Earnings call transcript: Kruk SA’s Q1 2025 sees stable performance

Kruk SA, a $2.1 billion market cap debt collection company, reported stable financial performance for Q1 2025, achieving earnings of 252 million zloty. Despite a slight decrease compared to Q1 2024, the company exceeded its accounting curve by 6% and managed to keep overhead costs lower than expected. Increased legal costs in Spain and Italy were noted. The stock price rose by 1.02%, reflecting a positive market reaction. According to InvestingPro analysis, the stock appears undervalued based on its Fair Value model, presenting a potential opportunity for investors.

Key Takeaways

• Kruk SA achieved earnings of 252 million zloty in Q1 2025.
• The company exceeded its accounting curve by 6%.
• The stock price increased by 1.02% following the earnings report.
• Planned investments for 2025 amount to 2.5 billion zloty.
• The company is focusing on digital transformation and process optimization.

Company Performance

Kruk SA’s performance in Q1 2025 was marked by stability, with earnings slightly above budget expectations. While the earnings were lower than Q1 2024 due to more evenly spread revaluation, the company managed to outperform its accounting curve by 6%, indicating efficient financial management. InvestingPro data shows impressive revenue growth of 22.75% and a solid Financial Health Score of 2.96 (rated as GOOD), underlining the company’s operational strength. The company is also capitalizing on strong performances in Poland and Romania, which are executing over 90% of their operating plans.

Financial Highlights

• Earnings: 252 million zloty, slightly above budget
• Additional gains: 17 million zloty from Wonga portfolio collections
• Overhead costs: Lower than expected
• Legal costs: Higher in Spain and Italy

Outlook & Guidance

Kruk SA does not anticipate 2025 to be a growth year. The company has set a minimum profit before tax growth target of 12%. Key strategic focuses include digital transformation, process optimization, and selective investments, particularly in Spain. Trading at an attractive P/E ratio of 7.3 and offering a dividend yield of 4.59%, the company maintains strong fundamentals. Analysts tracked by InvestingPro maintain a Strong Buy consensus on the stock, with multiple additional metrics and insights available to Pro subscribers. The company plans to invest 2.5 billion zloty in 2025, with 500 million zloty already secured through forward flow investments.

Executive Commentary

Mikhail Zasenpa, CFO, stated, "We expect 2025 will be not a growth year for the company." He emphasized the company’s commitment to digital transformation and expressed optimism about the company’s stability and prospects, saying, "We are doing our best to move ahead strongly on the digital transformation."

Risks and Challenges

• Increased legal costs in Spain and Italy could impact profitability.
• The company’s decision to exit operations in France, Czechoslovakia, and Germany may affect market share.
• Competitive pressures from companies like B2 Holding and Hoist could challenge Kruk SA’s position.
• The expectation of lower market share in 2025 due to selective investments.
• Potential bond issuance on the Polish market could influence financial strategy.

Kruk SA’s Q1 2025 performance reflects a balanced approach to financial management and strategic investments. The company’s focus on digital transformation and process optimization positions it well for future challenges, despite a cautious outlook for growth in 2025.

Full transcript - Kruk SA (KRU) Q1 2025:

Mikhail Zasenpa, CFO, Kruger: Good afternoon. My name is Mikhail Zasenpa. I’m CFO at Kruger, and it’s my pleasure to present q ’1 results of 2025. I’m using the the presentation that is available on our website. This was a good first quarter of the year and a good start.

We earned $252,000,000 zloty, which is somewhat more than we budgeted for the start of the year. It is less than we earned in the first quarter of twenty twenty four, but for the good reasons, last year was a record high level of of revaluation. This year, we we probably will see revaluation to be spread more evenly across quarters. And, also, because of that, we’ll see net profits to be to be more evenly spread over the over the quarters. But if you look at the underlying p and l elements, recoveries towards 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 cost 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 the results with about 17,000,000 zloty of additional gain for for this quarter. So overall, looking at the business, we’re we’re happy with these results, and we are exciting to to continue to grow.

And we we keep our expectation that 2025 will be not a growth year for for the company. Looking at at recoveries, you have a picture where Poland and Romania are performing superbly, % or above % 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. And on total, you see that we exceeded by about 6% our accounting 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 2,500,000,000.0 of investments for the full year. And please bear in mind that on the top of this 230,000,000, we already have secured forward flow investments for about 500,000,000 in 2025. We expect, as you as you hear, lower investments this year, just 2,500,000,000.0 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 the legal system there, and we’ll be watching how how the situation evolves. If you look at some of the costs items, we we had somewhat lower overhead costs, and that comes from than than we expected, and that comes from some of the delays in infrastructure and in in IT costs. Also, some deferred timing of the cost of relocations. Krug has a new head office in Wroclaw. If you are in Poland, we invite you to come and visit.

It’s a 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 in in Italy than initially anticipated in our in our budget. And now on Slide 10, you see segment analysis, superb 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 this specific first quarter of twenty twenty five, 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 18,000,000 zloty of additional legal fees that we incurred in Spain in twin in the first quarter of twenty twenty five, which would have otherwise been invested throughout the entire the entire year. So these results should also improve in the following quarter. Looking at Poland, it’s a it’s been a slow quarter as expected in terms of new investments, but the second, third, and fourth quarter should be much better than planned than than this. What you see here, it was a superb quarter for for our recoveries.

And as as a result, we were able to to once again positively revalue our assets. Please expect this trend to continue throughout 2025 and and below and beyond. In Romania, a good start in investment, 75,000,000. We see more opportunity to do 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 q one, as I mentioned, are burdened with higher than average legal costs that occurred in q in q one, 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 and plan. That’s why there was no reason to change the the the forecast for future recoveries. We are now waiting to see the results of April, and then and then, of course, we’ll be observing the trends in May and June to see if this new regulation called m a s c 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 in 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 April 1, but it’s too early to have final conclusions on that, so we’ll we’ll probably wait to see May and June. But so far, let’s say, this risk have not materialized. We’ll we’ll see in the future.

Overall, this is a temporary temporary risk. We’re quite confident that that Spain will be our good and attractive and profitable market with this uncertain uncertainty we’re still encountering in in in q in q two. And once again, we have accelerated sending the legal cases to courts in Spain so that they are not obliged to go through this mask procedures, and that meant about 18,000,000 zloty of additional legal cost that will not occur now in q two, q ’3, and q four in total. So the results will be better by by that this 18,000,000 than what we had budgeted in the following quarters of 2025. The other markets, which is France, Czechoslovakia, 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 q one, this forty seven 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 on the other markets, enjoying good profitability in the in the meantime. Wonga and Novom performed just fine, and, of course, there’s 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 Krug is even stronger than we anticipated, and it bodes well for the profitability of that business in the in the future.

And Novum also had another good quarter, although it’s a small small business. So overall, we’re quite happy with how the results how the results pan out for for q one. We are, you know, doing our best to move ahead strongly on the digital transformation. And I I may say I’m proud of Ofcook managers to organize their work well and and to to deliver everything that was planned in terms of in terms of the the goals for the first 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 and there’s many other initiatives that are undergoing. But it’s fair to admit it’s an early on process. It’s just a start, but it’s a good start of this transformation process. And just to remind you, the goal is to make a made state of the art IT infrastructure further optimizing our processes and allowing us to to to earn even better in the horizon for the next four, five five years.

Maybe a word of commentary on the power outage of Spain, and on this note, I apologize for my informal out outfits today. I 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 were safely stored in the in the outside centers data centers, which proved their worth, and nothing bad happened. Our people needed to go home after one and a half hours yesterday because there was no electricity in the in the building, but we resumed full work today in the morning.

So we do not expect any significant negative effects because of this this huge outage that happened throughout Iberia and Peninsula. On this slide 22, you see our our credit facilities. We enjoy very good access to that funding. We’re talking to banks about enlarging their exposures, we’re also quite successfully placing bonds to Polish retail investors. It’s a very comfortable situation now on the Polish debt 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. Questions tab. I have the first question.

Who are the competitors that you’re seeing getting aggressive in your key markets? Would you be able to comment on that? It’s the usual it’s the usual club. I wouldn’t say they are aggressive. I would say they are a bit, you know, more brave this year in some instances than the others.

As you may know, some of our competitors were were constrained last year and previous year because of the restructuring, the liquidity constraints. There is no, you know, one or second clear biggest competitor, but but, you know, we we see companies like b two holding, like Hoist, like Banca Iffis in Spain, like Link Financial in the a few of our countries that are quite active, but there’s also EOS, Intrum with the money of Cerberus is also becoming more active. So PRA as well. So all of those biggest European or or American companies are present and from time to time winning portfolios from us, and sometimes we are winning from them. So would say it’s business as usual.

We had a high market share in 2024, ’20 ’20 ’3. It’s natural that this year, some of our competitors would like to bite back and get some more more portfolios. Another question. Do you see signs that banks want to further decrease the risk exposures of their lending portfolio following the recent market volatility? In other words, there could be positive consequences for Krug as a result of the recent tariff volatility for more attractive than portfolio purchases opportunities.

No. I don’t see anything a direct impact of that. Please remember, we operate in relatively stable supply environment. Banks are regularly selling consumer unsecured debt portfolios because the provisioning loss imposes on them the the the this this this the necessity of of writing them them off. They also have their process.

It’s a relatively straightforward, fast collection process. So so they mostly sell as early as as their strategy as their strategy calls for. The only the only change may be French market, which were just 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 propensity. 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? May be active in the in the next months on the Polish bond market, but I will not be disclosing any details of that 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 in Poland. Another question, do you expect the higher legal cost for Spain and Italy to continue in the upcoming quarters? Go from the bag book 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 there will be less. In in in Italy, probably, it’s not extra extreme, but also q ’1 was was specifically high. I don’t have a forecast for that in front of me. Some part of this answer will depends of what we will will what will we buy, what kind of cases will we buy in the the next months of 2025?

But overall, you can you can treat q one of twenty twenty five as an extraordinary high legal costs situation which should which should look better. It’s not better or worse, but but this cost may be may be lower or to the proportion of of our assets on those two markets than in q one. Another question, do you maintain your investments plan for this year? Yes. This 2,500,000,000.0 zloty of investments continues to be our 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 the assumptions for the new option plan, the option stock plan stock option plan for the management of group, 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 evaluations?

We would need to see that the cases were successfully admitted to to the process to the to the legal process, which we believe will happen. We assumed in our twenty twenty four q four 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 to the current revaluation to the current situation of the value of the assets. However, if that happens, we will not recognize it instantly, you know, in q three or q four twenty twenty five. It we will be watching the on the path of how it how it will progress, and 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 that is is a is a positive situation, and it is it is possible a possible scenario that we will regain everything of that. So will 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 the situation many times. We’re not certain of that. As usually, we’re a conservative in accounting. There is still uncertainty. But if you ask me in three, four years, will you do well with the portfolios you bought in Spain in 2022, ’20 ’3, ’20 ’4?

I’m pretty sure we will be on the on the positive side and and with with good NPVs and and decent high teen percent IRRs. A final question from one investor. Regarding the forward flow, could you please provide us 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 or close to nothing from other markets. From what I see, these were all of the questions.

I’ll give you another ten seconds to ask some more. There are no more questions in that situation. Thank you very much for your interest in Kruk and and your time. I wish you good investment decisions in those volatile times. We’re moving ahead.

I I mean, we think our situation is quite stable, and we’re optimistic about our prospects. Thank you, and goodbye.

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