KRKKF (KRKKF) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon. My name is Michal Zasepa. I'm CFO at KRUK, and this is the conference for Q3 9 months 2026 results. Thank you for joining the call. I will use the presentation that is available on the website since yesterday. I will have the presentation, and then I will answer your questions. So please use the Q&A section of the Teams application to post questions that I will review and answer them later. So let's start. Q3 and overall, the 9 months for 2026 were disappointing for us if we look at the bottom line. The net profit was below our expectations. We expect actually the full year 2026 to not to be able to realize our goals and budgeted bottom line. It may be there is a risk that this year's results will be for the full year lower than the last year's results, unfortunately. The main reasons for that is the whole reason for that is lower recoveries on the back book of the portfolios of the unsecured consumer loans NPLs. We have missed for the 9 months of this year about 4% of recoveries versus operating plan. If you have about PLN 3 billion of recoveries, that means roughly PLN 120 million gap, to what we intended to achieve. In addition, this trend meant that we needed to revise also forecasts, and we have not recognized as much positive revaluation as planned in our budget, that's another amount of several dozens of millions PLN, and that adds to this difference versus our expectations. And the third, last but not least is that we suffered from negative deviation on FX because of Romanian currency depreciation versus euro, which cost us around PLN 73 million for the 9 months. And this erosion continued in the Q3 as well. So that's the situation on the back book, and that's the big picture explanation for this year miss on the net profit. On the front book, unfortunately, also it's negative. The competition is stronger than we anticipated. We invest less this year than we planned. The guideline I gave to the market after Q1 and at the beginning of the year was about PLN 2.5 billion. Today, this guideline is lower. It's closer probably to PLN 2 billion, plus/minus a few hundred millions. And the reason is the competition is stronger. We have lost already quite a few bids, and we decided to keep the investment discipline. We are keeping the expected IRRs with some small margin for lowering them. And we believe at this point, this is the right thing to do. On the other hand, the business is strong in terms of liquidity, access to funding. The business is profitable. We have earned over PLN 750 million for 9 months. So we have good ground to continue in the right conditions. We are very much concentrating on finding what we can improve in the business in terms of operations in that more competitive environment. We are looking at costs more intensely than we used to, and we will continue to do that. We are going forward with digital transformation, and we have achieved a significant milestone in July this year by releasing MVP for Poland, which proved that the product we were working on, this new IT system that our operations will use across all the 4 major countries will be a very significant improvement in our ability to collect in terms of time, most likely in terms of success rate and in terms of costs. We're here for the long term, as you know. So we're not worried too much that the competition is stronger today. Of course, we don't want to be complacent, and we will find ways to be more productive. But we know that in that business, there are better and worse times to buy. At this point, we are making a bet that it's better to keep investment discipline rather than just lower investment criteria and continue to buy as we planned. Now let's look at some detail to go through the key numbers and the market by market. So as you see here after 9 months, we deployed PLN 1.2 billion. So at least PLN 800 million should come in Q4 to realize this guideline of PLN 2 billion. That's possible. It's not certain, of course, but Q4 will be, or is usually a period of big supply. And overall, the supply is sufficient, is comparable to what we expected and what we saw last year. Recoveries are more or less flat year-on-year, this 2% change as you see here. And as I told you, it's roughly 4% miss on decreasing our unsecured target that we have in our operations. It's good that the cash EBITDA is strong and record high. PLN 750 million net profit means, unfortunately, 14% decrease year-on-year. And as a result, also our ROE went down to 17%. If you are now wondering what does it mean for our thinking about the distribution of profits to our shareholders, we don't want to haste with a decision. We don't know how much we will deploy this year. We don't know yet how much we'll deploy next year. We are running that business for the maximization of long-term value. But of course, if the situation is clear that we need less capital for deployment, then it opens a possibility to increase the dividend or maybe do a buyback. At this point, we have a right from shareholders to conduct a buyback program until the end of this year. We have no plans to use it as of now. But certainly, there is a price -- share price at which we'll say it's very obvious we should intervene, but there is no guarantee we'll use it. When we discuss with our Supervisory Board, there is a preference among the Board and Supervisory Board to use dividend, possibly an extra dividend compared to the dividend policy that we have as a more democratic means to distribute profits, but all 2 options, additional dividend and buyback are on the table if the conditions are right. We're not in a situation once again that we would like to make this decision yet. Also, if you look at our indebtedness, it's relatively high at 2.7. So it's not yet a moment when because of lower investments, our indebtedness has already gone up and go down. This will happen if we don't realize investments in the following quarters. As of now, I can sustain our commitment to the dividend policy, which holds for a number of years. Maybe another comment about expansion. Investors are asking us, okay, so in that situation, you're not deploying as much as you wish. What about U.K.? What about U.S. entry? The answer in our stance is the road to U.S. or U.K. market leads through success on the markets that we currently operate in. So as I will tell you, we have some challenges still in the countries where we are, in Romania recently also some in Spain. We want to concentrate on solving them first before we go to the market. So that situation means the full attention of the management will be on the countries at hand and will be delaying the moment when we enter a new country. I'll now go to more market-by-market commentary. So if you look at Poland, the investments level was somewhat disappointing. We hope there will be much more in Q4. But the fact is the pricing on the Polish market competition is quite intense. The pricing is quite high, and we are not, at this point, willing to lower significantly our expectations. If you look at the current business, the back book overall performed very well. And this PLN 366 million for Q3 was very close to our ambitious operating target. However, within this performance, there are groups of portfolios which underperformed on which we were not able to recognize as planned positive revaluation. There were also portfolios which overperformed, but we did not yet were in a position to say there will be any positive revaluation of that. So the total outlook is -- our assessment is that the business missed the target of revenues. We have not recognized as much positive revaluation in Poland as we plan. And you see here the PLN 53 million is below our expectations. In Romania, the situation is extraordinary. On the front book front, the competition is record high. We continue to buy. We probably are the market leader, but we lose some of the prominent deals we hope to buy because the price is unacceptably high for us. On the recovery side of the business, we have sort of a crisis situation. This crisis situation comes from depreciation of Romanian lei, which means a hit to the revenue side for PLN 73 million in 9 months or PLN 15 million for Q3 alone, but also there's other factors. There is a group of portfolios for which we raised expectations for recoveries last year in the budgeting process, and it did not materialize. So we were too ambitious in Romania in lending. Those portfolios, just for you to understand, are performing as well or better than the initial investment plan when we bought them. But in the history of the last few years, we raised the expectations and we raised them again in the budgeting process for 2026. And this time, it turned out that it was too much. So here, there is also an element of misjudgment by a few percent that we made. The good news is it's a situation that pertains mostly to 2026. But another element is that we see some weakness among consumers in Romania. This is something visible in amicable and legal and it is a signal that the Romanian economy is somewhat suffering. The GDP may be negative for Romania this year. The higher cost of living, in effect also because of the currency depreciation also didn't help the country did not have a functioning government for a number of months in 2026. So for that reason also, we are more cautious in Romania in buying portfolios less inclined to accept higher prices. But Romania will surely continue to be one of our best markets, we believe, and where we feel we have a very strong operational competence, and we should continue to buy at the right conditions and the right prices. Italy, the situation on front book is fully stable. We are realizing our goals, although we're not exceeding them. So you see here the value of positive revaluation over the last 4 quarters is moderate. It's relatively low. We wish we were able to beat these assumptions and recognize more, but this is the situation, which means we're good, we're competitive. We're as profitable as expected. And we had a very good start of the year. But in Q2 and Q3, we did not add much portfolios as you see here because of our competition. We hope we will reverse this trend in Q4. We have no signal for any weakness for consumer in Italy at this point. And Spain, a market which has been problematic for us, as you may remember, for 2 years already. And there is a situation in Spain is not certain. From one point of view, if you compare our operations today, the success rate in courts, it's significant improvement versus the beginning of the year or last year performance. On the other hand, we noticed in Q3, again, some slowness in court responsiveness in their ability to process our cases. We have a monitoring of information how much our cash is withheld by courts. This value is growing very rapidly, and we don't have a full understanding why the courts are so slow to release this money nor why they are quite slow in processing some of our cases. Again, this situation improved much in Q2. Now in September and also what we are observing in October, the situation worsens again. We don't have a full understanding of why courts are behaving like that and why this volatility exists over the past 3 months. So that increases some risks -- some risk for Spain as well, unfortunately. Based on much better performance in Spain in Q2, we already made some purchases that are going well. So far, as you see here, now the situation is open again, and we will be watching the recovery trends to decide if we are ready to deploy again. Other markets, which is now mainly France, the situation here is unchanged. We mostly gather benchmark through the small purchases that we've made. The performance here is relatively weak, continues to be weak on the legal front after 1.5 years of very good performance on. So here, the name of the game is not really to maximize profit, but really maximize our knowledge about the process and the benchmark for a time when we fully control operations and we are ready to deploy much more money. In the short term, there is a risk here that because of this legal collection being below our expectations, we may need to revisit the future forecast. And if you ask me if there is a risk of a write-down somewhere of our assets, I would say, in France, this risk exists for Q4. It's not very substantial, but it exists. Of course, all depends on the actual performance of recoveries in Q4. The lending business had a stable, solid quarter, earning PLN 26 million. As you may remember, we have 2 business lines for consumer lending in Poland, and we just started activities on open market in Romania, and that's early days, but it's quite promising. So this is where we are in terms of performance. We continue the reorganization to become a fund-like company at the top. And the process is going okay, okay. I mean we go through the milestone that we planned, but it takes more time. At this point, our outlook is that we -- if successful, this process will be completed by end of 2027. And in the meantime, we still have these hurdles to be achieved, which is regulatory improvement, positive confirmation from tax offices and eventually shareholders' approval for this change. But this strategy does not change, and our plan does not change. So overall, with this performance, you see the business, which is well capitalized, still at relatively high indebtedness, which will decrease if we do not achieve our investment target. Let's see what the reality is at the beginning of next year. With good access to funding, we just extended and increased our banking facilities a few days ago. So we are in a situation where we could accelerate if the conditions are right. In the meantime, we concentrate on improving our processes, looking through cost structures from organization to trying to be more lean and concentrating on delivering technological transformation that should be visible for some time from 2029. This is my summary, and now I'll be very happy to take your questions. I also recommend for those of you who want more detail to read through the transcript of our meeting with Polish investors that took place today in the morning where Piotr Krupa and I answered a few dozens of detailed questions that investors ask.

I'm now reading the questions. The first question is with Spain's volatility and challenges, would it be a fair response from you to increase the threshold of IRR for the portfolio to be purchased? In other words, be more selective in Spain? This is what's happened and we believe it's reasonable. Another question concerns Romania and the author asks whether the currency and other issues created opportunity of investments here going forward. There is a strong pipeline in Romania relatively to the size of the market. But we believe the level of pricing is too high to be reasonable at the time of still relatively high macro risk for that country. So we believe we better wait and pass on these opportunities and then see maybe at the year-end or beginning of the next year what the situation is. So we are cautious also because we see signs of some problems with recoveries. We have this benefit of having the largest portfolio in Romania among our competitors. So we probably see more than some of the incumbents, some of the contenders. You're asking also about 2027 and the outlook. So I hope that after 2026 being a problematic year, there will be improvement starting from 2027 and later. That would be our intention. We are now in preparation for the budget, which, of course, concentrates on 2027, but also we look at the longer horizon. And this budget will be completed within the next couple of weeks. And it is our intention to also communicate to the market our outlook after that, so you are better informed about how we see the business and its prospects entering in 2027. Okay. You are also asking what is the leading cause of lower-than-expected recoveries in Poland on the back book. So overall, recoveries on the Polish back book are right on spot, on plan. What I mentioned is that there are some groups of portfolios that are underperforming and there are others that are overperforming. On the underperforming, I would say it's a materialization of the business risk. So there was some optimistic assumptions taken in the budget, again, not at the point of purchase, but later on which we have a routine of doing where we set more ambitious goal for the operations. So certain specific actions were planned to be taken. And these actions did not bear such fruit as we expected. So I would say it may be that on some portfolios because I mentioned that also in Romania, on our old markets where we, year after year, raised our expectations, found some initiatives, we hit certain ceiling, certain barrier where it's not as easy to improve as it used to be for the past 7 years. So it's also a good lesson for us. So when I talk to those Romanian and Polish managers, they said, listen, we really believe that in October 2025, that these actions will bring about these results because we had basis for that in historical years. It did not happen. We interpret that as certain assumptions were just too optimistic. Overall, again, it's not a meaningful problem because the recoveries are as they were. But locally for 2026, it meant lower possible revaluation and lower revenues on the Polish paper. But overall, on the Polish portfolios, we don't see any material problem. You're asking also about the planned deployments for 2027. Let me get back on that when we finalize the budget and then we will confirm our outlook. And there's also a question whether what's happening in our investment discipline is temporary or this means some long-term effect. The fair answer is we don't know for sure because both scenarios could be possible, meaning one scenario, the market is too optimistic. We are reasonable and they are less reasonable, and they are overpaying. And in a year or 2 years, it will turn out that we can buy portfolios at lower prices at better IRRs, and we will win. But there is also a possibility that the market, meaning our competitors know something better that the recoveries will be bigger better than we thought that maybe in some areas, the operational process is superior to ours. We don't know that. So what we do is, right now, we keep the investment discipline, but we also, as I said, do not want to be complacent. We look for what we can improve. We try to think, okay, what else can be done to improve our success rate and maybe be able to recover more faster, better. One of the answers is with the new technology that we are building, we will be able -- we should be able. But this is not yet a reality. This reality will come from 2028 and 2029. And of course, we will review the stance on the investment policy on our operational improvement as we go. Now what happens this year is not something new. It happens in certain cycles every several years. So we're not very disturbed by that. We are intrigued. We're focused, but it's not something extraordinary. Those of you who have invested with us for more than several years, probably remember the times where in 2017, '18, the market has also been very difficult. In the years 2021, '22, '23, it was much easier to buy at a much higher return. So it's another lesson from that in this regard, better and worse times to buy. But of course, we should never neglect that somebody is better in operations, and we're not taking this as a given, that there's nothing to improve -- to internally improve. Another question, what's your take on the risk of losing market leadership due to shrinking market share? And how long do you intend to stick to this? Well, market share is not a target for us. For us, the target is to grow the value of the business. So it's irrelevant to some degree what the market share is. Second, the market share will be volatile. This is the nature of the business. One year, we'll have 50%, another year we'll have 20% or 15%. So the point really is to understand where can we improve in pricing and most importantly, in operations, in effect of operations to deliver on the digital transformation to be able to process cases faster, better and cheaper. That's the name of the game. And if we improve here a little bit sooner or later, we'll emerge as a company that is taking more market share. And on the top of that, you have the cyclicality. Sometimes markets in our industry are too optimistic, sometimes too pessimistic, probably similar like it is on the stock market. And here, investment discipline is very important, not to be moved too much by what the crowd is doing, but keeping what you understand is economically justified. You're asking whether the changes of the market structure are cyclical. They are cyclical. They are also, to some degree, structural, meaning we are all moving on certain path to higher productivity. And therefore, prices for portfolios today are much more expensive, higher than they were 5 or 10 years ago. But cyclicality is also a certain important element of that industry. You're asking whether these underperforming portfolios for Poland is a cyclical thing or something one-off. The way that we plan it, it will be one-off in a sense that we will make full correction of that, and that happened already to a degree for Q3. If something is that we don't see, it will happen in Q4. And in the budget, which will entail the long-term plan, we'll have our operating targets revised. So by year-end, we will include all of that knowledge, and it should be one-off. So it would have to be something that doesn't exist today that would surprise us in 2027. But this situation may -- will affect to some degree our recoveries in 2027, meaning, for example, that on this particular group of portfolio that are underperforming, we will see some lower cash also in 2027, 2028. And this we will see already in the budgeting process. But looking at this problem in Poland and Romania, I would say majority of the problem is pertaining to 2026, less -- much less to the future prospective years. You're asking that maybe share buyback is better investment than portfolios. Of course, at a certain price, it becomes obvious that it's better to buy your own stock than to buy low-yielding portfolio. We're not buying low yielding portfolios at this point. So we don't have this dilemma. But the answer is perhaps at some moment, yes, it will be the case. But here, once again, our preference is, first, stick to the dividend policy. Second, consider an extra dividend, maybe next year if there is a place. But more importantly, look at the business, have a good judgment about future deployments of capital, about our possible plans of expansion in 2, 3 years to a bigger market. So it's not a situation where we say this is end of story, we don't grow. We say there is more difficult situation today, plus we overestimated the recoveries by 4%. Yes, that's a problem. That's a significant problem for net profit, but it's not a situation where we would say we cannot grow. Now this business has enough market space to continue to grow if we improve even more. The question is what will be the situation in half a year, 1.5 years. So here, please understand we don't want to make decisions too soon because we could make a wrong decision here about deployment of capital. What do I think about the KRUK's valuation on stock exchange? It's very low. Obviously, if you look at P/E, even if you assume certain decrease of profitability for this year is the lowest valuation on the P/E we've ever had. And there is another list of questions. You're asking why our investments in Italian portfolios declining versus -- I understand versus last year. If that's the case, well, because we lost some of the portfolio, the supply is similar to what it was last year. For the full comparison, let's wait for another quarter to see the full year. But as you see in Q1, we were quite successful in Q2 and Q3 we must have lost some opportunities because investments were relatively low. You're asking about Spain. You say the recoveries increased 6% year-on-year, but it fell, as I said, in Q3 below our -- short of our expectations. What's driving the gap? The behavior of Spanish courts is driving the gap, and this behavior is volatile. So we had a number of months when it's improved. We also made some improvements to our processes, and it looks really well until July, August. And then we saw some weakness in September and now we're seeing in October. And it's difficult for us, at least today to have a full understanding of the situation. We'll see more whether it's temporary or something more lasting in the following months. You asked also about the returns we're expecting. So you may see our historical -- our historical assumptions about the IRRs on the presentation. It was usually 21%, 22% of gross IRR, 2.0, 2.3 money multiple. We are after 9 months of this year, close to what we had historically, somewhere below -- somewhat below, but maybe 1% below, not much below. Why? Because we keep this investment discipline. So we prefer to deploy less but at more stable at higher IRR currently. That's our tactic. I'm looking if there are any other questions. Okay. You're asking will you be able in the future to deploy capital at better -- at high returns? What will change versus today? Well, first of all, we believe with the improvement in our technology, with this implementation of our digital transformation, we will be a more productive company. So one thing that will improve is our ability to process this case will be faster, cheaper and will be better at adjusting the process for the right group of customers. Second, it may be that we are at a cyclically, at the moment where cycle is highly competitive and it will be less competition. But maybe we don't know. We don't know that for sure, of course. What we know is there are cycle in macro economy. And when these cycles occur, then there are times where people are scared, less money to deploy. And usually, after those crisis times, the purchases made then are more profitable than in prior times. So the cyclicality and in our history, we've had 2 such situations in the years 2010, '11 and then after COVID. And we see that those vintages from those years are significantly more profitable than average. So there will be higher times also to deploy more. In the long term, the important thing is to continue to improve on your productivity in operations. And second, be patient disciplined investor to wait for those pockets of times where there is somewhat less competition and be, hold to your money when this competition is intensifying. You're asking what's our durable competitive advantage. I would say one is operations and the fact that we should be able to process better, faster and more productively the cases. And it's a game, it's a race. It may have been true for some markets for some time. And then our competitors catch up, maybe somebody is better than us, then we try to catch up to them and get ahead of them. So as in every business, it's about productivity. But second, is this investment philosophy, long-term horizon, not being too hasty and too greedy to try to get the rewards too fast. And I think if you look at our 20 -- over 20 years of history in debt purchasing, that also allowed us to be more profitable than on average, the industry has been. What would be the early signs of cycle turning from a competitive perspective? Good question. One thing could be that some of our competitors will stop buying because they would have seen that the recoveries are not exactly where they were. That historically was something we observed. And as a result, we'll see less bidders at the table or less competitive. So that's one possibility. Also, please bear in mind, this competitive intensification comes at a time where macro is relatively stable. I mentioned Romania, but it's just one exception. Overall, the macro is strong. There will be some slowdown in the economy likely sometime in the future, nobody knows when. That will be the real test of who has money, who has ability to buy, who has courage to buy and who can then earn more money. So in our philosophy, we want to be prepared for this crisis time as well because we think there will be more money to be gained at such moment. As I see no further question. Okay. Sorry, there's another one. The question is, can the rising government bond yields impact us directly or indirectly? It can impact us indirectly in a sense that it can influence the cost of debt for us on the bond market. So investors have a choice if they can buy treasury at a much higher return, why would they buy at this rate from KRUK? They would expect the KRUK to raise the coupon. So that can touch us indirectly. But as you know, we are diversified in our access to the funding. We depend mostly on bank funding, which by nature is less expensive than the bond funding. And in the bond funding, we are on 3 separate bond markets, Polish wholesale market, Polish retail market and Nordic bond market. And we pick those markets which are cheapest and more beneficial for us. I think I answered all of the questions I've seen. Thank you very much for your questions. Thank you very much for your time and interest. And have a good day. Goodbye.