Kruk SA
WSE:KRU
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Earnings Call Analysis
Q3-2023 Analysis
Kruk SA
KRUK, a leading debt management company, reported its best results ever for the first three quarters of 2023 with multiple indicators of strong performance. Net profit increased by 12% year-on-year to PLN 757 million. Cash EBITDA showed even higher growth, and the company recorded a notable 19% year-over-year growth in recoveries. KRUK also marked an all-time high in new investment purchases, nearly PLN 2 billion. The company maintained its industry-leading ROE well over 20% and saw assets grow by 30% year-on-year. Furthermore, KRUK is one of the least leveraged companies in the market, with a net cash to EBITDA ratio of 2.3x.
KRUK took advantage of market opportunities stemming from competitors' limitations in 2023, leading to more purchases and better returns. The company's recoveries in Q3 exceeded accounting forecasts by 13%, particularly outperforming in Poland and Romania, suggesting potential for future positive revaluations. Investments focused heavily on foreign markets, notably Italy and Spain, due to favorable conditions such as reduced competition and higher expected returns. Investments in Poland also picked up, showing promise for higher activity in Q4. KRUK remains optimistic about future investment opportunities.
KRUK's revenue grew by 20%, strengthened by positive revaluations of assets, particularly in Poland and Romania. Costs increased due to the scaling of the business, yet the company managed them by recruiting strategically and leveraging automation to attain scale economies. Inflationary pressures, particularly in Poland and Romania, led to salary adjustments for employees. Funding costs also rose by 54% year-on-year, primarily due to an increase in debt volume and interest rates.
Despite rising interest costs, KRUK sustained a competitively low funding cost, attributed to successful bond issuances on the Polish market. The company remains well-funded with the ability to tap both the Polish and Nordic bond markets if necessary. A strong balance sheet and liquidity position afford KRUK the flexibility to continue investing in profitable opportunities.
KRUK is placing a strong emphasis on digital transformation as a priority for 2024. The company is currently collaborating with experienced advisers to review digital opportunities that could lead to greater operational efficiency and enhanced customer engagement. Expected IT investments are slated to yield both immediate and long-term value.
Beyond Spain, Italy, and Poland, KRUK made smaller investments in Romania and is cautiously expanding into a new undisclosed market. The company's approach is data-driven, utilizing test investments to build a strong foundation before committing significant capital for expansion. This strategy reflects a commitment to long-term, sustainable growth.
Looking ahead, KRUK omitted a specific investment forecast number but suggested it would likely fall between PLN 2.5 billion and PLN 3 billion for the year. The company expects the remainder of 2023 to be positive and is excited for the potential record profits by year-end.
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Good afternoon. My name is Michal Zasepa, I'm CFO at KRUK. And it's my pleasure to welcome you to the commentary of Q3 or 3 quarters 2023 results. Thank you very much for your time and logging in to this meeting. I will now comment on the presentation that should be already visible on your screens.
This presentation is also available on our website. And I invite you to ask me questions via chat in Teams application. I will refer answer to those questions after I finish the slide presentation. So let's start.
This is the best results of this business I've ever had in 3 quarters of 2023, KRUK earned PLN 757 million, up 12% year-on-year. And if you look across the measures here on the slide number 2, they are all showing very good performance. Cash EBITDA, even stronger growth than the net profit. Recoveries, a strong 19% growth year-to-year and record high new purchases in that portfolio of close to PLN 2 billion.
The company gross profit quickly. You can see here almost PLN 40 profit per share, 10% growth year-on-year. ROE remains to be one of the highest in the industry, well over 20%. And the assets are growing quickly, 30% year-on-year, while we still are one of the least leveraged companies in the market with net cash to EBITDA at 2.3x.
This is a year where we celebrated 25 years of our history. So it's worth reminding that the KRUK is a story of a start-up, a story of Piotr Krupa, our Founder and currently still CEO, founded that business with PLN 3,000. And today, this is close to EUR 2 billion market cap company. So we have a good track record in growing value for our shareholders, as also evidenced in our 12 years history as a publicly listed company. We IPO-ed just to remind you, at PLN 40 a share. Today, it's more than 10x more, if you invested at IPO, with the dividend, you'd earn 12x money on that business over the 12 years period of our history as a listed stock.
This year is a very good year because we continue to build on what we built so far to continue to improve our processes, do it at a steady pace with long-term horizon without changing our strategy, and we take advantage of the market opportunity. This market opportunity came in 2022, but even more visibly in 2023, as many of our competitors are out of breadth, are to leverage to continue to buy at the speed, the pace that they had before, and that opened a new opportunity for KRUK to buy more and at better returns. And this is the story of this year. Also backed up by strong recoveries across the geographies where we are.
If you look at recoveries, overall, they were excellent in Q3 alone, they beat our accounting forecast by 13%. And if you look at each of the markets, in every one of them, we beat accounting forecast, but in some of them very significantly, in some of them less significantly. The outperformer was Poland, our biggest country in terms of assets still. Also excellent performance came in Romania, and that's one of the reasons why you see another round of significant positive revaluations in those two countries.
Good performance came from other countries, Italy, Spain, most importantly. But this performance wasn't as good as it could be. And therefore, there is not much of positive revaluation this quarter.
Overall, we believe that in every of our big markets, Poland, Romania, Italy and Spain, we stand to recover significantly more than the current accounting curve. We have ideas and plan to beat these forecast targets, so in mid- and long term periods of next several quarters and several years.
We have ambition to show significantly more volume that will come through positive revaluation through our book. How much? When? Of course, that is will be dependent on actual performance also on outside environment, but we are quite positive that we still have good ideas how to generate additional value from the back book.
And that's also why we are quite brave in investing money. This year, as you saw, it's almost PLN 2 billion invested in the first 3 quarters of this year. Mostly to the foreign destinations, about 20% of the investments came from Poland. This is a spectacular results in my opinion for Spain and Italy, where KRUK dominates the market this year for buying consumer unsecured portfolios from Spanish and Italian banks and large consumer finance organization. This is possible on such scale possibly first year ever, although last year was also quite decent, for two reasons.
First of all, we again showed we can recover better and we can pay for these portfolios at higher price remaining -- retaining the same expected return. And second reason is market. There is less competition for portfolios, there's fewer competitors, and those competitors that remained, also have higher expectations for returns because interest rates went up because they need to generate additional margin. So this is a very good environment from such a long distance runner like KRUK, and we take advantage of that.
Q4 is quite promising. We, of course, don't know yet how much we will invest, but it will be, for sure, a few or several hundred million zloties. We think today that the Polish market could offer more opportunities in Q4 than in the previous quarters. We think that we'll be investing less in Italy and Spain in Q4, but let's see what markets brings. But we're very excited about 2023 and this remaining 2 months as there is a good number of investment opportunities. And as I said, this PLN 2 billion has been in investments at quite good returns better than last year, better than budgeted, so we are very happy with where we are today.
If you look at those most important elements of P&L, revenue is growing by 20%. And within the revenues, you have this big positive revaluation, which is something we just have to do given how good recoveries are, especially in Poland and Romania, as I mentioned, and please expect a similar situation in the following quarters.
If you look at the costs, they are growing because the scale of the business is growing. We are recruiting people in Italy and Spain because we grew very significantly size of our assets there, but we are not doing it proportionally to the size of the assets. There is more automation, there is economies of scale, which we are taking advantage of, and therefore, that's mitigating these costs.
On the other hand, in Poland, especially but also in Romania, Czech Republic, we have high inflation of wages. So this year, again, we will need to raise salaries to our employees by double digits, and that's reflected in the P&L.
And last but not least, you have funding costs that also grow very significantly, 54% year-on-year. Mostly, this is a result of increased value of debt on our balance sheet and also interest rates increase year-on-year. However, part of that increase is mitigated by the fact that quite successfully, we are raising money on the Polish market, issuing unsecured bonds and then we swap them to euro instrument, fixed rate instruments, getting very competitive pricing of about 7% of total cost of funding, which is, I think, quite significantly below the European bond market benchmark that we would get looking at our own issues from May or the competitors' issues.
So possibly, we also have an edge, some competitive advantage in raising money from the Polish bond market. And we're quite successful in doing it over the past couple of months, raising well in excess of PLN 500 million from Polish institutional investors, our shareholders, pension funds, but also retail, Polish retail investors.
We continue to be quite well funded with that good access to debt funding in Poland, both from the bond market and from banks, also an opportunity, if needed, to tap again on the Nordic bond market. We have the money, if we need it. Money is not a constraint and we have space on the balance sheet. We have space in terms of liquidity to raise more debt and use it on good investments if there was a need for that.
We continue to put a lot of focus on technology, transformation, digitization. This year is a preparation here where there's a lot of initiatives ongoing, but there is a major project which says what the priorities should be. Where is the biggest gain for us in the next 5 years from technology? And please expect that in 2024, we will be rigorously implementing our conclusions and realizing our strategy, which will lead to higher costs of IT, higher investments, but also which will promise more efficiencies and more value in the next couple of years.
We think we have a business which lends itself very well to digital transformation in the areas of automation of the process of human-less interaction with the customer, of automatic processing of all the paperwork, which is millions that we are doing in the legal process, but also about high personalization, about understanding better how to conduct and how to talk to indebted customer in order to be more effective or just be having a better proposal, more convincing proposal to these millions of individuals.
If you look at Slide #10, that's our segments review. So starting from the top, this PLN 2 billion is a significant growth versus last year. It came in big chunk from Spain. In Italy, where, as I said, we have a very good market share, and this year, we'll be able to show it to you for the full year at the beginning of the next year, when we'll be releasing full year numbers.
Romania, decent results smaller than last year given the market, but Q4 offers some additional opportunities. In Poland, it's better than last year. Still, we think we could add significant amount of investments in Q4.
Recoveries overall, excellent, excellent results. Our assets exceeded for the first time PLN 8 billion. You can see that Italy and Spain are already bigger in terms of assets than Romania, also promising further growth of recoveries in those countries. If you look at EBITDA, a good growth in every country and very strong cash EBITDA across also all geographies. Overall, this is a very good situation.
And then a closer look at Poland, as I said, excellent recoveries. So we still count on better, more investments in Q4. These very strong recoveries allowed us to recognize another PLN 50 million of positive revaluation. The market has improved. You may remember at the beginning of this year, we were a little bit complaining that the Polish market remains very competitive. We couldn't buy as much as we wanted. That has been gradually changing to our benefit. And we see that in Q4. Hence, some more optimism about what the full year number of investments in Poland should be, it should be still much higher than the 3 quarters you see here.
Romania, also a very good performance on recoveries. And as a result, very good significant positive revaluation. And we are happy with the investment that is a commanding market share that we have with this over or close to PLN 200 million investments and there is more coming in Q4.
In Italy, very good investments over those 3 quarters, probably not so much will be added in Q4, although there are some small portfolios that we're bidding, and bidding for stable recoveries, although we hope them to be a little bit bigger and because they are not, then it's a relatively small positive revaluation, but we believe in the mid- to long-term potential for extracting more value, is definitely there.
One more comment about Italy, there is nothing new in terms of regulatory changes in Italy. This proposal to redeem that of some of the Italian debtors was negatively commented by the prime minister and from our understanding is this project is no longer processed. We assume it's gone, it's dead. So we are not worrying about that situation.
Spain, a year of record high investments, investments at relatively high IRRs. This is a comfortable situation for us as recoveries are stable. We have not recognized positive revaluation here, maybe it will be the case in the next few quarters. We had some slowdown in recoveries that we observed due to strike within the employees of Spanish courts, but this is something that we believe is temporary.
And overall, we're very happy with the investments we made in the biggest portfolios available in the market from the largest banks in Spain, which builds our capacity, our ability to build benchmark, build even better operations, take advantage of economies of scale. KRUK, especially in Spain in 2023 makes a giant step forward into establishing itself as one of the biggest, most successful debt buyer in consumer unsecured space.
In the auto markets, combined in terms of cash flow performed very well. You can see here. Cash EBITDA in terms of EBITDA due to some one-offs, but also somewhat lower recoveries than the ambitious operating plan were not as good, but this business remains one of the smallest and less significant -- it's not significant for overall results of the group. But there is also fair to say we don't see much potential for growth in those markets.
In Wonga and Novum, a good performance. If you look at the details of quarterly results of Wonga, there is an accounting change coming from the fact that Wonga stopped selling their NPL portfolios to KRUK or the market but entered into a long-term servicing contract with KRUK, which initially takes away some of Wonga's revenues because Wonga will not get the cash from sale of portfolios, it will recover it over the 20 years period through the servicing agreement with KRUK.
Overall, this is positive for the group and for the business with the changed legislation for consumer finance companies that will allow Wonga to have cost of risk as cost -- as tax deductible, which wasn't the case so far, which will lower Wonga's effective tax rate from current -- from before over 50% to about 20%, 25%. So that's a positive change, but there is a change in how revenue is recognized and quarter-to-quarter you see a decrease.
Overall, both businesses are stable, profitable and the challenge for the future is how to grow. Wonga has ideas and Novum has ideas about some new products, and this is something of our ambition to provide Wonga with ability to grow at fast pace in the next couple of years. We believe there is a good potential for that, and the market eventually is stable in terms of regulations. So also, hopefully, on that front, we'll not have issues again.
If you look at funding or the cash flow, you can see here, that there is not much of bonds outstanding in 2024, it was a total of [ 103 ]. I believe, most of this was already bought by us. So the cash flow stability is very good. This is the data at the end of the quarter, which showed over [ 600 million ] of a payable credit. But after that, we issued a significant amount of Polish bonds. So access to funding is granted for the next couple of quarters at this point.
So overall, summing up. This is a very good situation, a situation in which we take advantage of the fact that we were not too aggressive historically in buying portfolios and levering the company up that allows us to take advantage of higher returns in this market and establishing our position more firmly where some of our competitors at least have trouble with sustaining the level of investment.
We feel there is still good potential to grow on those four countries that we are present, but we already are preparing to enter a new market. We are already bidding for portfolios in one of the big European markets with the intention to buy a small portfolio this year or early next year.
We will be just investor, while servicing in this initial phase will be done by a selected partner, a local partner in that market. And through these investments, through this entry, we'll be able to better assess realities of that market and sometime in 2024 decide whether we are ready to put more money at risk and do a proper market entry or that experience will tell us to do something else. And we are also excited about this new project.
We are now in the middle of budgeting. As always, we'd like to show growth of profits for the following years. I believe the company has very good prospects because there is a stable supply of portfolios. And we feel much better in the environment of higher interest rates because there is less competition and the money is spent, invested more rationally than before. And this is a very good environment for a solid company like KRUK.
So please keep fingers crossed for us the next 1.5 of the months, I think, should be good. I don't know if very good or just good, but we are also very curious and excited how much profit overall in this year we brings and it looks like it will be a record year for us.
Thank you very much for listening. And now I will look at the questions. Please send them to me, so I can also answer them, and I see some of them and I'll answer them now.
Question number one, do you expect new NPL volumes after implementation of NPL directive? In which countries are you planning to invest more next year?
We don't know whether NPL directive will change supply. Our assumption is neutral that the NPL directive should stabilize legislation in this industry, should maybe give us some better information about the portfolios. But we don't know whether it will be a significant factor for supply.
Long term, maybe because if the industry is more stable, banks feel safer to engage in that selling. Those who are not, there may be still some. So -- but I don't think immediately we'll see that effect. But the good situation in which we are is we don't need growth of the market to really show growth. We grow through growing the market share and that's still a possibility.
In which countries are we planning to invest more next year?
Well, look at this year, this is 20% Poland, the 30% Italy, 30% Spain, that may change to the benefit of Poland for the full year, I think. But the fact is that the -- looking at the market size, #1 is Italy, #2 is Poland, #3 is Spain, #4 is Romania, then our market shares are also jumping from 20% to 60% year-on-year. So my bet would be Poland and Italy and Spain are equally likely to have significant share of next year investments, who will be the biggest contributor depends really on competition, and on the returns that we'll be able to get.
So the reasons why you see so much investment in Italy and Spain this year more than in Poland is because we have higher returns there. That in Poland, in terms of our expectations, Poland is, from that point of view, a more competitive market for us. If this to be reversed, you would see that in Poland, we invest PLN 1 billion and maybe somewhat less in Italy and Spain.
Another question is, should we expect PLN 2.5 billion or PLN 3 billion investment this year?
I can't give you a number, but probably expect somewhere in between.
Interest paid in this quarter was just PLN 33 million compared to PLN 89 million in Q2.
This must be some mistake in calculation because we definitely grew interest on credit because the volume of credit increased you should take account for hedging mechanism, which provides again and should be treated separately.
Please ask this question to IR to get the precise answers, but definitely, there is nothing in business terms that happened that would cause the cost of interest to decrease significantly. It did increase, although you need to look at the hedging cost as well separately to understand the clean interest costs.
Some industry players are talking about growth, 30% to 30% IRRs in markets such as Spain, Italy, are those the levels that you're seeing at the moment as well?
I'm thinking gross net now. In terms of net, we are looking at high 18%, 20% IRRs currently. So gross, it could be up to 30%, yes. So somewhere there, the 30% seems a bit high. But the fact is that those returns are significantly higher than it used to be, say, 2 years ago, even there is a jump step up from last year, which is quite significant. And this is visible.
We were used in Italy and Spain to compete with 5, 7, 10 bidders. Today, this year, it's 2, 3 maximum. It's a very different game this year.
How many investments should we see in new markets? Are you planning to enter one or more of which country? And of course, which?
Please expect this is still an early phase of entry, expect low investments. Lows, meaning a few EUR 10 million, EUR 15 million investment, but not EUR 50 million, not EUR 100 million. It's one country we are talking about. It's small investments, test investments that will allow us to gather real data to say, okay, we like what we saw. We understand what we can do, not on paper, but in real life, and we go there step by step further. But please expect any entry that we will make. It will be a long-term project that will not bring significant profits in the first couple of years of operations, but we need to believe it has a long-term significant perspective to increase profits of the group.
To the extent, Q3 is affected by FX changes.
Not significantly. Those FX changes were there over the 3 quarters. But if you look at the data, I think PLN 4 million is a total effect, so it's insignificant.
What are the top priorities? Biggest tasks you're currently working on, and will be working on in the upcoming few quarters?
There's quite a few in Italy and Spain. It's beefing up the organization. So it's ready to absorb and effectively collect on this much increase of the book that we invested in.
Also, we need to strengthen infrastructure, the fundamentals, some of them are still support from Poland, some of that needs to be moved, for example, we'll be moving servers from Spain to -- from Poland to Spain to be more local, to be more -- to be able to react much more quickly. So we need to follow after this increased investments, we need to follow with quality infrastructure and also grow the organization. So that's one priority.
Second priority is an overall priority of making sure in every country, we have a number of optimizers, lean thinkers, lean management experts, and we cultivate the lean culture, this continuous improvement cultures, which results in hundreds of improvement initiatives across the group. And that's something we'll never stop being our priority because that's an essence of our success.
And third priority is digital transformation, where with external party, very experienced advisers, we're now making an inventory of ideas, setting priorities, comparing ourselves to the best the benchmark of the world, not necessarily from our industry to say, okay, what we can do, what we could change in terms of technology to be faster, more efficient, and cheaper, collect more.
And in 2024, we will be implementing these recommendations, these findings that we will agree on with the advisers this year, at the beginning of next year. And it's quite exciting, we see that there is a really big opportunity to improve there.
Is there any other competitor in as good condition as you? Or all of them are having problems with liquidity?
No. Not all of them are having problems with liquidity. It's a quite diverse space. So surely, there are some competitors that will also have low leverage. But the fact is we don't see today, this one company that we could say, okay, this is our #1 competitor in most of the countries, and we really strive to be like them and try to replicate some of their great ideas.
There are strong competitors in every market, but there's less of them because some of them indeed went too far in terms of leverage and need to make a step back. But please understand that it's still a competitive market. Only I would say it's reasonably competitive rather than overheated like it was for years.
The big difference also is that especially in Spain and Italy, financial investors, credit funds put a lot of money into buying NPLs, outsourcing collection to their platforms or some other independent debt collection companies.
Now we see that this segment at least in consumer unsecured, is gone. This business model, I think, has finished when interest rates went up so much. And also, it's one of the reasons why there is less competition.
You asked about [ Ophelos ] acquisition by [ Intrum ].
I don't have an opinion on that. But I'm frankly quite curious why Interim is continuing on big M&A because it's not the only thing they bought this year given their cash flow constraints, but they must have a very good reasons for that.
We understand this is a technology firm. We took a look at a few tech companies in our sector. We decided that they were not worth the price. But we never look at Ophelos side, I don't have an opinion about this particular thing. But our conclusion was, we know the technology. We could do it ourselves if we organize ourselves well. Let's try to do it ourselves before we buy and spend money on goodwill. So let's see which strategy is better.
Do you have any other questions? If not, then thank you very much, again, for your time and interest in listening to our commentary. If you have follow-up questions, don't hesitate to contact our IR. I hope to meet some of you in Prague at [ WOOD & Company ] conference or some other time in one-to-one or other conferences throughout the next months. Thank you very much, all the best.