are only on 2 engines that are profitable, but about 5 engines that are profitable, and also we're building future and this growth in all of those countries should be visible in the future. As you see, the expenditures are also not in one or two countries only.

And more details on Poland. As I told you, a very good trend of the recoveries across all the asset classes. This trend continues also in Q4. Unfortunately, COVID situation has worsened in Poland. We don't see any new regulation or effect of the recoveries, but we are also, of course, cautious. I think, in COVID terms, we are ahead of some tough times for the next couple of months, but it doesn't look like the government is imposing a countrywide lockdown, nor we are aware of any regulations that would hint a slowdown business here. So hopefully, the business will not suffer, but people-wise, employee-wise, this is a difficult situation, and of course, we are concerned.

In terms of new investments, it is the best year ever. We had PLN 461 million, not including the large portfolio of PLN 1.3 billion on our value from one of the biggest Polish banks that we won and which will be booked sometime in Q4, and this is not all. So we are quite ambitious to grow the group in Poland. We are able to, despite very heavy competition mainly from international players, but we are more competitive than we were historically, and we are able to win at decent IRRs. This year's supply of portfolios in Poland is exceptionally strong. We are taking advantage of it. Possibly, the next year's supply in Poland will not be as strong. So it's giving us more motivation to fight for this portfolio in Q4.

In Romania, we're very happy with the trend of the recoveries. As I told you, the recoveries and the unsecured consumer portfolio is excellent, have you been excellent, and most likely will be excellent for the next couple of quarters, hence a significant positive revaluation. On the other hand, the corporate portfolio suffered. We made a thorough review, over next summer, early in fall, result of that is some negative revaluation, but, well, this is the business. We go on and we believe we shouldn't expect any bad news in the near future. In the meantime, we were able to invest in a few portfolios. And this PLN 118 million is already a few times larger number that you may have seen in our 6 months results, which is very positive. So we are positive on Romania, although the investment potential is much smaller than it is in Poland.

And then you have Italy, which has it's very good year. KRUK is really happy this year, as we see continuous strength of very good recoveries on all asset classes, secured and unsecured. And the new investments we made over the past 12 months are performing very well. And that's why we would be very happy to add from new business. If Italy stayed this year, we will be working on that and the prospects for Italy and the new investments are quite good. The market is big. And we proved ourselves and to the Italian banks that we are back in the game. We are booking in portfolio at competitive prices, expecting quite decent IRRs. So we feel we are in the game and the possibilities to grow the business are opening up quite widely for us. Of course, we are trying to be not too excited about it and going step by step. But that means that we could expect further growth of our book and profits in Italy.

Please see that for the second time in the row, we have positive revaluation on the Italian assets, PLN 16 million this time. This pertains to the unsecured book. And this is the result of world, which recovers and continuous trend, expects more if we will be going that path.

Spain on Slide #12. Also very good performance on retail, unsecured and small positive revaluation, which you don't see because it's covered up with bigger negative revaluation of the corporate assets. Overall, the situation in Spain is good. We're profitable unsecured. We're most likely growing this profitability into the next quarters. We placed PLN 130 million to work in new portfolios. We are not likely to end new portfolios this year, but we see that there is significant supply being built for 2022, and we will be ready for it. And then 2022, we could see growth of investments on the Spanish market.

We had some difficult supplies on the corporate portfolio, this write-down that you see in the valuation is concerning this asset cost. We are still learning that business. We built out and we're not giving up. We're not buying such portfolios, but we try to make sure we improve the operations, we improve the team, so that you can go back at some point to doing that business on some other portfolio. So far, it's a learning phase.

And to Slide 13, other markets, very good performance on all the 3 of them, in Germany, in Czech Republic and Slovakia. You can see very nice profitability of 49%. You can see EBITDA double the EBITDA of the previous year. We're very happy on that. But this is not so much investment we put into this market where no investment in Germany, we're positive in investments there. But we are pursuing [indiscernible] Czech Republic and Slovakia. But the markets there is not [indiscernible]. We, however, will be buying some new portfolios most likely in Q4 in Czech and Slovak Republic this year.

And a few words about other businesses. Wonga had very good performance. You can see that we're growing the book, and profitability EBITDA stood PLN 25 million, more than doubling the last year results. Also, NOVUM had very good results. The business tripled its EBITDA year-to-year. If it is not growing, but remains in core markets region, but it remains a highly profitable business.

If you look at the full picture, this has been a very good quarter for us, more or less, close to our expectations. Q4 has good prospects, but we expect that the profitability will be such that it will not be a very strong quarter, given the 3 quarters of this year. But it's quite obvious for us that this year will be a very good year in total.

And we are in process of budgeting. And our ambition is to come up sometime in December with a budget that will be showing growth in 2022 versus a very high profit in 2021. Why is it possible? Because the back book performance is so strong that are very likely to continue to release positive revaluations throughout 2022, but also beyond, and because we are just adding to the business significant amount of our portfolio this year, which will mostly generate profits in 2020 to '23, '24.

One more comment regarding earning access to funding, we are also quite comfortable in this area. Despite large investments and significant outflows for bond redemption, the company is very well funded. We successfully raised this year many hundreds of millions of zloty, which is close to PLN 0.5 billion in bonds and even more in our large banking lines at very good terms, I think. And we are ready to invest to continue to increase our investments. Interest has increased in Poland. Of course, it has a direct impact on the growth of our financial cost. We are ready for that and are budgeting this increase. Actually, I think it's a reasonable decision to raise interest rates in Poland, given high inflation of almost 6%. Now it's not concerning us much at this point.

And bear in mind, of course, inflation is negative for financial costs, but it's positive most likely for our cash flows and our revenues because people who are retained that we have some with more money to repay it. Of course, that's wrong as this inflation is not too high and doesn't need to some [indiscernible], but this is not the basic senior, I think.

And last, but not least, if you look at Slide #24, we wanted to raise your attention to the fact that KRUK is growing very significantly profit this year the share price is made behind the DI positively today. But overall, we are relatively cheaper on the price to earnings than we were historically or where the industry is -- some industry averages there. So I hope if we continue to deliver quarterly results, the market will appreciate.

We'll be also doing more and more in ESG. On Slide 25, you will see what we have done in terms of social responsibility statement, healthy workplace initiatives and also environment. We recently hired a Manager who's responsible for ESG, which will work with the management of putting some more concrete targets and strategy, and we're very happy because it's very consistent with how we view the world, showing us of the responsibility, not only for environment, but also for the social impact. We want to be transparent for our investments. So we are really coming this market's change and the fact that the businesses are not only about making profit, but also understanding the impact in making a positive impact on the planet and the environment.

On Slide 26, you see the plan for the IR activities. I will advise you to a big conference in projects coming up. Most likely, I will be present remotely on the conference, given the COVID development, but I hope to talk to many of you there, if you attend.

This concludes my presentation. And operator, we are ready for questions now.

[Operator]

[Operator Instructions]

And first question comes from Marta .

[Marta Jezewska-Wasilewska, analyst]

I do have one question because you have extremely strong recovery in those first 3 quarters. And I'd like to learn a little bit more color what is standing behind those. Could you share a little bit of light, either with regards of which of your vintages are standing behind those? And actually, even more interesting for me would be which countries delivered and contributed most to this recovery level.

[Michal Zasepa, executive]

Sure. So let me look at Slide #8 where you have a breakdown of recoveries. You see that in the 3 quarters of '21, this PLN 1.6 billion recoveries came from Poland, PLN 783 million; in Romania, PLN 422 million; Italy PLN 226 million; Spain PLN 118 million. Now why they were so strong in those countries, and taking one country at a time. In Poland, we have a continuous strength of overperformance on the legal stream, which comes from the fact that we are sending to legal process and successfully collecting on a larger amount of cases than before, which is a result of higher at business of legal system in Poland, but also high effectiveness, better precision of our scoring models, which allowed us to pick additional thousands of cases.

But also the fact that we that we accelerated significantly delivery process, and now something that took us 3 years, take us only 9 months or 6 months. And in addition, there is a positive feedback group between the amicable window system and back amicable legal systems. In practice, it means that if you have not paid to KRUK in amicable process, it means that those case for legal process. If you have not paid legal process, then maybe you will ask them to take in amicable. If not, the legal process was repeated and so forth. And that resulted in higher effectiveness than we planned some time ago.

On the top of that, you have significant investments in Poland overall in the group in 2021 out of those PLN 1.6 billion, about 10% came from new investments. And then they came to a large degree from Poland. You see that out of the PLN 900 million investment over PLN 460 million were Poland. The performance of this portfolio was also very good. Shortened valuation initial plan and the valuation level.

So it's not one change. It's dozens of small changes in the process in Poland, which has not happened overnight, but were being implemented over the past couple of years. And now you've seen them in full. And now as we are not afraid of negative public COVID effect on recoveries, we are also making them more visible in revising upwards our forecast, not only cash but also positive revaluation is significant in Poland.

A similar history could be told about Romania, but also most of these additional recoveries are from legal process. In Italy, you can say that finally, we have the results of this changed strategy that changed a few years ago from typical amicable strategy to a strategy -- to a collections strategy and adjusted to Italian environment, which has short -- even shorter than in Poland amicable process going to court. And in the process of court, during the legal process in Italy, we go back, visit those people offer them settlement plan. Some of them take advantage of that, become our clients. They supplement -- pay those repayment plans. And on them, we continue and go through the near process.

And the results you see this year are finally the result of this improved legal and amicable process in which we invested from now those 2, 3 years, and we see the results that are even higher than planned. And the upside, which we are seeing is also coming from the fact that quarter-after-quarter were sending from those portfolios of the -- from the bank book that we already in more cases the legal process. We are in the process of also analyzing where is the bottom in those portfolios of cases, which really are already not profitable in legal process, and it doesn't make sense, and we are testing and we're sending more hundreds and hundreds of cases with the risk that at given point is somewhere there. But so far, we have not reached it yet, which tells us, okay, send more, spend this money, but expect results and most likely build some upside to what we have in the books.

And lastly, Spain, again, a strong influence on the legal process, which is quite effective in Spain, in which two years ago, we identified several accounting cases of transfers to the process. And they already started to work, started to bring in, so bringing in cash. So overall, it's mostly about much longer lifetime of these portfolios based mostly on stronger recoveries from legal profits but also stronger amicable process when we are advanced in the legal stage.

[Marta Jezewska-Wasilewska, analyst]

Okay. And if I could have one more follow-up, like if I can just rephrase it. So basically, if you invest the growth, you expect recoveries to come at the later stage but with higher sort of with the same kind of cash multiple or even better alternatives, if I understand that correctly?

[Michal Zasepa, executive]

Yes. Well -- Yes, if you compare it to the assumptions we had 5 years ago in Italy. But overall, the evolution that we've gone through is that the curves are longer, the recoveries last 10, not even 15 about 20, 25 years. The recoveries on the [indiscernible] are significant, and the recoveries in total are greater than we anticipated a few years ago and that there is a positive relationship feedback loop between middle and amicable recoveries also over many years period.

But in practice, if you take the example of this -- of the Italian portfolios, it means, okay, on this controls we bought back say in 2016, and we rolled them down. We will recover actually more money from them than we initially thought when we were buying this portfolio. So in that sense, we were not wrong. But the curve which we will realize it's much different. It's much flatter and longer than we initially anticipate.

[Marta Jezewska-Wasilewska, analyst]

Okay. Just one more question on the positive revaluations that are also quite visible in the third quarter. At the second quarter, you've been suggesting that positive revaluation in the first half were related alive to the fact that you've started extending the recovery curves from 10 to 15 years. Can I learn the reasons of positive revaluations in third quarter as well? Is also driven additional selection of portfolios that you've investigated and proven that it's increasing, I don't know. Can you just give us some color?

[Michal Zasepa, executive]

Yes. So just to comment on what you said, the extension of the curves in the accounting world was the reason why you saw some positive revaluation, I believe, in Q4 of 2020. I think this is the case, not in the second half of 2021. the revaluation in second half or in the second quarter of 2021 were they measured most in Poland and Romania were conservative and were based on acknowledging that mostly over the next 6 to 9 months recoveries will be significantly higher and the change we've made in second -- in Q2 2021 was that, okay, we had yet another quarter of very strong recoveries, which are 35%, 40% above the accounting target. So they are really significantly better. There is no reason to believe that will fall down dramatically over the next quarter of by 40%.We need to raise that and didn't raise significantly or at all the long tail of the curve, but we did raise the curves mostly from 6 to 9 months period.

And as a result, in Q3, we see a much smaller revenue stream from this delta of revenues. There is a specific figure in our accounts, which sell this is the revenues which come from the fact that recoveries were higher by a certain amount than the planned accounting recoveries. This data has decreased significantly in Q3. Why? Because we raised the curve in Q2 for the next couple of -- for the next 3 quarters. We did the same exercise in Q3 for the next 6 to 9 months. So what you should expect that we are -- we should be quite precise in terms of recoveries for the next 3 months and then probably if this trend of recoveries will continue this gap will still be visible and we will most likely revalue the cure the accounting cost upwards yet again in Q4 and Q1.

This is once again the only reasonable thing to do. It's also cautious because we could argue today, why not move somewhat up also recoveries 18 months from now or 24 months from now. We don't do it at this point because we still are in a coverage situation. And of course, the longer the future is, the more uncertain gas. But Q3 revaluation is the same logic we applied in Q2, and it concerns the 6 to 9 months period.

[Operator]

[Operator Instructions]

We have no further questions. So I'll hand back to the speakers for their final remarks.

[Michal Zasepa, executive]

Thank you very much for your time and your interest in our company. I wish you good health, be careful. And please, contact IR team or myself, whenever you would like to follow-up and have questions. We are in the middle of a busy Q4. So please, keep your fingers crossed for very good investments this year. And I hope to see you via conference on sometimes in-person over the next months in the future. Thank you very much.