Earnings Call: Q4 2020

Mar 26, 2021

Hello again. Let's start. It's my pleasure to welcome you to 2020 results of Krug Group. My name is Michalza Sempa. I'm the CFO of the company. We finished 2020, a difficult year, maybe the most difficult year in our history, but we finished it with profit and with a very good cash EBITDA with very strong cash flow and very low level of leverage. So I think we are we We can say we won this uneven war with the pandemic situation, and we are prepared now To go back to growing the business as last quarter was very good for Krug and the beginning of this year is also very good. I will, of course, concentrate mostly on 2020, but this is the history and I think and we as the management team think the future is quite promising for Krook. You see here on the Slide 3, we had a very bad Q1, but then later, we were profitable. The profitability was slow, and I will explain how to, in my view, interpret these results. But the good information is that throughout the year, starting from May, we saw an increasing trend of recoveries versus our original budget. And at the end of the year in December, we already regained full strength. We were 100% of the operational pre COVID plan. And we continue this past making this 100% of the plan in the beginning of this year. Hence, we believe we have good grounds to see significant improvement of results in 2020, 2021. 2020 was a year of relatively weak investments level. In total, we invested EUR456,000,000 But look at Q4. Q4 was really solid in terms of investments, and we think it's a good prognostic for 2021. We have ample of place for growth. As you see, the indebtedness level is quite low. We have a lot of money available in credit lines, which are unutilized and ability to also and sell bonds on the Polish market experienced for the past couple of months shows. So When you look at 2020 results, you compare them to 2019. Let me maybe show it better on the P and L. You see a significant decrease, 70% decrease of net profit. Why did that happen? 1st and foremost, because of the decrease of revenues, Decrease of revenues as a result of lower than planned recoveries, but also because of our negative revaluation, so the change of the forecast for future recoveries. That alone decreased the debt purchased revenues by 14% or about PLN160 1,000,000. We made, I think, a very good effort at optimizing costs, cost savings throughout the year versus our budget. We saved about 77,000,000 holders. You don't see the decrease of costs comparing it to 2019 results. This is because we were growing cost of salary, especially in Poland, Romania on a growing trend. So like for like, you need to add a good 5%, 6% to them. We continued to invest money in the legal process in several jurisdictions. And also what you see Here in the cost in 2020 is one of cost of writing of goodwill for the Spanish servicing business for CHF 25 million. Overall, if it wasn't for the cost savings we have done, the results this year would be about 5,000,000, 7,000,000, not 81,000,000. Another important element that decreased profitability in 2020 is taxation. 2020 was a year where we saw significant surplus of cash being generated in our investment companies. This is because we invested less than planned. On the other hand, our needs for cash being spent or transferred to shareholders in the mother company, Krug SA did not change much. As you may remember, we decided to transfer money to shareholders through a buyback program in 2020. We also recommended a significant Dividend in 2021, we are about to we are planning to buy back over PLN1 1,000,000,000 of bonds outstanding and due in 2021, 2022. And as a result, We decreed we assumed that we will increase the level of transfers of cash from those investment companies for the next 3 years as our accounting rules say. And therefore, we needed to increase the level of provision for deferred taxation. It would still be as an increase Even if it wasn't for COVID, we did plan in the budget a taxation of about PLN 50,000,000, but it is significantly more, a good €17,000,000 more because of a different cash flow profile that we are planning now. So the gross profit, as you may see, is about SEK 200,000,000. The net profit ends up being only the SEK 81 million. But look at cash EBITDA, that shows the growth the strength and healthiness health of the business, 10% growth in a relatively difficult year. On Slide 5, you see a quite detailed description of how our Recoveries were versus operated plan versus budget throughout the year. As I said, the main message is we are back 200% capability in Q4 in December, especially the performance was very good toward the end of the year for unsecured consumer portfolios. We suffered in corporate portfolios. We were far from the budget. This is mostly because of the changed regulations and lower effectiveness of the legal process in throughout Europe, our debt has already been accounted for in our books. So we don't see significant risks, Other risks in the corporate secured business going forward, although that changes quarter to quarter quite and this uncertainty, of course, remains. And I see upside in 2021 on unsecured consumer books. And I'll tell you about that referring to each of the markets in a moment. We were happy after this year, we are able to recommend to our shareholders, I think, What is quite rich proposal for a dividend, PLN8 per share and that's a record high dividend the company paid. This dividend level is something which is not compromising our growth prospects. We are capitalized so well that we can afford both to have a significant dividend and also a quite ambitious target for profitability growth in 2021. This proposal reflects the preference that we heard from Few key largest shareholders of Krum Group and the management board approves that this recommendation is good for the business. A few words about how we changed operationally in 2020. This was a transformational year For us, not only because we proved to ourselves we can very well work in remote mode. Until now and through most of 2020, About 95% of our employees are working remotely, and that works really well. So we're happy and proud that our employees proved to be very effective in the different settings under work ethics and Crude culture proved to be doing very well in these more difficult circumstances. On the other hand, we did several changes to the organizational structure. As you may remember, we strengthened the management board. There is 2 new people on the board, and we have one of our experienced Crook manager promoted to be Head of Operations. We have a new guy on the block, Mr. Adam Modigosky, who is a PhD engineer and now responsible for IT and modeling of our in pricing decisions in buying portfolios. So we feel this team can now can give even bring more value to the company and help it grow in the future. On the other hand, We made a number of improvements in the business, in analytics, in operations that and we see fruits of those efforts now in recoveries and also precision and competitiveness of our pricing decisions in the past couple of months. So we and I think that we're entering 2021 with a very solid standing in terms of operations on each and every one of our markets. This slide shows something which is important to us, although it's hard to translate that into numbers. But I'd like you to understand how we evolve. We have updated our mission, vision and values to reflect better a current Crunk reality. You may remember throughout the years that we are very proud of our amicable approach and We often use the phrase, we help people repay the debts. This is all true. The amicable process is very important to us, but we see that the collection process that we are involved in throughout all of the markets is much longer and it's more and more often involving the legal process. This is changing environment, Ecosystem, also legal systems. For example, in Poland, the prescription time has been significantly shortened. That pushes us to stop collecting amicably and go legal. All these changes means more of our cash, Significantly more in the future will be coming from legal process than Amicable, even though Amicable process will usually be the starting point for Santel we can come back to when the customer wants to settle instead of us continuing the legal process. Therefore, we define ourselves as a debt collection company, which acts to safeguard the social and legal norms requiring all of us to pay debts, but we always respect the people that we interact. And this rule, the respect is something that we want to strongly hold on to That gives us the certainty that what we are doing in our processes, but also in interaction with all of the stakeholders in the business is the right thing to do. We also define our vision, not as we used to before a certain financial target, but has certain qualities that we want to strive. And these qualities are values that we want to be adherent tool that we want to live. These values are below on this slide. People who are congruent with these values and share The need to progress even if we already are successful and mean the Toyota inspired management method, which calls for continuous improvement. And when we all will be congruent with these 3, we believe financial success will follow and will continue. We are more and more involved in corporate and for Responsibility, Projects and Actions. I encourage you to go through this slide to make your own judgment, but I think we are doing a number of very important things, and we are planning to do more in the future. Now a commentary to our segments of business. This summary slide shows you that we were quite successful in investing in Poland in 2020. You see here the level of investment despite a significant drop of the market, which you will see in a second, was higher than in 2019. Q4 was a really good quarter for our investments in Poland. And Q1, although it's usually the weak quarter of the year, also will bring better than expected results. Recoveries overall were a little more than last year, as you show some 7% below our operating target, very good on unsecured, close to the target overall and significantly below on the secured part. The value of portfolio dropped from 2.2 to 2.0 as a result of small investments, but we hope to improve that this year. Purchase debt continued to be dominating part of the business in terms of share of revenue. EBITDA, as you see here, was produced by 2 countries, Poland and Romania, where Italy and Spain suffered and caused these negative numbers here. But the good information is we believe we are entering 2021 with a clean sheet. We believe we have very good chances to be profitable in all of our business lines in 2021. Poland, market dropped quite dramatically by more than 50% Year to year, as you've seen in terms of volume of results, even more we're happy. We landed at 35 market share, and we are determined to be strong in Poland to improve our operation pricing capabilities to fight for a very important portfolio. This fight is with the largest competitors in Europe. We are a playground. Poland is a playground for top 5, 6 debt collection companies who are the major players in other markets as well. If you look at our results for the full year, Poland excluding Wonga, the profitability is Quite decent results of investments are quite good. Recoveries were strong. We see an upside here. We see the trend, which is coming from October November, which shows a strong Trajectory significantly above accounting curve. We recognized positive revaluation in Q4. We will be cautious to watch for COVID situation in Poland. We just have a strict lockdown introduced, plans to be introduced on Saturday. So we will be cautious then, but all the other signals that we get are positive. So we are quite a bit about Poland. Romania, also significant decrease of the market. And maybe last more comment to Poland. We see quite significant number of portfolios. The market will grow in Poland and we want to be an important part of that. So Poland will be, I think our sweet spot and the place where we'll make a lot of investments in 2021. Romania has seen a Big drop of the market value because of COVID. We were the dominant player of 43% of that market. We think I think we will see an increase of the market in 2021, definitely. Will we get to the level of 2019? I'm not sure, probably not. We don't see so many portfolios. Now the banks are still quite cautious than to selling them. So the more important it will be for us to have a high share of whatever is sold on the market, we are going to be quite competitive there. Results are very good despite the fact that probably first time in many years we saw negative revaluation. We We're hit hardening by a legislation introduced in April, last thing to, I believe, August that forbid us to collect in legal process on certain categories of cases. Good information is this legislation was temporary. And after that, We smoothly brought recoveries back to the pre COVID level and December, January, February are all very good months, which means there is an upside on the back book in Romania. Please expect some positive revaluation throughout 2021. Again, We are cautious about the COVID effect. We will be cautious about it in Q1, but so far no good signs in recoveries. Italy, a market which was a little intransparent for us In 2020, on the one hand, we were very cautious. We haven't bought anything. On the other hand, there were portfolios that were sold mostly to local players. In these uncertain times, banks were less transparent about how they sold portfolios. It's not that we feel that we lost many opportunities. We were on this we wanted to be on the safe side and not to invest in many portfolios in a country, which was one of the hardest hit during the COVID times, but the fact is the market was relatively big comparable in volume at least to the one in previous year, and we haven't invested anything. That is going to change In 2020, we want to be more present on that market, especially that the results for the portfolios both throughout the past 2 years are quite positive. They are on plan. 2020 results were bad To be planned, we needed to write down the value of the assets by PLN96 1,000,000. Still Look at cash EBITDA, a significant growth versus 2019. Why? It's a natural consequence of heavy investments in the legal process in 2019, which started to bring results and decrease of the legal costs in 2020. So you may see Italy as a country where the back book has been invested in heavily throughout the past couple of years. And the next couple of years should see a natural growth of profitability because of these actions and investments in legal process. We are positive on Italy. We want to continue, Wanted to grow in that countries. We see positive trend despite these negative revaluations, which were mostly caused by COVID. We believe our operations are stable or still increasing their effectiveness. The results of the Portfolios we bought in the past couple of years are improving. There may be even opportunity for positive revaluation somewhere maybe at the end of 2021 if things are going according to operating plan. And the other markets being Spain, Czech Republic and Slovakia. And Spain So a decrease of the market, you see that here on the retail portfolio, of which we bought a significant portfolio. Czech and Slovakia was relatively also decreased, as you see here, from 2.2 to 1.1. So both of those markets saw a decreased supply. And the results were so so or actually bad in terms of profitability. The investments was mostly Spain and a few small investments in Czech and Slovakia. Recoveries in Spain were significantly below plan, but very good improvement at the end of the year in Q4. Two sides of the coin, unsecured business, having nice improvement in Italy, the corporate unsecured business that we also have, noting and disappointing results, we wrote it down Also in Q4, hopefully, we'll not see more surprises, although you never know what those corporate assets. In terms of the most important part, the unsecured consumer debt, I also think this is a Positive situation coming into 2021. We invested heavily in legal process in 2020. So This EBITDA is so negative also because we spent a few €1,000,000 on legal process that should result in improvement in recoveries and profitability in 2021, 2022, 2023, and this is what we're counting on. We also want to continue to buy to grow scale. We are a little subscale in especially in Spain. This figure includes also the other assets, and hopefully, there will be good market for that. Czech and Slovakia, good business. We were not hit hardly by COVID, but decreased supply of portfolios we hope to buy back, go back to more significant purchases this year. Wooga had also a headwind because of the regulations, because of COVID and the Credit policy that will be decided to be much more strict. Therefore, we have not realized our budget, but we grew. We grew from €170,000,000 to close to €119,000,000 in terms of the balance sheet value of assets. And EBITDA was positive €16,000,000 versus a loss in 2019. It's much less than we planned for, but it's a business which is making money, and we think it will be making much more money this year than in 2020. Dovomenerif, small businesses profitable suffered somewhat. We want to See them grow this year. One more thing. If you read our financial statements, you will see change of Some of the important names in our revenue in profit and loss account, this was enforced by us by our auditor Under IFRS 9, our auditor convinced us that we need to change some of the names. We need to name the revenues as interest income, as The correction to this interest income, which is This position expected credit losses And this expected credit losses, if you look at the slide slide and the slide last table here, Expected credit losses from the purchased net portfolios include revision of recovery projections, which is the revaluation and deviation from actual recoveries. So this delta between the actual and planned according to accounting curve and level of recoveries. If you look at this, you can understand the following. In Krug, we have 3 main lines of revenue, Say contract revenue, which is this interest income. So when we buy portfolio, the interest income is derived from the Discounted cash flow from this first initial projection. Then the TIMES Live, we revised these projections, cash flow differ from the plan. And these two corrections are so seen in the line revision of recovery projections, which is the revaluation, which is which for 2020 was €205,000,000 and this deviation of actual recoveries from accounting plan, which was PLN234,000,000. So It's a fair observation that overall in 2020, despite the very negative effect of COVID, we still had a positive correction of interest income of SEK30 1,000,000. But please remember, in our conservative accounting method and practice. We usually have significant A positive difference as in 2019, and we had this deviation of over SEK 100,000,000 and also we usually have significant positive Revaluation in 2019 was it was €80,000,000 So the difference between those two tells you really the impact of COVID on our profit on our revenues in 2020. I've mentioned to you that we're on leverage at a relatively low level, and that gives us opportunity to grow I share also to share profit with the shareholders. You can see here, we have still over PLN1 1,000,000,000 of available credit lines. Our issues of bonds on the Polish markets were very successful, actually Surprisingly high level of demand, which encourages us to tap on that market again when we need. So we are ready to grow. Of course, we're cautious of COVID. We will be watching closely And how this pandemic evolves, so far, there is nothing tangible that we see as negative in terms of planned negative legislation. We also don't see negative sentiment in consumer behavior. So finger crossed 2021, despite still this pandemic situation, is looking quite positive. What does it mean? Well, for us, it means that if you look at the results of 2021, this year should be better in our expectations than 2019. Thank you very much for listening, and I invite you to ask me questions, please. I have first question, how much of the investments in Q4 was Poland? And Poland was most of these investments. I don't recall the exact number now. But if you look at the investments in Q4, there were PLN344,000,000, definitely more than half, maybe even 70% or 60 something percent was Poland. If that's important for you, please contact our IR for details. Second question, how do you see the investment pipeline in your respective markets? Poland is strong. We see it because we already bought a few portfolios in Poland this year, and that's unexpected. We budgeted less in January February. So we have visibility till the half of the year only maybe, but it's looking very good. And even more importantly or equally importantly, I think we're more competitive in Poland for the past 6 months that we were because of some of the improvements in the process, Also some better methods in pricing, in analytics that we have worked on for the past year and a half and that were introduced throughout 2020. So I expect Poland will be definitely the country where we invest a significant amount of money. In other markets, Romania will doesn't look like it's It's going to provide a lot of big opportunities. But if we can get there to well over 50 percent of the market share, it still can be significant purchases of well over €100,000,000 or maybe even €200,000,000, so let's say here. If you look at the other countries, yes, we have appetite for more portfolios in Italy and Spain. In total, when you ask me what's your appetite, we would be budgeting somewhere above the level of 2019 investments, which were over €700,000,000 So somewhere between €800,000,000 €900,000,000 of investments would be our appetite at the time of budgeting at the close of the year and the beginning of this year is very good. And another question, how has collections started so far in 20 Well, it won very well. Both January February were good. February were good in all of the markets. Each single market has made its operating plan. I don't know, of course, the full results for March, but so far, the March is going quite well. And another question. On Slide 24, how are collection developing so far this year compared to the 25, 205 projection adjustment. They are above. They are above. They are significantly above the accounting curve, and this accounting curve includes this 205. So please expect that you will see an increased value of this Different deviation between the actual and planned recoveries. On the revaluation, we'll see. I think we are in a period where we still should be a little cautious about the COVID pandemic and its impact on our recoveries in the future. But so far, it's positive news. Do you have any other questions? If not, then thank you very much for your interest and time. I wish you health for you, for your close one. Please Be careful with COVID and hope to see you and talk to you throughout 2021. Goodbye.