KRUK in Q3: strong recoveries, sound liquidity position and record-high cash EBITDA

In Q1–Q3 2020, KRUK generated record-high cash EBITDA, of PLN 915m, up 8% year on year. In Q3 alone, cash EBITDA and net profit reached PLN 324m and PLN 54m, respectively. KRUK more than recouped its YTD loss, delivering net profit of PLN 34m.

In the first three quarters of 2020, recoveries amounted to PLN 1,346m, up 3% year on year, while in Q3 alone they reached PLN 452m, up 4% year on year. The Group achieved 92% of its overall operational target set in the 2020 budget for the period January 1st–September 30th. In Q3, recoveries came to 90% of the operational target, having improved by 3pp relative to Q2. In particular, the secured and corporate portfolios had a negative effect on actual performance against the Q3 target.

The strong recoveries and the PLN 14m write-off, mainly on the corporate and secured portfolios (significantly lower compared with the previous quarters), translated into a PLN 78m quarter-on-quarter increase in revenue (up 30%) in the third quarter and a PLN 9m increase in revenue year on year (up 3%).

‘Cash EBITDA of PLN 915m is the best result ever posted by KRUK, generated over a challenging period and – what is also noteworthy – after the recognition of a non-cash impairment loss of PLN -25m on our Spanish subsidiary. Once the pandemic broke out, we realised that 2020 would be much worse than the year before in terms of our bottom-line performance. However, after the first three quarters KRUK made up for its first half of the year loss, delivering net profit of PLN 34m. It should be noted that in the third quarter alone the net profit figure was arrived at after an additional charge on account of deferred tax of PLN 60m. On the other hand, strong recoveries were significant performance drivers, improving total revenue by 30% quarter on quarter. We are also consistently working to tighten cost discipline at our organisation. The cost savings we achieved in the third quarter amounted to PLN 31m relative to the budget and PLN 23m relative to the first quarter of 2020. We reduced or temporarily suspended the payment of certain costs of litigation and enforcement. We also brought down the cost of salaries and wages, by PLN 7m relative to the first quarter, mainly on the back of natural employee turnover and scaling down of recruitment, and by cutting our ad spending, marketing costs, business travel and other expenses,’ said Piotr Krupa, President of the Management Board of KRUK S.A. ‘In the third quarter, we achieved 90% of our operational target for recoveries. It is worth noting that in September the target for unsecured retail debt was overshot at the Group. Let me remind you this is the main type of debt we invest in, accounting for 81% of the carrying amount of all our debt portfolios. We are – of course – keeping a close eye on what is going on in Poland, in Europe and globally. The Covid-19 pandemic and its impacts still entail a number of risks and uncertainties we may not yet be able to predict,’ Piotr Krupa adds. ‘What is particularly important to me is that our performance was delivered in safe working conditions. Today, our operations are being continued on all the markets where we hold assets. Our operating systems, and especially our employees, are prepared to work remotely, also if the pandemic situation takes a turn for the worse. We are getting ready for various scenarios of how the pandemic may develop, but in the base case we do not assume for the time being a full lockdown in any of the countries where we operate,’ said Piotr Krupa.

In Q1–Q3 2020, the KRUK Group purchased debt portfolios, comprising mainly retail debt, with a total nominal value of over PLN 825m, paying for them PLN 113m, of which PLN 33m was spent in Q3 alone, chiefly in Poland. The KRUK Group holds equity of PLN 2.1bn, which represents 46% of its financing sources. As at September 30th 2020, its cash and cash equivalents amounted to PLN 266m. The Group increased its cash position by PLN 15m relative to June 30th 2020 and repaid some of its credit facilities, which increased the amount available under the facilities to PLN 1,181m. KRUK is also among the major corporate bond issuers in Poland. In Q3 2020, the Polish Financial Supervision Authority approved its prospectus for the 7th Bond Programme with a total nominal value of up to PLN 700m for all the bond series. As part of the Programme, in September 2020 KRUK issued five-year retail bonds with a total nominal value of PLN 25m, bearing a fixed coupon of 4.8%. Given strong interest in the offer, the bonds were allotted to investors with a proportional reduction rate of 61.4%.

‘During the first three quarters of 2020, the KRUK Group invested PLN 113m in debt portfolios. This is obviously a moderate amount compared with investments we had made in previous years and relative to our financial capacity. This was primarily a combined effect of two factors. The first one had to do with creditors’ decisions to hold off or limit debt auctions (which only started to change at the end of the third quarter) and KRUK’s own deliberate policy of scaling down investments in the period of significant uncertainty triggered by the pandemic and its consequences. The second factor was related to the strong market competition in Poland and the prevailing prices, which in our opinion do not reflect the risks associated with Covid-19 and its effects. At the moment, considering how strong KRUK’s balance sheet is, we neither need or want to take on such risks, without any influence on the prices of assets. Looking at the escalation of the pandemic, I believe this to be a good decision,’ said Piotr Krupa. ‘However, we do see a recovery on the debt sale market and we are also active in debt auctions. With the net interest-bearing debt to equity ratio at 0.9x and net interest-bearing debt to cash EBITDA at 1.6x, KRUK’s financial condition is robust and stable. We are well placed to step up our investment activity, especially when the uncertainty surrounding the pandemic subsides and the amount of non-performing loans across banks begins to grow,’ added Piotr Krupa. ‘The Management Board is of the opinion that KRUK’s liquidity position is stable enough to allow it, rather than requesting support from its shareholders, to share a part of its 2019 profit, of PLN 95m, in the form of a share buyback. At this point, I would like to strongly encourage all those shareholders who have not yet tendered their shares in the buyback process to do so. Tenders will be accepted until November 13th,’ concluded Piotr Krupa.

On November 5th 2020, the KRUK Supervisory Board, in line with the CEO’s proposal, passed a resolution to appoint Adam Łodygowski as member of the Company’s Management Board, Chief Data and Technology Officer, with effect from November 6th 2020. Mr Łodygowski will be responsible for pre-purchase valuation of debt and the IT area at the KRUK Group.

‘We are working constantly to go unscathed and in the best possible shape through another pandemic wave. We do not want to slow down the pace and we are determined to carry on with our previously adopted strategy. As technology advancement and improved valuation methods are critical to the Company’s future financial performance, we decided to strengthen our Management Board by inviting Adam Łodygowski, an expert with extensive experience in technologies, information and data analytics, to join in. Adam graduated from the Poznań University of Technology and completed a joint programme of studies organised by the Poznań University of Technology and the University of Hanover. He studied at the Louisiana State University (USA), where he was awarded the title of Doctor of Science. He has gained professional experience in London and Poland, including at Credit Suisse, where he was in charge of a team of quantitative analysts, statisticians and programmers providing analytical solutions, tools and technologies to support key areas of the bank. In 2018, Adam was promoted to lead an over 130-member Quantitative Analysis and Technology Group for Poland, supporting the bank’s key business lines and technological solutions in quantitative analysis and valuation of derivatives. He is also into sports, so he is no stranger to teamwork. It is good to have a stronger team in these areas right now,’ concluded Piotr Krupa.

Additional comments from Piotr Krupa, President of the Management Board of KRUK S.A., to Q3 2020 results: Link

Results presentation: Link