Earnings Call: Q1 2021

May 24, 2021

Hello, and welcome to today's conference. My name is Lauren, and I'll be coordinating your call today. I will now hand over to your host, Please begin. Marta, please go ahead. Good morning. Good afternoon. My name is Matej Askar Vasilevska, and I represent Wood and Company, that is the host of today's call. Today's call is to discuss a fantastic record high first quarter results of Cook, The largest debt collector in Poland. And the call will be run by Michal Zasanta, CFO at Krug. Michal, over to you. Thank you very much, Martha, and good morning, good afternoon. Thank you very much for Being here on this call, it's my pleasure to walk you through Q1 2021 results, especially these are The record results we've ever had. The 2nd best is PLN 110,000,000 of net profit quarterly, but that was long ago Back in 2019, and we are back to the record, it seems. I will be using the presentation, which is available at our website, I'm now looking at A snapshot of our results, a record high net profit. Why is this net profit so high? And the answer is default. 1st, excellent recoveries. Excellent recoveries that I'll be telling you in a few moments on each and every market, which is also a new situation. And second reason is a good new investment Starting from Q4 and good performance on those investments in Q1. Those two elements are responsible for this very good net profit that you see. The cash EBITDA, also a very good result. You will see a good control of costs, high recoveries equals Very good EBITDA. Based on these very good results, very strong cash flows, the management proposed to shareholders to increase the dividend to SEK 11 per share. The shareholders will decide on that in the next Couple of weeks at the upcoming AGM. The purchases at SEK160 1,000,000 were very good. We did not plan on such high investments. And this is, it seems, a beginning of a good trend because we see Relatively strong pipeline, and we are ready to go back to investing on every single market that we're covering. So it may be a good year in terms of our investments. You may remember at the year end, we were telling you We budgeted over PLN 800,000,000 for this year, which seems modest at this time. And we are targeting PLN1 1,000,000,000 plus investment this year. Maybe we will We have an update, a positive update of that in a quarter or 2. But today, we see this as reasonable and achievable. Of course, we are still Relatively far from it after Q1, but there's a lot of portfolios being offered on the market in Q2. So overall, a very good result. Of course, these results are achieved In the environment of pandemic and in we made decisions about Booking revaluations for Poland at the end of March. That was peak of the pandemic situation in Poland. Of course, We were concerned how the situation will affect us. Is this Some risks that we don't see today and may be seen tomorrow. So there is some caution also in these results in our relatively conservative review of future refabricers for our Polish and Romanian unsecured lines. And so far, not on mute. March results, also April results show that there is no additional risks, Although we don't know exactly how this good performance, especially in Poland On the poly retail side, it can be explained by Factors such as our improvement of operations, which definitely has been the case, but also very strong sentiment, very strong Strong stability within debtors and their payment behavior. Maybe during the lockdown, people were more willingly paying money And repaying the debts, maybe that will change once they once we all start to consume and spend more money. We don't know that. And then we'll find out in the next couple of months. So far, it's been very good results and Results on recoveries were above our expectations, especially in March and also this trend was continued At the end of Q1, we still are a lowly leveraged company, as you see here on the Slide 3, Which means we have appetite to grow. We have place to grow. We are planning to grow. And today also, we announced The new issue of bonds on the Polish market is targeted to retail investors, and that probably is not our Last issue this year. On Slide 4, there is some more detail about our I think I covered most of those points. I will go now to Slide number 7 and just the remainder. We have an anniversary, a 10 years anniversary being a publicly listed company. Thank you very much to those investors who've stayed with us for those 10 years. We promise we'll continue to deliver as much as we can achieve in the future. The past was not that bad. If you look at Slide number 8, we've always been above the indexes. And it seems There is now an additional momentum for growth starting. So bear with us. I'm now looking at Slide number 11, a summary of the group results. And again, it's very Positive for me and the Board to say we were profitable on operating level in every single country that we operate on. And this is that hasn't been that often in the past 2 years that I could say it. I hope I will be able to repeat that once and again The next quarter, but this is what it looks like today. Poland and Romania, a very strong performance on the back book. And Italy, Also an increasing effectiveness on the legal stream, which bodes well for the next couple of quarters. Spain, we've started the year with a hiccup. We had a big snowstorm. The country in Madrid was paralyzed for a week. We managed the company managed this small crisis and ended Q1 on plan, And it's building some surplus over the plan in April, and the situation is stable and improving. Also our small additional businesses, long novel Credit Information Bureau were all profitable. And The overall result is €127,000,000 of profit and close to PLN200,000,000 Of EBITDA, which is a great result. Now looking at Poland alone on Slide 2. We were quite active in investing in Poland. €130,000,000 shows you In a relatively weak period in terms of supply, we were able to secure quite a few portfolios. We see that we are Stronger in Poland than ever before. By this, I mean, over the past couple of quarters, we improved The precision of our scoring statistical models, we also improved our effectiveness of our operations, and this is visible in our market share in this 1st month Of 2021. Yes, we accept somewhat lower IRRs than in 2020, but This is a market situation where our competitors are well funded, the categories are strong, Risk is relatively lower than last year, so it's time to play a little more boldly, and this is what we do. Poland is strategically for us a market where we want to be strong, and we Aim at achieving higher market share than this 20%, 25% that we usually had in the past years, and we believe we have now tools In terms of our operating effectiveness to achieve it and to have Poland as a strongly growing market In the next couple of quarters or maybe even years. And the beginning of that, I think, is quite successful. And we see quite a few more portfolios we could target in Poland this year. The performance on the unsecured book was excellent. You see that there was about CHF 13,000,000 slightly of positive revaluation on the unsecured, some CHF 7,000,000 negative on the secured part. This €13,000,000 is a rough conservative figure. But bear in mind, we made this decision on the 30th March, Unfortunately, the death toll in Poland in the peak of the pandemic was a heavy toll and we even We didn't know where we were going. Today, the situation is much better. Recoveries are continuing to be strong. So if that situation repeats in May June, please expect very good results in Poland in Polish business in Q2. Quite a few transactions were on the market, and it looks like this year, it will not be a very strong supplier of protons in Romania. This has to do with still this negative effect of the taxation law on banks trying to sell their portfolio. This The law is not going to change this year. We think maybe that will be changed next year. So it will be a difficult time To buy much more portfolios still, this €20,000,000 is quite insignificant. Yes, we have plans to go much more, Much above this figure, but Romania unlikely will not be the main driver of our investment this year. On the other hand, our debt book in Romania is performing superb. You may remember we suffered a lot in Romania last year. Our recoveries dropped by over 25% as a result of changing the law. That is gone. The law was brought back to what it was before pandemic. From Q4, part of Q3, We see quite strong recoveries and we see that trend being continued in March and April. So again, please expect very good results overall. On Romania, you see here EUR 15,000,000 Your positive revaluation of the retail book minus 3 on the secured part. Again, if these trends continue, it's Quite likely that you will see positive revaluation and a very good EBITDA in the following quarters in Romania, despite the fact that we don't Put much more investment in that market, which I hope is temporary and in a few quarters will change. In Italy, we are hungry for new investments because we haven't bought anything for 2 years. But more importantly, we're ready To absorb the investments. Why? Because we have a relatively long track record of achieving or Overachieving our targets in legal collections, the last part of the puzzle that we needed to say, we know what we've been what we are doing and we are ready We continue to invest. The Q1 was very good in this respect. We see Good acceleration on the legal process that led to increased legal costs In Italy, in Q1 'twenty one, despite that, you still see additional results in EBITDA, 12,000,000 and good prospects to see good recoveries and much better profitability In that circumstances and looking how our Expectations for recoveries for the books for the portfolio that we bought over the past years are slowly starting to go up. We are ready to go back to buying portfolios. And there are some portfolios that we are targeting. So please expect us to start to buy portfolios in Italy this year. Again, This is a situation where Italy seems to be on a very good road to more stable press. Profitability and Q1 is a very good step in that direction. Other markets, including Czech Republic, Slovakia, Germany and Spain were performing on plan or somewhat above plan. As I mentioned, the most important part of that group is Spain under in January for the weather reasons, but then regrouped and Caught up in the shortfall in February March and finished the quarter on plan, which is a very good sign. We see also a very stable situation there. We're happy with the portfolio we bought at the end of the last year. And as you may know, we secured we won auction for another portfolio back a few weeks ago. So we are on a growing path in Spain, and we have stable team improving results. So there is also more optimism in this in Krugsbane, and it is a profitable business On EBITDA level, which is very good. Czech Republic, Slovakia, Germany, good recoveries. Press. It's DKK10 1,000,000 of investments related to Czech Republic and Slovakia. I mean, we hope to invest more in the next couple of months And we are just managing our set in a runoff boat in Germany. So as you see, the Q1 in many, many, there are no negative press. Surprises on the positive news, which makes us very happy. Also the other markets, the other Business lines performed well. Longer, as you hear, brought close to PLN10 million of EBITDA diluted results from last year Despite the fact that it didn't grow revenues, and we hope to increase the size of the business in the next couple of months, Which is not so easy because in pandemic time lockdown, the demand for consumer finance dropped In Poland, but now we see some revival over the past 10 days where the lockdown It was decreased. So hopefully, that means that Wonga will have it will be a little more easy for Wonga to but the business is already profitable. Also very good performance from The second cash loan business, no one had a decent performance in the Credit Information Bureau, although a certain decrease of profitability due to market reasons. Now if you look at the P and L, my summary would be Very good start in recoveries. Expect that this is just the beginning. In order to reach €1,000,000,000 We need to invest over €840,000,000 more and that will be our target this or maybe a little bit more. Recovery is an excellent trend. Hopefully, we will not see a drop. But the fact is We are not positive if some of these March or April recoveries are not some positive effect of the lockdown where people were eager, willing to pay that when they did not consume much. This is unknown, but this is something we'll find out in a few months. So far, so good. Purchase that portfolio's revenues were increased by this SEK 18,000,000 prevaluation. Please expect more into the next couple of quarters. Why? Because you see that the deviation from actual services recoveries to the accounting plan was quite significant and positive, As much as high as 89,000,000 slots is in Q1. And this is something, of course, which is a trade off between The revaluation, the revision of the forecast. And that shows this strong And this shows the strong trend of recoveries. The company is very well capitalized. You see on Slide 22 That we are indebted at only one times to net debt to equity, 1.5 to net to debt EBITDA, net debt to EBITDA. So that gives us quite a lot of room. And of course, we want to use this leverage to space to drive returns for shareholders. So the plan for this year is to continue on this trend, maximize the market opportunities in Poland, Romania, Cautiously, but more boldly come back to investing Hi, Miguel and Marta. Thanks for a good set of results. That's all very exciting after last year. I have something which something surprised me in the last few months and I just wanted to know why you did something. You bought back your own shares A few months ago and you made it clear that that was you weren't going to pay a dividend, but you're going to do this instead. But nobody except for the very small shareholders got any benefit from that. We participated, but didn't get anything at all. And that seemed to be quite un shareholder friendly for anybody except Retail. You've consistently done a very good job of keeping in touch with institutional shareholders. So I wondered whether you were forced to do that by the regulator Why you did that? Because we effectively just missed out on a dividend, which the smaller guys got. Okay. Richard, thank you for that question. We have Bob, we have run this buyback program as a specific project for 2020 In the pandemic situation, that was a preference of some of the bigger shareholders in the core group. And the idea was to make this as an alternative to dividend Where we have offered investors to buy back the shares at a very significant premium To the current market share. Now if I remember correctly, 91% All the shareholders of Crook participated in this program, which means all the big shareholders, all the big Institutional shareholders of Pruk participated in this program and benefited from it because we were buying shares at 3.50 at the time. I'm not exactly sure what it was, but maybe the share price was 160 or 170 at the time. So the shareholders who participated in this program, of course, benefit largely. Now these shares will give a And this is the only thing I can do legally do with those based on this agreement with the shareholders. Now I'm sorry to hear You have not participated as a shareholder in that. We were and I was surprised that as much pressure. 9% of shareholders of group do not participate in that. We made sure that we communicated Quite widely and engage shareholders several weeks to participate. Still, it seems we were not effective That's not exactly my point. Sorry to interrupt, Mikael. No, no, we did participate, but I was under the impression that Small retail got a much better success rate in their price than the institution. No, I understand. All right. Okay. Then just to expand on that, there was some privilege for the very small shareholders Holding 50, 30 shares not to have a criticism from the Polish Retail investors community that this program was aimed only at satisfying the big institutional shareholders. To some extent, few people, 100 people, maybe got a slightly better deal and got a very Relatively small amount of money. Other than that, I think all of the institutional investors benefited from the struggle. All in all, we will be paying Much more likely only the dividends in the futures, not the buybacks, because I don't like the situation where as much as 9 So we now have a question from Radim Krumil from UHST Asset Management. Please go ahead. Yes. Good afternoon. Thanks for the questions. Can you maybe just try to Bring some more color on your P and L and this $130,000,000 net income for the Q1 because when I'm looking at last year, Basically, the run rate was around 50% per quarter. So how much of this is, let's say, some kind of 1 off incurred in these numbers or what could actually be the recurring net income One, assume for the rest of the year for Crook, it would definitely be helpful for me to understand this almost tripling of Q4 results. Yes. So trying to answer this question, there is No one off in these results that would make these results look much worse. On the other hand, there is an accelerator of results, which comes from the fact That after pandemic after Covinia, the recoveries in Crook are significantly above The accounting recovery forecast. So look at the composition of the Revenues, because it is the revenues that are the most important driver For the current and future performance of Krug and its profitability. Now in 2020, the revenues were under the heavy negative effect Of changes in the law and our negative revisions on the forecast. So we press. Incurred significant losses. So in that sense, they were decreased. Now not only you don't have this effect In 2021, but we're also starting the year with a relatively low base of accounting revenues and the recoveries Very strong and they actually accelerated. Why they accelerated? Because we have introduced several improvements Because we have bought in the last two quarters more than we expected and more than overall on average press release. 2020. Now what it means for the results of this year, future year? I don't know exactly, but The fact is, with this strong result in the Q1, we are definitely going In the direction of the best results in the history of this business in 2021. It's too early to say what it means exactly, but it's a very solid result in terms of cash flow. And there is no single important element that I could say it's a one off, it will not repeat. Of course, We will be recognizing positive evaluations in you will see certain trend Of the results leveling off, but this is not something which will happen in 1 quarter that will last Several quarters, maybe even a few years. So I think we are at this We are discovering that the business has most more potential to grow Again, we would still think half a year ago, not to mention a year ago. I see. So theoretically, the whole 2020 is a low base year Comparing, let's say, the current trends, yes. Yes. Well, you can say that 2020 was a year where there was A few negative significant effects, and it's not a good base to grow results. I encourage you also to look The details of the proposed option program, which was announced and made public a few days ago on our website. In this program, the supervisory board proposes to shareholders that Group management is remunerated in this option program as long As we grow at least by 15% EPS starting in 2021, but from the base of 2019, press. 2020 is not taken into account, but the 2019, 15% increase calls For some PLN370 million of profit. So this is the threshold, which supervisor is set For Cook management to say, if you want the bonus, if you want to take part in this option plan, you need to deliver in press. 2021, at least around SEK 370,000,000. And then on the top of this SEK 370,000,000 Additional 15% every year. This is our and this is something, of course, we want to make happen And maybe beat it. Okay. Fair enough. So 370 should be the, Let's say, at least a target for the whole year based on the option for them. Yes. That's right. Roughly above that, it's maybe 360 something. Thanks. It's helpful. And definitely, if you might comment on, let's say, your plant purchase, Because I remember probably a year ago or maybe during 2020, you were kind of Saying that the crisis usually creates a good opportunity to buy into attractive portfolios. But it seems to me that Also due to the different path of the pandemic, this is not really the case because you also mentioned during the presentation that IRs are, let's say, lower Then what you were maybe hoping for or Yes, that's right. So it is it's not the market situation in where we are now, it's not a situation of Heavy prices that created a big problem with the banks now, And they're desperate to sell and there is so much supply and only limited demand, which means there will be very good IRRs This is a situation where banks are not under so big pressure to sell because the NPL increase wasn't so big so far and where most of our competitors They are more leveraged than Krug, but they also didn't have very difficult time In this 2020 crisis. So it's more like back to business pandemic. We are all well funded. This is our top 6, top 7 European players. We are all eager to buy because we haven't bought so much question. 2020, so the IRRs the recoveries are good. So the IRRs are somewhat lower than in 2020. Press. Still reasonable, but it's not El Dorado. It's not and we don't see at least yet any Very significant influx of portfolios on the market. There is much more supply than in 2020, but I'd say it's Pre COVID, it's 2019 levels, not something extra. So in that sense, the crisis Did not really create that much turbulence in 2021 as we might have expected Maybe last question also related to this topic. So how comes you're feeling confident that you can manage to purchase around EUR 1,000,000,000 worth of portfolios When you're also suggesting that the banks are not in, let's say, in a position that they will be pushed to dispose of these portfolios. So Where do you think the supply is coming? Or do you really believe that the COVID has held back the banks that they were not offering the portfolios? Thanks. This PLN1 billion of investments is, of course, an ambitious target, but it's possible To realize in 3 or in 4 main markets, Poland increased our investment level, And we see very good results so far in our competitiveness on the Polish market. We don't need supply to grow. We need to have a higher market share, and this is likely from what we're seeing now. Plus, good investments in Romania, not very high, €100,000,000, €150,000,000 may be in a very positive scenario closer to €200,000,000 A few investments in Italy and Spain, but one investment in Spain may be as much as 100,000,000 Those are relatively large portfolios in those markets. So if you group those 4 markets, need something for Czech Republic and Slovakia, You may already be close to $1,000,000,000 without the market growing at all. Okay. Okay. Well, yes, wish you all good luck, yes, for 2021. Thank you, Ed. Thanks. Thank you. Okay. We currently have no further questions. So I will now hand back over to the host. Thank you very much for your time and listening to about Crook results. I hope to see you, talk to you on some conferences. Please expect that