Kruk SA

WSE:KRU

Q1-2025 Earnings Call

[Michal Zasepa, executive]

Good afternoon. My name is Michal Zasepa. I'm CFO at KRUK, and it's my pleasure to present Q1 results of 2025. I'm using the presentation that is available on our website. This was a good first quarter of the year and a good start. We earned PLN 252 million, which is somewhat more than we budgeted for the start of the year. It is less than we earned in the first quarter of 2024. But for the good reasons, last year was a record high level of revaluation. This year, we probably will see revaluation to be spread more evenly across quarters and also because of that, we'll see net profit to be more evenly spread over the quarters.

But if you look at the underlying P&L elements, recoveries were strong. Costs were somewhat lower than planned in terms of overhead. And this result was better than planned despite the fact that we had higher legal costs than we budgeted, and they were higher in Spain and in Italy. On the other hand, we had an extra gain on Wonga, which came from an important synergy. We see better collections on Wonga's portfolios, which are serviced by KRUK. And in accounting, it was required that we raise our recovery curve and that affected on the net results with about PLN 17 million of additional gain for this quarter.

So overall, looking at the business, we're happy with this result, and we are exciting to continue to grow, and we keep our expectation that 2025 will be another growth year for the company. Looking at recoveries, you have a picture where Poland and Romania are performing superbly, 100% or a little above 100% of operating plan. You have Italy, which is right on spot our plan, and you have Spain, which underperformed on operating plan, especially in January, but later improved in February and March, remained below operating plan, but was right on accounting curve forecast. In total, you see that we exceeded by about 6% our accounting curve.

Investments were relatively modest for the first quarter as expected. We expect more investments to come in the next couple of quarters. We sustain our guidance of about PLN 2.5 billion of investments for the full year. And please bear in mind that on the top of this PLN 230 million, we already have secured forward flow investments for about PLN 500 million in 2025. We expect, as you hear, lower investments this year, this PLN 2.5 billion than last year, and that comes from the fact that last year, we had very high market share. We expect to have somewhat lower market share this year. And also, we will be more selective in our investments in Spain because of difficulties with the legal system there, and we'll be watching how the situation evolves.

If you look at some of the cost items, we had somewhat lower overhead costs, and that comes from -- than we expected, and that comes from some of the delays in infrastructure and in IT costs, also some deferred timing of the cost of relocations. KRUK has a new head office in Wroclaw. If you are in Poland, we invite you to come and visit. It's a very nice place to work. And some of the costs are also cost savings. On the other hand, we had, as I mentioned, higher legal fees in Spain and in Italy than initially anticipated in our budget.

Now on Slide 10, you see segment analysis, super performance on EBITDA and cash EBITDA in Poland and Romania. You can see EBITDA in Italy stable year-on-year despite the fact that we grew assets. This is because high legal costs in the specific first quarter of 2025. So there is no reason to worry here. And in Spain, the results is depressed by lower than recoveries than the operating plan and also by these additional legal costs. It's about PLN 18 million of additional legal fees that we incurred in Spain in the first quarter of 2025, which would have otherwise been invested throughout the entire year. So these results should also improve in the following quarter.

Looking at Poland, it's been a slow quarter as expected in terms of new investments, but second, third and fourth quarter should be much better than planned -- than this, what you see here. It was a superb quarter for our recoveries. And as a result, we were able to once again positively revalue our assets. We expect this trend to continue throughout 2025 and beyond.

In Romania, a good start in investment, PLN 75 million. We see more opportunities to deploy capital this year in Romania than a year before. We also continue to see strong recovery trends. Another quarter of strong positive revaluation, very good results overall, as you see here. And Italy, already -- we already made some investments here. We have some forward flow contracts. The competition possibly is somewhat higher this year than it was last year, but still we expect to realize our investment budget and seeing good profitability. You see another quarter of positive revaluation, which also bodes well for the future quarters.

And the results for Q1, as I mentioned, are burdened with higher-than-average legal costs that occurred in Q1, and that comes with specificity of the portfolios that we bought. And finally, we have Spain, where we will be more selective in terms of investments, and we were in the first quarter. Recoveries were below expectations because they were below operating plan. They were right on the accounting curve plan. That's why there was no reason to change the forecast for future recoveries.

We are now waiting to see the results of April and then, of course, we'll be observing the trends in May and June to see if this new regulation called MASC mask, which aims at making the legal process in Italy more effective in the mid- to long term. But initially, it may further delay the case processing in courts in Spain, will affect us or not because it requires one additional step of obligatory mediation between the creditor and debtor that needs to be done. And if it's not successful, the documentation from this process needs to be sent to court.

So far, we see no effect of this new law, which came into force on the 1st of April. But it's too early to have final conclusions on that. So we'll probably wait to see May and June. But so far, let's say, this risk has not materialized. We'll see in the future. Overall, this is a temporary risk. We're quite confident that Spain will be our good and attractive and profitable market with this uncertainty we're still encountering in Q2.

And once again, we have accelerated sending the legal cases to courts in Spain so that they are not obliged to go through this MASC procedures. And that meant about PLN 18 million of additional legal costs that will not occur now in Q2, Q3 and Q4 in total. So the results will be better by this PLN 18 million than what we had budgeted in the following quarters of 2025.

The other markets, which is France, Czech-Slovakia and Germany performed fine. Just to remind you, we are developing our business in France. So please expect investments there. And all of these investments in Q1, this PLN 47 million are our new investments in France, which is doing well. And we are in process of exiting and selling our assets, closing our operations -- closing our companies on the other markets, enjoying good profitability in the meantime.

Wonga and Novum performed just fine. And of course, there is this extraordinary gain coming from revaluation of recovery curve in Wonga, but that's important business element. The fact that we're able to do this proves that the synergy between Wonga and KRUK is even stronger than we anticipated, and it bodes well for the profitability of that business in the future. Novum also had another good quarter, although it's a small business.

So overall, we're quite happy with how the results pan out for Q1. We are doing our best to move ahead strongly on the digital transformation. And I may say I'm proud of our group managers to organize their work well and to deliver everything that was planned in terms of the goals for this first quarter. It's a busy schedule and a lot of work. We are -- in the next coming months, we'll be deciding on some key technology partners, for example, providing us a workflow system. We're very advanced in selecting such a partner, and there's many other initiatives that are undergoing.

But it's fair to admit it's an early on process. It just a start, but it's a good start of this transformation process. And just to remind you, the goal is to make a state-of-the-art IT infrastructure, further optimizing our processes and allowing us to earn even better in the horizon for the next 4, 5 years.

Maybe a word of commentary on the power outage of Spain. And on this note, I apologize for my informal outfit today. I was stuck in Lisbon, and my flight was canceled yesterday. But I'm happy to say that our business in Spain, did not suffer much because of this outage. All of our data were safely stored in the outside centers -- data centers, which proved their worth and nothing that happened. Our people needed to go home after 1.5 hours yesterday because there was no electricity in the building, but we resumed full work today in the morning. So we do not expect any significant negative effects because of this huge outage that happened throughout the Iberian Peninsula.

On this Slide 22, you see our credit facilities. We enjoy very good access to debt funding. We're talking to banks about enlarging the exposures, and we are also quite successfully placing bonds to Polish retail investors. It's a very comfortable situation now on the Polish debt market. So it's not a constraint at all, the shares. I think this is all of the highlights. And now I would welcome your questions, please.

[Michal Zasepa, executive]

I have the first question. Who are the competitors that you are seeing getting aggressive in your key markets? Would you be able to comment on that?

It's the usual club. I wouldn't say they are aggressive. I would say they are a bit more brave this year in some instances than the others. As you may know, some of our competitors were constrained last year and previous year because of the restructuring, the liquidity constraints. There is no one or second clear biggest competitor, but we see companies like B2 Holding, like Hoist, like Banca Ifis in Spain, like Link Financial in a few of our countries that are quite active, but there's also EOS, Intrum with the [indiscernible] is also becoming more active. So -- [ PRA ] as well.

So all of those biggest European or American companies are present and from time to time winning portfolios from us. And sometimes we are winning from them. So I would say it's business as usual. We had a high market share in 2024, 2023. It's natural that this year, some of our competitors would like to buy back and get some more portfolios.

Another question. Do you see signs that banks want to further decrease the risk exposures of the lending portfolio following the recent market volatility? In other words, there could be positive consequences for KRUK as a result of the recent tariff volatility through more attractive than portfolio purchases opportunities?

No, I don't see a direct impact of that. Please remember, we operate in a relatively stable supply environment. Banks are regularly selling consumer unsecured debt portfolios because the provisioning loss imposes on them -- the necessity of writing them off. They also have their process. It's a relatively straightforward fast collection process. So they mostly sell as early as the strategy calls for. The only change may be French market, where this propensity of selling has been increasing. But I don't see any direct effect of the tariff war on our business on the bank's [indiscernible]. But I do see a stable and as expected supply of portfolios on the market.

Another question, could you share your plans for issuing bonds in the nearest future?

We may be active in the next months on the Polish bond market, but I will not be disclosing any details of it now. We likely will not be active on the European or Nordic bond markets in the next couple of months because we probably will have cheaper options of funding still in Poland.

Another question. Do you expect the higher legal cost for Spain and Italy to continue in the upcoming quarters?

Though from the guidebook that we have. So in Spain, we virtually sent all of the cases we could that were available. So of course, there will be some, but they will be less. In Italy, probably it's not extreme, but also Q1 was specifically high. I don't have a forecast for that in front of me. Some part of this answer will depend on what will we buy, what kind of cases will we buy in the next months of 2025. But overall, you can treat Q1 of 2025 as an extraordinary high legal cost situation, which should look better. It's not better or worse, but this cost may be lower or to the proportion of our assets on those markets than in Q1.

Another question, do you maintain your investment plan for this year?

Yes, this PLN 2.5 billion of investments continues to be our guidance. And if you ask us, "Okay, what's your guidance for profit growth?" Of course, we don't give a forecast, but we guide you to look at the assumptions for the new option plan -- option stock plan -- stock option plan for the management of KRUK, which calls for a minimum of 12% growth on the profit before tax. So this is our minimum threshold, which we should -- which we would like to exceed this year.

Another question, how do we think about Spain? Hypothetically, what needs to happen for you to go back to your original recovery expectations as of 2024 beginning, I mean, before the revaluations?

We would need to see that the cases were successfully admitted to the process -- to the legal process, which we believe will happen. We assumed in our 2024 Q4 revaluation that 90% of this change in the forecast is a loss and only 10% is a deferral in time. The upside is it will not be 90% loss. It will be 10% loss or 0% loss only. The money will come later in time. So that's a possibility and an upside to the current revaluation -- to the current situation of the value of the assets.

However, if that happens, we will not recognize it instantly in Q3 or Q4 2025. We will be watching on the path of how it will progress. And it will take us a few years to recognize it and this additional revenue will be coming through recoveries -- delta of recoveries to the accounting curve and maybe some positive revaluations every now and since. So that is a positive situation. And it is a possible scenario that we will regain everything of that.

So there will be some loss of money in terms of time value of money. But in cash flow terms, it may be that we'll recover everything or more than we initially thought. And we saw this situation many times. We're not certain of that. As usually, we're conservative in accounting. There is still uncertainty. But if you ask me in 3, 4 years, will you do well with the portfolios you bought in Spain in 2022, '23 and '24, I'm pretty sure we will be on the positive side and with good NPVs and decent high-teen percent IRRs.

A final question from one investor. Regarding the forward flow, could you please provide us a breakout of the countries that make up the forward flow agreements?

We don't give that detail, but most of that from top of my head is coming from Italy, where this is most frequent; a little bit from Spain, but it's a tiny bit; and some from Romania; and virtually almost nothing or close to nothing from other markets.

From what I see, these were all of the questions. [Operator Instructions]

There are no more questions. And in that situation, thank you very much for your interest in KRUK and your time. I wish you good investment decisions in those volatile times. We're moving ahead, and we think our situation is quite stable, and we're optimistic about our prospects.

Thank you, and goodbye.