Hello, and a warm welcome to today's KRUK Q1 2022 Results Conference Call. My name's Emma, and I'll be coordinating the call today. You'll have the opportunity to ask a question at the end of the presentation by pressing star followed by the number one on your telephone keypad. If you've joined online, please press the red flag icon. It's now my pleasure to hand today's call over to Marta Wasilewska. To begin, please go ahead.
Good morning and good afternoon, everybody. My name is Marta Wasilewska. I work at Wood & Company, that hosts this call. Welcome everybody, and now without any further delay, let me hand over the floor to Michał Zasępa, CFO of KRUK. Michał, the floor is yours.
Marta, thank you very much. Good afternoon or good morning, everyone. Thank you for joining this call. It is my pleasure to present you the results of the Q1 of 2022. I will be using the presentation that is available on our website. I'll be telling you which slide I'm at. This is a very good start of 2022. We are above by a few dozen million PLN on net profit versus our budget. This 244 million PLN comes as a positive surprise for us. Why is it a surprise despite high, you know, interest rates? Because recoveries are stronger.
In March alone, our recoveries versus the operating plan, this ambitious target, which is significantly higher than the estimated remaining recovery which represents our accounting curve, was PLN 30 million higher. The reality was PLN 30 million higher in one month of March, which was excellent, than what we planned a few months before as a target for our operations. That shows you that this is a big number and it is quite optimistic for me for 2022. When I look at the high interest rate in Poland, I know we will pay PLN 40 million, maybe even more, in financial costs above what we assumed in the business plan. I see that there is an upside coming from better than expected recoveries on purchased debt.
At this point, I can tell you we see no negative effect of any market changes, you know, increase in energy prices, interest rates increases, in Central and Eastern Europe on our recoveries. Actually, the reverse is true. Far, we are wondering why the recoveries are so strong in the first three months of this year. Also April is looking quite positive. As a result of these recoveries and this excellent performance on the debt book, you see a very strong Cash EBITDA and you see a business which yields 28% of return on equity, one of the highest among our competitors, maybe even the highest among the big purchasers in Europe, while we remain one of the lowest leverage companies.
It's even more difficult to achieve that level of return on equity. Yet, we are definitely not the highest valued company in the market. I think there is some disconnect between our results, our profitability, also good prospects for this year, and where the share price is. This is of course my opinion. On the new business investments, we made PLN 262 million of debt purchasing, which is right on target, and we realize our expectations, and we see a very nice pipeline of performance in Q2. We expect that this promise from now on, KRUK will be able to, or expectation, to invest at least PLN 1.5 billion a year. It looks quite realistic this year.
Of course, at this point, it's still, you know, early on, but the pipeline is strong and Q2 is looking exciting in terms of opportunities to buy portfolios. I'm also happy to report that we just paid the dividend, highest dividend in the history of KRUK, 13 PLN per share. If you are a shareholder, you should have it on your account. I got my money yesterday. Again, you know, KRUK is showing that we are able to continue to grow and at the same time pay a dividend. It's not a small dividend, it's 35% of last year profits. We are in a situation where three countries of KRUK Group are the border countries with Ukraine.
We are very much, of course, alarmed by this situation, full of sympathy towards Ukraine and refugees. We are actively supporting Ukrainian refugees coming to Poland, Romania, Czech Republic and Slovakia. We earmark PLN 1.5 million for such help. We spent some of that yesterday or the day before. No, the day before yesterday, Piotr Krupa, our COO, was awarded, you know, and I'm not sure what it was, a statuette from the minister of Ukraine in Poland for helping to build Ukrainian House in Wrocław, in where our headquarters is hosting, as far as I know, over 100 young Ukrainian children, young people who were left in Poland for some reason.
Those people, soccer players coming for soccer competition in Wrocław, where the war caught them. Some young children from some orphanage. They were evacuated to Wrocław. Different stories, all of them, you know, our reality is full of them. Over a hundred people that we created shelter, and we were very proud of that. We are also encouraging KRUK employees to volunteer in helping refugees in the places where we work. We try to be active on that front. On the other hand, we see no direct impact of this conflict on our business, fortunately. It's not something that today we are afraid of. Of course, we make some contingency plans, especially for hacker attacks on our IT infrastructure.
We think what it would mean if, you know, the world and the war also, you know, involved maybe some Polish territory. This is, you know, hopefully only hypothetical, but we will have backup plans for such situation as well. ESG is something which now is a theme, and we try to put it in communication to you, dear shareholders, that we are very actively pursuing a technological transformation, becoming a company where our collection process is more and more in the online world, where our clients communicate to us through the systems that we make available to them, make payments electronically. This is a trend following the behavior of our customers.
This is a very good trend, because so far we observed that if we really are good at communicating with people and co-conducting our process through electronic platforms, our success rate, collection rate do not drop. Sometimes they even increase. Maybe because it's easier for the people to pay, maybe it's because they feel more confident in their decisions. Our costs of that process are a fraction of the cost of people. It's a clear direction that is benefiting the business and also offering possibly a better service for the client. It's a win-win situation, and we put a lot of efforts internally to go in that direction.
Second area of technological development is making better decisions based on statistics, based on, machine learning and artificial intelligence, algorithms that we are building and that will help us to decide, you know, when to call, what to tell to people, which case to concentrate on, which to defer, when to go to court, when not to do anything and spend costs. Of course, we have those mechanisms, but we can work on improving them. The more data we have, the more experience we have, the better these algorithms are. I'm happy to tell you that KRUK is in a business that is a very fertile ground for technological development, both in terms of interface and of the collection process, but also this algorithm, decision-making algorithms. Why?
Because we deal with millions of people in repetitive processes. Statistics, all this new technology is something that we could use, only we need to have stable environment, a lot of data, and the results will come. It's an exciting area. We beef up our competence in this area from the top to down to the individual developer. On our board, we have a person responsible for IT and data science. We are recruiting also senior managers. We're recruiting developers across all the six countries where we are. Our IT and analytical the number of IT people and analysts, statisticians in KRUK today is possibly far higher than the number of call center agents or field advisors.
It's also a change of the paradigm, the change of the business model. We become more of a tech company slowly year after year than a, you know, a collection company, which means we employ that many collectors, and this is our main area of expertise. At some point in the future, you will see that KRUK, the standard KRUK collection process toward individuals will be done by machines, will be done without much interaction from humans, and it will be the exceptions, the high tickets, the difficult cases that will require, you know, human attention and processing. You know, our COO, Piotr Kowalewski, says, in this business model that we have, you know, we buy portfolio, we pay, say, PLN 1 billion, and our goal is to recover PLN 2 billion. The first PLN 1 billion will be, you know, recovered at the click of the button.
The machine will go contact people, enable them, you know, payment terms, watch, monitor, remind, and we'll get the first PLN 1 billion. The second PLN 1 billion, we will need to actively pursue it, because it will be difficult, more difficult cases, some exceptions that could not be coded so easily in our IT and decision-making infrastructure. This is the future, and we are well on the way to this future. What it offers, higher profits, better cost effectiveness, higher value of the company. Of course, we're not the only company doing that, but we are now fully concentrated on that and quite excited about it. Maybe we are uncovering another area where we could have some competitive advantage. If you look at Slide 9 , this is results of this segment.
We're happy with the level of investments for the Q1 . You see here it's significantly higher than last year in Q1 . We're very happy with Italian and Romanian investments, where most of these investments came. We're not worried at all about Spain and Poland because supply was very low in Q1 , and we know supply is much higher in Q2 . Further during the year, we expect a lot of performance in Poland and Spain as well. Recoveries were excellent in Poland. They beat our high expectations and with a significant surplus. In Romania, they were right on a very ambitious plan. In Italy, they were above our expectations somewhat.
In Spain, on the retail portfolios that were below in January and February, possibly due to our too high expectations and some, you know, imperfections in planning, but they were right on the target in March. On the corporate portfolios, where we suffered for the past couple of years, we had, you know, a few million PLN less, and we expect to have also less recoveries in 2022. We had a small negative revaluation there of 4 million PLN. That's the reason why in this quarter the EBITDA is negative. I think this is a temporary problem, and it's not a strategic issue for the company. I think the retail business is solid.
The scale needs to grow from this PLN 300-something million we have on the balance sheet of the unsecured portfolios in Spain, and these results will improve in following quarters. Very good result in other markets in terms of recoveries in Czech Republic, Slovakia, and German assets. You can see EBITDA also a nice growth versus last year. Q1 is super strong performance in Poland, super strong performance in Romania, very decent growth in Italy, PLN 37 million, and that means zloty, and that makes most of the results. If you look at Slide 10, Poland, excellent recoveries, as I said, expenditures wait for Q2 , Q3 , and Q4 , there will be much more.
Very good trend of recoveries and a positive revaluation of PLN 40 million. Good profitability of 35% of the portfolios. The business is really good in Poland. We're happy with the investments we made, the large investments we made in Poland in 2021. Competition is strong, but let's see what it will be when more portfolios come in Q1. As I said, the supply was limited, as expected, because the Q4 of last year, the supply was very strong. In Romania, look at the investment level, PLN 100 million. That's significantly more than last year. In total, 2021, we invested, if I remember correctly, or you have that number here, that's PLN 116 million total.
The start of the year is excellent. Recoveries are very good. The trend is so strong that we felt very comfortable recognizing a significant increase in the forecast, and you see the revaluation of close to PLN 90 million. This is as planned. The business is going so well that we need to continue to raise our accounting forecast to catch up with this reality and the quite likely higher recoveries in the next couple of quarters. Very high profitability, as you see here on EBITDA and profitability of 50%. Italy also very good results. We're very happy with this PLN 160 gross investments. This is one big investment in corporate unsecured and a few smaller in unsecured.
Now we're targeting unsecured in the next couple of quarters. Recoveries were a little bit above our, you know, high operating target. The value of the business is now at PLN 1.5 billion worth of the balance sheet. Yet again, we were able to have some revision, positive revision of the forecast of recovery to see another 12% of positive revaluation, which is a sign of strength and health of the business. Decent profitability of 32% looks much higher than in June 2020. Always good in Italy, and we are on the path to continue to increase the profitability. Spain is relatively showed a relatively weaker result. As I said, it's not a fundamental problem.
It is a somewhat weaker performance for corporate portfolios which are limited in scale. They represent about 20% of the total book of portfolios we have in Spain. We now think that the other quarters will be better for Spain. The fact is, scale of the business in Spain is too small for us to see much growth in profitability. We look forward to increasing our investments in Spain, especially that recent investments, I mean recent for the past two years in portfolios in Spain, are performing very well. We have good grounds and good, you know, good analysis to back the future investments and, you know, please keep fingers crossed for new business.
In Spain, we are in a few very promising auctions, so hopefully we will be able to report to you that we were successful in buying new portfolios this year. That will increase the value of the business and also nicely improve profitability of the whole business in Spain. Czech Republic, Slovakia and German assets, little supply, little investment, very good recoveries, relatively small positive evaluation, but even without a very good profitability of 45%-46%. Other businesses, this is mostly our lending businesses, Wonga and Novum. The performance in Q1 was very good, but we are ahead of an important and negative change in the legislation in Poland. The Polish parliament is likely to pass a law, anti-usury law that will limit the non-interest cost of credit in Poland quite dramatically.
That will affect negatively all the, you know, financial sector, but especially the non-banking lenders. The good information is both companies have a plan how to deal with this changing environment, that they will do some modifications in their products. It's a significant transformation of the business model. We are working on the business plans for both businesses now. It's fair to say we have a plan that we'll develop in the next few weeks. We have a good idea of what we want to do, but it is a lot of uncertainty about what will be the market like, what competitive situation will be like, how will clients react to this changed situation, and how much business there will be for Wonga and Novum.
Today, I'm relatively optimistic, but I want to tell you openly, listen, if this law comes in, we'll need to watch carefully what's happening, how the client and competitive behavior changes our situation, and we'll need to react. Today, I think we have at least a year observation because this new law likely will be passed in the next couple of weeks, but will be in force maybe in July, maybe something later. The new product that we'll launch will probably, they still need IT development. They will be launched only at the beginning of 2023.
We will have a few quarters of this uncertainty to be able to say, "Okay, we're on good track in both businesses, and we grow those businesses, and they're profitable enough for us to continue." I think we have one of the best managerial team. If there is a market in lending for non-banking solution in Poland, we'll be there and we'll be successful. If the market is not attractive, then we'll need to think what to do with that. Now, if you look at slide with the financial results, Slide 17, you see here the performance, the quarterly performance. An important element of Q1 results was positive revaluation, PLN 135 million.
I will comment in more detail on that item in a second. If you look at the balance sheet at Slide 20, you see our leverage continues to be quite low, 0.9 debt to equity. We're happy to increase it. All we need is good investment projects, and hopefully we will have place for at least PLN 1.5 billion of investment this year. Now we added for this presentation two slides. This is Slide 21 and 22. This is an attempt to remind our shareholders and analysts how important and systemic the revision of forecast collection forecast is to our business model, and what are the reasons for that. Why do we do that?
Because sometimes people forget or sometimes people still misread that and think that change of the forecast is something extra that, you know, happens maybe it's a one-off that should be treated differently. The point I'm making here in this slide is please remember the revenue of KRUK will always and only be the excess of recoveries above the purchase price. The revaluation and so-called deviation from actual revenues are just the arithmetic, two methods that we need to use in order to match the actual cash flow to the planned cash flow. If we wouldn't have this then this calculation of the revenue will be wrong.
The reason why KRUK has a long history of positive changes is that we earn much more money. We recover much more cash than we initially assumed in the investment plan, in the cash flow that was the base for accounting when we bought this portfolio. This is the reason. Why do we recover more is another question you may ask. I'm trying to answer that in this slide also here as one of the bullets under practice. Well, because we improve effectiveness, we extend the length of the collection process. We discover that portfolios perform and pay us money not only for 5, 10, 15 years, but also later. Also possibly because people have more money today than we were buying these portfolios, you know, 5, 3, 7, 10, 15 years ago.
Secondly, we are using a professional cautious judgment. When things go worse than planned, we write portfolios down. When things are better than planned, we wait, and we acknowledge this in time, partially, in order not to risk that we would be too optimistic too soon in our accounting plans, which we feel we should, you know, really avoid situation where our judgments were wrong. We prefer to be too cautious than too optimistic, because if we are too optimistic, then in situations where there is an additional, you know, negative shock, you will see that our results are very unpredictable and, you know, one quarter are very high and another quarter, you know, you have losses. We don't want to do it. We don't think it's unprofessional and irresponsible.
If you on Slide 22, you have a detailed view on how these deviations and revaluations looked quarterly. You can see a pattern. When business is as normal, you see significant amounts of more money coming to our pocket than the plan, and we are in process of increasing this accounting forecast. Most of that change in the forecast, as also we point out in one of the bullets on here, pertain to the next two years of the valuation process. It's also skewed toward the midterm, short-term, although the potential is long-term for the upside of 10, 15, 20 years.
Here we say 70% of the revaluation in Q1 is about the change of the forecast in the next two years. Please, if you are interested in that, if you ever have doubts about it, read this material. If it's something that's unclear, reach back to IR, to me. We'll be very happy to explain to you why this is a systemic element of our revenue. You should expect that if business goes on as usual, you always get some positive deviation and some positive revaluation in that business. One thing that Piotr Krupa said to Polish investors says, "Listen, you know, look at our ERC," that's on Slide 23, PLN 10.3 billion.
Our operating target is set a few billion PLN higher than that in the horizon for the next 20 years. This is our target. Our business people, our managers know this is what they want to, this is what we mean to achieve. Of course, it's uncertain. We don't know what law will be. We don't know what the economy will be like in 10 years, in 20 years, and our forecasts are 20, even 25 years from now. On the other hand, Piotr Krupa said today, "Listen, but the debt we own is not PLN 10 billion, it's not PLN 15 billion, it's PLN 80 billion." We are saying, well, PLN 70 billion or, you know, 60-something billion PLN is worth completely zero. The name of the game is how can we tap a portion of this remaining legal right that we own? How can we talk to these people?
How we can contact them? How we can be more persuasive? How through different means that we have at disposal, professional and fully legal, we can recover more? This is, you know, something that technology innovation, but also improving, you know, economy, of course, is going to help us. In that business, we have a natural upside to which we try, you know, to crystallize to realize. You know, the history of group for the past 20 years is getting a portion of that upside. Because of that, you see the history of a very long and quite significant positive revaluation as our accounting catches up with this more confirmed plans and reality.
In terms of funding, Slide 24, we are good. We're quite successful this year in extending or prolonging our new agreements with the bank funding. You see here over 1 billion, 100 million available to be drawn. We made successful issues of bonds, PLN 400 million this year. The bond market in Poland is not too good now. Investors lost some money on Polish bonds because the state treasury bonds because of interest rate changes. It's not probably the best time to go into the market. You know, I think the market will improve in few months, and if we need to, we can also tap the Polish bond market this year. We are ready to continue to increase our purchases this year.
Also please take a look at Slide 26 at how what we do in terms of our social responsibility, environmental responsibility. We do much more than we were doing a few years ago. We want to be part of, you know, greater good of the society and our management, but our employees are quite active in several initiatives you can see described on 26. Thank you for listening to this update and commentary to results, and I'll be very happy to answer your questions now.
Thank you. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. If you've joined us online, please press the red flag icon. Again, that's star followed by the number one on your telephone keypad or the red flag icon if you've joined us online.
We are asking, waiting for the first questions. Maybe I can have one, on Romania situation in the Q1 , if I may.
Sure.
Let me-
Go out-
Let me-
Please.
Let me just ask you, because you said recoveries in Romania grew only 3% year-on-year, so it was clearly not that great dynamic in comparison to the blended group. At the same time, Romania was the single star among the biggest are of positive revaluations. You've also added that Romania saw some positive deviations in repayments. Can you just comment on the, like, why you saw such big revaluations in light of the fact that you had only 3% growth of recoveries? Was it driven by a new portfolio being purchased cheap, or have you had just simply too low recovery curves on the old bank book? Like, can we just understand it a bit better?
Sure.
Thank you.
Sure. Can you hear me, Marta? I'm not sure if I'm heard.
Loud and clear.
Okay, very good. The reason is the difference between the accounting curve assumptions and, you know, the reality that we are seeing approaching. In Romania, this accounting curve, even though we raised it historically, is going down very, you know, deeply in the next quarters and years. You probably don't have this accounting curve for Romania only, but you need to believe my word. Even though the recovery did not grow quarter to quarter, they still were in Romania, these recoveries were, what, PLN 145. Let me look at the report I have. Okay.
To give you know, an example in Romanian retail, you know, we had a plan to have, you know, 30-something in accounting of recoveries. Indeed, we had 45. We are realizing significantly higher recoveries. On the other hand, we see the assumptions for the next, say, two, three years, not to mention longer future, where these recoveries are falling quite steeply. What we're doing is we say, "Okay, there's no way these recoveries will be. I'm making up a number, 20 in the next, you know, two quarters if they were, you know, 45 in this quarter." We need to increase this curve somewhat.
We continue to do it quarter by quarter, for many quarters now. These recoveries do not go down as quickly. So you have a situation where we bought these portfolios on the assumptions that they will be, say, the recoveries will be dying off much quicker and they lasted much more. We are catching up with these assumptions from the accounting curve to this reality we are observing. The distance is still quite far. What we're doing with the revaluation is we're mostly increasing the curve on this next two, three years. Then, you know, it's the future of the next five, seven, eight years, and the difference is even larger.
We will need to continue, most likely to positively revalue this asset, even though the recoveries from the bad book may not grow. Because the bad book has a curve. If you have the bad book that you know is more than one and a half years old, the bad book goes down. This revaluation is done on a vast majority of the portfolio. It's not a single portfolio, it's not a single vintage year of investment. It's majority of the portfolios we bought over the past several years in Romania.
Thank you.
Just as a reminder, if you'd like to ask a question, press star followed by the number one on your telephone keypad. If you've joined us online, press the red flag icon. At this time, we have no questions, so I'll hand the call back to Michał.
Thank you very much for participating in this conference call. I invite you for meetings with me in Prague, where we are going in June. I wish you good health and hope to see you in person, some of you at least, in this year. Thank you very much.
This concludes today's KRUK Q1 2022 results conference call. You may now disconnect your lines. Enjoy the rest of your day.