Speaker #1: Peter Krupa, CEO of KRUK, and Michal Zasepa, CFO. Good morning. The same team for years now. Ladies and gentlemen, together with Michal, I would like to present our results for the first 3 quarters and also address the market situation and our strategic direction.
Speaker #1: I think I will start with what is most important. We are not satisfied with the level of profit. After 9 months, we achieved 357 million zlotys in net profit, which is 14% less than the year before.
Speaker #1: That is still a solid result, but. Below our expectations, and we do not intend to downplay that fact. At the same time, I believe that one must look at KRUK and evaluate it not just through the prism of a single quarter or half year, but also through the quality of its assets, its ability to generate cash, and how it uses capital.
Speaker #1: After 9 months, collections from purchase portfolios amounted to nearly 3 billion zlotys, which is 2% more than before. Cash EBITDA exceeded 2 billion, reaching a record level.
Speaker #1: So why is the net profit lower? I wanted to point out 3 main factors. First, regarding collections from retail portfolios, which are our core business, we recovered about 4% less than we assumed in our operational plans.
Speaker #1: A 4% deviation on a scale of 3 billion zlotys. In total for these collections, every 1% is 30 million, and we will comment on these collections in a moment, but that is the general picture.
Speaker #1: Secondly, the impact of collections on revenue and the valuation of portfolios. Obviously, lower collections limited additional deviations from accounting assumptions and influenced a lower level of positive portfolio updates.
Speaker #1: That is another several dozen million zlotys less in revenue than a year ago. And thirdly, there is another coincidence affecting the company, which is exchange rates.
Speaker #1: The weakening of the Romanian leu against the euro negatively impacted our results by about 70 million zlotys. And these are the 3 factors that, to a large extent, practically explain our lower result.
Speaker #1: We are observing weaker-than-expected collections primarily in Romania and Spain. We will comment on this, in Poland and Italy, the situation remains stable. We are also analyzing the level of competition, macroeconomic factors, and our operational efficiency.
Speaker #1: We are truly investigating the root cause of these collections, and I want to emphasize that high cash EBITDA does not exempt us from the responsibility for shareholder profitability, both cash flows and net profit matter.
Speaker #1: That is obvious, but it is worth noting our financial situation here. The company remains, KRUK remains in good financial condition. The group's assets have exceeded 12 billion zlotys.
Speaker #1: The net debt-to-cash EBITDA ratio is 2.7. We have good access to financing. In October, we increased our revolving credit facilities to over 1 billion euros.
Speaker #1: We have also extended its availability period until 2031. This provides us with security and great financial flexibility. But I also want to emphasize one principle.
Speaker #1: Capital availability does not mean, so to speak, an obligation to invest immediately. A strong balance sheet allows us to patiently select investments with the right risk-return profile.
Speaker #1: And this is of particular importance in the current market conditions, which I would like to comment on. First of all, in the first 9 months, we invested 1.2 billion Polish zlotys in new portfolios.
Speaker #1: That is, of course, less than a year earlier and also below our assumptions. Competition, especially in Poland and Romania, is very strong. Prices. Of some portfolio offerings do not meet our profitability expectations.
Speaker #1: So we have a classic choice: either increase investments while accepting lower rates of return, or maintain investment discipline. And at this stage, at this point in the cycle, we choose investment discipline.
Speaker #1: Very consciously, the portfolios we buy today influence our results for many years to come. Obviously, the purchase price is fundamental to future return on capital, and we do not want to improve short-term investment statistics at the expense of long-term value.
Speaker #1: This does not mean giving up on growth and investment. We expect significant tender activity in the fourth quarter. Overall, there are a great many portfolios.
Speaker #1: You see, there are competitors reporting very high levels of investment. However, we do not, at this stage of our market and situation understanding, accept that.
Speaker #1: We do not accept those returns and that potential return on capital versus the risk involved in such a purchase or investment. But we intend to participate actively in the market and we have the appropriate funding to do so.
Speaker #1: However, we will not significantly lower our expected rates of return today just to achieve higher investment levels. We are waiting. We prefer to invest less, but with the appropriate expected profitability, rather than increase scale at the expense of future results.
Speaker #1: What else? The efficiency of the portfolios we already own will become increasingly important to us. It must be remembered that we are in possession of a massive volume of portfolios.
Speaker #1: For many years, KRUK's development was based on growing investment scale, geographic expansion, and an extensive. Portfolio of assets. And this model, which we have used for years, has allowed us to build the company's current position.
Speaker #1: Today, however, we have a very significant value in our debt portfolio, which will continue to generate cash for many years to come. Therefore, we are devoting more and more attention not only to buying new assets but also to the efficiency of those we already own.
Speaker #1: We want to maximize the value of our current portfolio. We also see additional. Opportunities there. This means that. It means more effective recovery. We will be working on this.
Speaker #1: Better results through better use of data, higher productivity, and also lower unit costs. We have limited influence on the actual prices of portfolios offered by the market and the competitive situation.
Speaker #1: We have been in this market for 30 years. We have seen various phases of lower, higher, and medium competition. Let me remind you that KRUK performed very well in 2021 to 2025, when the competition was lower.
Speaker #1: At that time, we had both the resources and the capacity to compete, and we significantly boosted the company's profile. We are now seeing a natural rebound.
Speaker #1: Our competitors have reorganized internally, returned to the table, and are purchasing receivables. We are being more cautious in this process. An important tool for achieving this goal: namely, if we are buying a bit less, then let's focus more, pay more attention to the assets we already have, to those 90 billion Polish zlotys in our retail portfolio, which is the face value, the nominal value on our balance sheet.
Speaker #1: And an important element here is technological transformation. We are not stopping here. We told our investors and shareholders that KRUK is in the process of technological transformation.
Speaker #1: We are well on our way. In Poland, we have already launched the first version of our new operating system. The first portfolios are already being managed by a completely new operating system.
Speaker #1: The initial business results are in line with expectations for the basic functionalities that have been implemented. We are constantly expanding them. We have further implementations ahead of us, as well as rolling out these first basic models in other countries.
Speaker #1: That is why I am speaking about Poland. We are developing data analytics and automation. That is what everyone is talking about now. We are absolutely on board with this trend.
Speaker #1: We have the ability to use artificial intelligence, and we do, but one must remember that I am an extremely pragmatic entrepreneur. Success will not be defined solely by the implementation of technology.
Speaker #1: Success will be its measurable impact on productivity and costs. In parallel, we are simplifying our processes, structure, and management methods. We want KRUK to be more efficient and capable.
Speaker #1: Of generating more value from our existing assets and resources. This is a multi-year process. We will evaluate the effects based on real business results, not the number of systems implemented.
Speaker #1: That is obvious. This brings us to an issue that I consider one of the most important for our shareholders: capital allocation. From the beginning, I built KRUK looking at the company not only from the manager's perspective but also as an owner, as a founder, CEO, and significant shareholder, I have a very personal connection to the long-term value of this company.
Speaker #1: My interests as a shareholder are aligned in this regard with the interests of the other KRUK owners. I would say, very much so. For many years, we reinvested a significant portion of our generated capital into development, and we still believe that attractive investments in debt portfolios should be our first choice, and that will remain the case.
Speaker #1: But I would also like to emphasize a principle I consider fundamental. That KRUK's scale cannot be an end in itself. The goal is value for the company's owners, for the shareholders.
Speaker #1: We do not build value simply by increasing assets, the number of cases, or debt levels. We build it by achieving appropriate returns on invested capital.
Speaker #1: That is why we always allocate every zloty where we see the best long-term risk-adjusted return. If the market offers attractive portfolios, we will invest in them.
Speaker #1: However, if investment opportunities are limited or temporarily unavailable, we will also consider other ways of utilizing capital, including potentially higher distributions to shareholders. I don't want to say this is an announcement of a specific dividend or a change in payout policy.
Speaker #1: It is a bit too early for that. It is a logical consequence of the right approach to capital. As a shareholder, I look at these decisions just as I would expect from the management of a company I invest in myself.
Speaker #1: Capital is meant to create value, not just serve the ambition of scale alone. In this context, I would also like to refer to our strategy for 2025 to 2029, when.
Speaker #1: We presented it almost two years ago, in January 2025. Well, we were, I don't want to use that word, but almost a market dominator.
Speaker #1: We had just finished four years of very large investments where our market share. Grew significantly. We saw that the market around us had its own internal competition problems, and we assumed an ambitious growth in the scale of investment activity back then.
Speaker #1: Remember, before COVID, we were entering a world of results around 250 million. Then, very quickly, within three years, we entered a world of 800, 900 million, or a billion.
Speaker #1: Now we are in a world where, after three quarters, we say, we are dissatisfied with 750 million. Yes. And at that time, when creating that strategy, we also assumed ambitious growth in the scale of investment activity.
Speaker #1: We also identified risks that could affect the realization of this plan. Today, we already see that some of them are starting to materialize. The level of competition is higher than we thought, and that is where this risk is specifically materializing.
Speaker #1: The macroeconomic situation, well, we are in many, in four large markets. It varies, and as you can see, every now and then this risk materializes somewhere.
Speaker #1: Currently, we have a recessionary situation in Romania, and we are monitoring it closely. We have, well, we will talk about this in a moment, that one of the reasons for the poorer result is lower repayments in Romania than we assumed.
Speaker #1: That does not mean these portfolios are not earning well and generating good margins, but it means not as high as we had projected in our estimates.
Speaker #1: And. Our primary goal remains long-term growth. Long-term growth, I would say, mainly in KRUK's value for shareholders. I understand that perfectly. The principles of responsible investing, risk management, and financial discipline are not changing.
Speaker #1: Greater importance, however, may be placed on the efficiency of the current portfolio, organizational productivity, and the flexibility of cost allocation. So, dear shareholders, ladies and gentlemen, I would like to conclude with five thoughts.
Speaker #1: First, we are not satisfied with this year's earnings for the three quarters, and we are not trying to hide that fact. Second, we generated 2 billion zlotys in cash EBITDA.
Speaker #1: We have a strong balance sheet in good access to financing, but we must also work on our profitability. Third, and perhaps most importantly, we will not buy growth at any cost, nor will we significantly lower our expected rates of return.
Speaker #1: At this stage, we believe that is unnecessary. We have plenty of matters, plenty to do, and a steady stream of cash flowing in. Investing at a low return and accepting excessive risk in the long term is unnecessary at this stage.
Speaker #1: Fourth, we want to increase the value of our existing portfolio through better recoveries, technology, productivity, and cost discipline. We have already seen periods like this, and what happens to the company if we don't invest?
Speaker #1: We had such a period in Italy, for example. You may recall that today Italy is earning decent returns. We have a large business there, but we faced similar troubles regarding Italy.
Speaker #1: For a year, we didn't buy anything, we focused on improving efficiency. We returned to the table, started buying again, and the portfolios performed better.
Speaker #1: And fifth, we will allocate every zloty of capital with the best long-term risk-adjusted return and shareholder value in mind. I have been building KRUK for many years, and together with our shareholders, I am primarily interested in its long-term success and the current assessment is more demanding.
Speaker #1: We have the assets, the competencies, and the financial capabilities to meet these challenges. It is not about KRUK being the biggest at any cost.
Speaker #1: It is about KRUK becoming an ever better business that responsibly and effectively uses the entrusted capital. Now, together with Michal, we will move on to a detailed discussion of the results.
Speaker #1: I apologize for this somewhat long introduction, but there is a lot of uncertainty around us. You likely have many questions. I would like to remind you that there is a Q&A session.
Speaker #1: We will answer those questions. So, Michal, I'm handing the baton to you, and we are moving on to the details. A layer deeper. Thank you, Peter, once again.
Speaker #1: Good morning, good morning to you all. Ladies and gentlemen, in a moment, Peter and I will go through the individual markets. But looking at the whole picture, I want to say where we stand today.
Speaker #1: Those 4% lower payments compared to our ambitious operational plan have, as Peter mentioned, a major impact on the results, because there are lower revenues from payment deltas, but also smaller revaluations.
Speaker #1: Looking at this situation after the third quarter, we want to tell you that there is a risk that this year's net profit results will be lower than last year's results.
Speaker #1: We see such a risk. These problems that we see in payments will, to some extent, not entirely, but to some extent, carry over into future years, but we are currently in the business planning process.
Speaker #1: We are looking at the overall situation for next year and the years following. And our goal is to develop a plan where we will try to compensate for what we missed, in order to show growth in subsequent periods.
Speaker #1: When it comes to investments, as you all know, many scenarios are possible, and there is always a certain probability of landing within a specific investment range.
Speaker #1: Just a few months ago, we thought that an investment level of 2.5 billion or more was within our reach. Today, we believe it is more likely to be around 2 billion, maybe a little more, or perhaps just a little less.
Speaker #1: We don't know for sure either. The fourth quarter is usually a quarter of high supply, so time will tell. The coming weeks will show how much we will be able to win.
Speaker #1: Regarding the distribution of funds to capital, please understand our current thinking as follows. We have a dividend policy, it remains in effect, so dear shareholders, you can expect it to be continued.
Speaker #1: We have uncertainty regarding what the actual value of investments will be this year and the next. We don't really know that, because it is the result of a competitive game.
Speaker #1: So, we will likely feel more confident about knowing how much of these funds we need only after this year ends and we have certain expectations for 2027.
Speaker #1: Please also remember that the company is very strong in terms of liquidity today, but has a significant debt level of 2.7. In our strategy and liquidity policy, there isn't much room to increase this cash debt level.
Speaker #1: So, we must first see that we are investing less. Indeed, the debt level must drop from this current level of 2.7 for us to comfortably say that there is room to discuss with shareholders some larger, extraordinary payout beyond the dividend policy, such as a dividend.
Speaker #1: As some of you probably know, we also have a tool at our disposal in the form of a share buyback. Shareholders have placed this tool in our hands.
Speaker #1: It's validity expires at the end of the year. So, we have that possibility, although as of today, we have made no decision to use this tool.
Speaker #1: Ladies and gentlemen, I am moving on to the results for individual markets, so I will skip these few slides. Perhaps I will pause for a moment on this slide regarding transformation.
Speaker #1: If you are asking yourselves why KRUK will grow in the future, one answer is that we will have a much better tool for operational processes in the form of a new IT system.
Speaker #1: Something very concrete has already happened. This system, in a minimal version, the so-called MVP, launched in Poland in July, and what we have seen confirms our belief that this is a strategically very important project that can bring us a lot of value and, in a sense, revolutionize the way we conduct our operational processes.
Speaker #1: The results we are seeing, of course, on a small, closed scale of a few thousand cases currently being handled, are very promising and it is a dramatically more efficient working environment than the one we are currently working in.
Speaker #1: Ladies and gentlemen, this is a summary of the results in individual markets. 1.2 billion. As I said, we hope that 2 billion will be reached by the end of the year, but this is, of course, just an expectation.
Speaker #1: Repayments, that 4%, that's a small amount of several tens of millions of zlotys. We counted on more in this plan, and I will tell you that there are several factors why this did not happen.
Speaker #1: The good news is that several of these factors relate more to the situation this year than in the future, though not entirely. Yes, some of these trends will continue to some extent, and we must take this into account in the budget process.
Speaker #1: And then we have this event, hopefully a one-off, although there is no certainty here either. We lost over 70 million, 72 million, because the Romanian currency weakened against the euro.
Speaker #1: The business is making money, as you can see here, in terms of EBITDA, in every one of these markets. Year on year comparison in Poland.
Speaker #1: Significantly worse in Romania, mainly due to this revaluation, but also some other problems we encountered in 2026, which I will talk about. We are satisfied with the results in Italy.
Speaker #1: They are generally in line with our plan, and we see improvement in Spain, however, it is unsatisfactory. We were counting on these results improving.
Speaker #1: Much more significantly. At the cash EBITDA level, the situation is good, it is stable, although of course it was supposed to be even better, because we are missing about 120 million in cash compared to the original plan.
Speaker #1: Ladies and gentlemen, Poland is a highly competitive market, this is another quarter. Our subjective perspective is that there are the most competitors at the table here, and indeed this level of investment is disappointing for us.
Speaker #1: The ball is in play. We will see what happens in the fourth quarter and in the subsequent ones regarding repayment levels. This level of repayment is very close to our operational goal, so if you look at the whole, you could say it's very good, but unfortunately, looking at the structure, we have a group of portfolios performing worse and a group of portfolios performing better.
Speaker #1: For those performing worse, we were unable to recognize a positive update. Those performing better have not yet been subject to such a revision, and consequently, the total revenue we have, as well as the revaluations on the Polish market, are lower than we expected.
Speaker #1: And that is what we expected. And you can see that for yourselves. Taking, I don't know, an average of the last 4 to 6 quarters, this level of revaluation is lower in the third quarter, so Poland also did not meet its revenue plan, even though, in total, it did meet the collection plan.
Speaker #1: As for Romania, well, it is unfortunately the biggest negative surprise of the year. Not only is the market highly competitive, we have truly never seen such high prices for portfolios relative to the nominal value, and this surprises us because we are deeply convinced that we know this market best, as we dominated it for many years.
Speaker #1: However, there are players on the market who clearly accept higher risks than we do. The situation in Romania is difficult. The country is in a certain macroeconomic imbalance, has a high current account deficit, and a high fiscal deficit.
Speaker #1: It did not have a government. Romania did not have a government until recently for quite a few months. The currency has devalued. The ron devalued by more than 5% against the euro this year, and that hit us for the amount of 73 million zlotys here.
Speaker #1: Additionally, it is the only market where we actually see certain symptoms of deteriorating repayment capacity of debtors, and the fact that some of our clients are stopping payments or are unreachable, both in the amicable process and in the enforcement process.
Speaker #1: However, in the case of Romania, we are also dealing with a situation where we did not meet our targets, which were probably too ambitious.
Speaker #1: And this is a situation where there are several portfolios for which we raised our collection expectations over the last few years because they were performing very well.
Speaker #1: We are not fully. We are not fully meeting these plans, and this has no connection to the macro situation. It is related to our incorrect assessment from a year ago at the budget level, where we raised targets for some portfolio groups in good faith as a consensus between the Romanian team and the analytical team at headquarters, believing that certain things would turn out differently.
Speaker #1: They did not turn out that way. And consequently, we must correct ourselves here. Despite this difficult situation, as this is likely the worst year for Romania in many years.
Speaker #1: Please notice, this profitability is still relatively high. We have no doubt that this business will continue to be a highly profitable operation for us, and we hope that this year, 2026, is quite an exceptional situation.
Speaker #1: As for Italy, here fortunately the situation is very close to what we expected. At the operational plan level, we are close to what we planned, but we are not exceeding it.
Speaker #1: Sometimes we might be missing a percent, maybe two, maybe half, and in another month we exceed it. As you can see, for the last few years we have been at a low level of.
Speaker #1: Updates. It was like that in the positive update, it is like that in this third quarter, so we also have an appetite for more, we would like to find ways to exceed our own expectations.
Speaker #1: For now, it is a success that we are actually very close to those expectations. And competition in this market is also high, as you can see after the first quarter, which was very good, the level of investment is low.
Speaker #1: I hope that this will change in the fourth quarter. In Spain, a market where the assessment is ambiguous, because on one hand, looking at the last 9 months, we have made a very significant improvement in efficiency, which we see in the court process.
Speaker #1: The repayments have accelerated, they are significantly higher, but on the other hand, we were counting on even more, and in the third quarter, this situation worsened, so unfortunately, there is a certain return of uncertainty here.
Speaker #1: The second quarter was relatively good. We saw an unambiguously positive trend. Something happened in the court system in August and September, and we fear that it will also be visible in October, that the progress we expected is not happening.
Speaker #1: So there is some uncertainty regarding the coming months. These results. I think, Mihal, it is worth saying here that the Spanish enforcement system differs from the one known to us in Poland and to most of you, and it cannot be copied directly, because they're the courts simply perform the role of a bailiff.
Speaker #1: And today we are dealing with a situation where the courts have already collected a large amount of cash from debtors, but they are not forwarding it to us.
Speaker #1: Yes. However, our model is based on cash on our account, on our balance sheet, and if, for example, those courts for some reason sent us all of it today, we would not have any issues in Spain at all, we would say it is okay.
Speaker #1: But this is also an element of the judiciary reform, because a major judicial reform is taking place there, and some inefficiency. We in Poland have experience with what a reform in the judiciary can look like and how it can go.
Speaker #1: Yes, and as you can see, we return to purchasing in the third quarter, investing 130 million zlotys. This investment is going well so far.
Speaker #1: But of course, these are the first weeks and months of this work. The situation, to repeat, is on one hand much better than at the beginning of the year, but on the other hand, we have experienced further hesitation in court operations in the third quarter, which concerns us, so we are diagnosing this and looking for ways to improve the situation.
Speaker #1: The remaining markets are mainly France. The situation there has not changed after a very successful period of amicable debt collection, during which we recovered significantly more than we had planned.
Speaker #1: We currently have these cases in the court process, which is going worse, and unfortunately, this trend is continuing. There is some risk here for the coming quarters as well, and we are preparing to start building our operational capacity next year, and we hope that this will also allow for better control and improved process efficiency.
Speaker #1: In the meantime, we are collecting data and learning about the effectiveness of the legal process there and why, based on the portfolio we have accumulated.
Speaker #1: So it is still more of an exercise in gathering know how than an activity actually calculated to maximize profit. Laga and the lending business in general had a relatively good and stable quarter, as you can see, another quarter with about 26 million Polish zlotys in EBITDA, and we are currently working on a plan for next year and see potential for significant growth in the future.
Speaker #1: To summarize, ladies and gentlemen, this was a quarter in which we did not meet our plan. Also, looking at these individual quarters, the nearly 200 million in profit is a relatively weak result.
Speaker #1: Unfortunately, we expect that the fourth quarter will not be a record one either, because as I said, we must count on the risk that the full year profit will be lower than a year ago.
Speaker #1: However, we hope that we will subsequently develop a plan that will allow us to rebound and return to growth. The business is strong in terms of cash flow, strong on the balance sheet, with good access to financing.
Speaker #1: In the coming quarters, we will consider whether it is profitable to carry out some early redemptions of expensive bonds and replace them with cheaper debt so that we, as a company, have a lower financial cost.
Speaker #1: Ladies and gentlemen, these are. I think the most important information. Perhaps one more thing. We want to return to the market with our conclusions after we finish the budgeting process, and this will show us what the outlook is for the next year and how that outlook relates to our strategy announced in 2025.
Speaker #1: So please expect us to return in December with a summary and an update of our view on the future of the company. In the meantime, I encourage you to ask questions, and I will now move to the Q&A section and we will.
Speaker #1: Maybe, maybe I will address this, as I can see this question has already been repeated two or three times, and it still concerns the big picture.
Speaker #1: Yes. The strategic one, meaning KRUX International expansion into further markets like the USA and UK, which we talk about often. Dear shareholders, I approach this very simply.
Speaker #1: This means the gateway to the UK and US market will only open through success in the markets where we already operate. So, in a situation where we do not yet have sufficient comfort and are still reporting that we have problems here and there, do not expect us to make a bet and say we will find solutions to these problems by entering too.
Speaker #1: Large, competitive markets. I think that day will come and we will work on it, but not in the coming quarters given the current situation.
Speaker #1: I don't think that will happen. Unless some mega opportunistic situation were to arise in those markets. But why would that be the case? So, we are approaching this very, very rationally, but certainly not in terms of an escape forward.
Speaker #1: Okay, thanks, Peter, for that comment. So, what our history in this market teaches us is that our market is cyclical. There are periods when it is worth pressing the gas pedal and investing as much as possible.
Speaker #1: There are periods when it is worth investing less. It is always worth looking at ourselves critically and asking why someone else is able to offer more.
Speaker #1: Is there anything we can change in ourselves to be even more effective, even more cost-effective, and we will certainly do that. And as Peter said, we have no appetite here to.
Speaker #1: Escape forward by entering a new market and adding complexity for ourselves when there is still a lot to do here. And please also remember, the market is such that even if KRUK invests only 2 billions zlotys this year, our balance sheet will grow, and our potential to generate margins will grow as well.
Speaker #1: Of course, it would be great if it were 3 billion or 2.5 billion. So, in the markets where we are, we still have growth potential.
Speaker #1: Those markets are interesting to us, they certainly offer great potential, they are huge, but in the near future, we are focusing on the problems we have here in Europe.
Speaker #1: You are asking about the progress of our reorganization towards an asset light fund model. This project is moving forward. It is moving forward well, but a bit more slowly due to regulatory reasons, so for now, we have nothing very specific to report to you here.
Speaker #1: Beyond the fact that we still expect this organizational project to conclude by the end of 2027, while some time ago we thought it might be mid-year, the perspective currently looks like, if everything goes well, it will likely be the end of next year.
Speaker #1: You are also asking about costs, ladies and gentlemen. We are looking at how we can be a more agile organization, a leaner organization in terms of costs.
Speaker #1: We have been taking such measures for several months now and we will continue to do so. You are also asking about the level of expenditure on technological transformation.
Speaker #1: I have a request here for Tomek Kojiak from JAR to write this information for us in the chat or tell us. I do not remember at this moment.
Speaker #1: The specific amount for the nine months. In any case, these costs are lower than those we planned. At the moment, the project is more or less on schedule in terms of time.
Speaker #1: So for now, it turns out we are able to implement this program a bit cheaper than we originally assumed. You are also asking about a change in our view on.
Speaker #1: Investment ambitions, where actually after the second quarter results, even in August, we were talking about 2.5 billion. So, what actually happened? In the meantime, we lost a lot of portfolios and that is what happened, meaning this plan drifted away, and we counted on some of those portfolios.
Speaker #1: Being with us, and that is the main reason. I mean, the good news is that there is supply. There is a large supply of portfolios.
Speaker #1: There is truly a large supply. Practically every day there are tenders in the markets where we operate, and we keep seeing this increased supply.
Speaker #1: However, there is very high competition and we try, as I said at the very beginning, to target those portfolios where we hold quite firmly to the return.
Speaker #1: Targeted returns, and at this stage, it doesn't hurt us that much yet. We still believe that it is fully, fully adequate. However, the question is, could we lower these expected returns?
Speaker #1: We could lower them, but we think that would not be the best decision at this stage. I mean, we will see what happens. I also assume that.
Speaker #1: This competition will normalize a bit in the coming quarters. I say a bit, because it will be known what the recoveries are on the first investments.
Speaker #1: Of those expensive ones purchased. And the models will simply have to relate to that in some way, and the board. In principle, a reduction in purchases, that is the next question, should result in lower collection costs.
Speaker #1: However, nominal costs increased in the quarter. Why, I mean yes, it absolutely will be. You will certainly observe a decrease in these costs, although our balance sheet remains large, and the fact that we bought and invested 1.2 billion last year, 2.2 billion, still generates costs, for instance, through the initiation of court cases in subsequent tranches.
Speaker #1: We are still working through that investment peak from those years, and we still have a great many cases and much more to do. There is a lag effect.
Speaker #1: I have the answer here. Thank you, Jarek. Expenditures on transformation. Cash expenditures amounted to 90 million zlotys for three quarters. For three quarters. I also see a question regarding the risk that repayments.
Speaker #1: On portfolios will be below the accounting curve. Because here the author of the question notes that the delta of payments, the difference or deviation of actual payments, was only 8 million.
Speaker #1: Of course, such a risk may occur in the event of a further deterioration in repayments. This risk, in my opinion, is greatest for those relatively small assets, because there is about 190 million zlotys on some portfolios in France, so there is a risk of a write down there in the fourth quarter.
Speaker #1: On other markets, rather not, but we are close to the accounting curve, for example, in Spain. So if something really bad were to happen in the courts there, then there is some risk of that as well.
Speaker #1: Overall, we are not afraid of this. That is why you remember that our long-term operating plans still significantly exceed the accounting plan. There is a difference of several billion zlotys.
Speaker #1: So, in the long term, it is more a question of when we will be able to recognize a positive update. Or return to it rather than write it off, but of course, on individual portfolios or specific markets, such a risk can always arise.
Speaker #1: We also have a question about Italy. Here the author of the question points out that the payment result in the third quarter. Was not low in our opinion.
Speaker #1: It was in line with our expectations. Please also remember that there is some seasonality here. It stems partly from the fact that August is simply there, and the third quarter should generally be lower.
Speaker #1: I don't recall at the moment, but it might also be that, I don't know, in the third quarter of the previous year there were some non-categorized portfolios or a so-called cutoff, and that distorts the comparison.
Speaker #1: However, in relation to our operating plans, repayments in Italy in the quarter were consistent with them, and therefore we are eager to continue investing there.
Speaker #1: It is only a matter of competitiveness here. You are also asking about Poland. In the third quarter, repayments in Poland. Were the lowest of the 2025-2026 quarters.
Speaker #1: They were consistent, as I said, with our overall plan. That is how these curves are distributed. However, the structure was a negative surprise for us, a negative one.
Speaker #1: On some portfolios, those repayments were, were lower. And here, also somewhat similar to Romania, we think it's a matter of setting those goals or timelines too high.
Speaker #1: We are making up for it elsewhere, but we aren't updating those portfolios there just yet. However, let me repeat again, in Poland, we don't see any fundamental macro issues.
Speaker #1: Some suggest that increased competition in Poland and Romania is simply normalization, because profitability in these markets was higher than in Western markets. I mean, we've been in this market for 30 years, so I think we have a good feel for it.
Speaker #1: And. Answering that question, in a sense, absolutely yes. That is, in a way, this business becomes more of a commodity every few years, right?
Speaker #1: however, we think that this moment, it's not, it's not that moment yet. And and that is why we maintain this cost discipline, well. Investment.
Speaker #1: investment, investment. We are not, we are not afraid of the competition. After all, we started the company from the very beginning in high competition in Poland and we always had between 25 and almost 30 percent market share.
Speaker #1: Well, and this year we will probably have significantly less, and in my opinion, that is not, you also remember the years, 17, 18, 17, where we were also losing portfolios.
Speaker #1: I don't want to compare this situation to that one, because we had a different situation back then, but it is aggressive now, whereas in years 22, 23, 24 we said we are winning.
Speaker #1: And, of course, I wondered a lot, what if we are wrong, what if others are right that they are not buying, while we are.
Speaker #1: It turned out it was a great decision, and today we are entering this turn and hitting the brakes a little. And also, of course, what if we are wrong.
Speaker #1: If we are wrong, we will waste a growth opportunity, but if we are not wrong, then in a year, two, or three, you will again see Kruk stepping on the gas and overtaking the competition.
Speaker #1: Once again. In this business, really, long-term thinking and building value is the essence of looking at things at all. That is easy. I am not saying that the management of our competitor companies is doing something wrong.
Speaker #1: They are simply accepting greater risk, and if that doesn't materialize, well, they will pass through that gate without any problem. But if it does materialize, well, then it will be like with interim, right?
Speaker #1: The largest company for years. An unreachable benchmark for us when we were starting, it seemed. Well, and as if it didn't fit through that gate, right?
Speaker #1: And today it has completely different problems and interim is no longer buying. We emphasize, ladies and gentlemen, that we will not change our investment policy.
Speaker #1: Even if one or two quarters are bad, we look at the situation over a longer horizon, because we know there are cycles and periods of high and low competitiveness.
Speaker #1: Another participant in our meeting asks what would have to happen for us to announce a share buyback this year. Well, ladies and gentlemen, we are not going to show our hand here.
Speaker #1: There is likely a price level at which the management board and the supervisory board, which must approve this plan, will say, okay, let's allocate this amount of money and do it.
Speaker #1: However, we are leaning more toward discussing a potential additional dividend with you next year. I believe a dividend is a more democratic way of sharing profit, and we are not really thinking about a buyback at a price significantly higher than the current one just so some short-term shareholder can exit.
Speaker #1: We primarily look at what the business will need to maximize profits in the coming years, not just quarter by quarter, but over the years.
Speaker #1: Of course, a scenario may be possible that I will show. There is a surplus, as some of you have also noted. But there isn't much room for that today because the debt is at 2.7, not at a significantly lower level.
Speaker #1: When the debt is lower, there will be more room to share that profit, provided we are betting on a scenario where there won't be more of those investments for some reason, which is absolutely not our current assessment.
Speaker #1: We are simply saying that in 2027 we will likely invest closer to 2 billion than 3 billion, but time will tell what happens in 27.
Speaker #1: Nihal, this is a question about the impact of the weakening Romanian leu, but specifically for. The third quarter, do you have that information, or can we provide it, since we stated that for the three quarters it's nearly 70?
Speaker #1: Yes. Well, there was further, there was further weakening. I will also ask Ire to provide that information in the chat. The order of magnitude is probably a few millions allotties, and the situation worsened further.
Speaker #1: But I will ask for precise information, as I don't have those data points in front of me. You also ask about the problem of not meeting the assumptions of the incentive program and how that affects team morale.
Speaker #1: Of course, it is a problem. As some of you might remember, the only bonus you can get at Kruk if you are a manager and qualified for the option program comes from executing those warrants.
Speaker #1: The current program, which the shareholders voted for and granted us from, I believe, 2024, has a strike price at the 430 Polish zlotys level.
Speaker #1: Not only is the current price far from that, but we will also not meet the 12 percent growth target of this program this year, so there will most likely be no allocation.
Speaker #1: That is a problem. What saves us a bit is that most of our managers have been with us for many years. They participated in the previous program, 2021 to 2025 I believe, because the new one is 2025 to 2029.
Speaker #1: Well, they have commitment there. Perhaps they also still have shares from earlier periods, but we are effectively lacking such an incentive tool this current year and there is no Kruk premium.
Speaker #1: We are still looking at the questions. We also have a question, Peter, regarding collection rates on the banks' side. Are we observing the materialization of a risk consisting of improved NPL collection by banks thanks to the implementation of AI tools, and what could potentially worsen the prospects for the entire market?
Speaker #1: I would say that we do not see any significant impact of that kind. Although, if you look at the last few years, the prices paid for portfolios are increasing.
Speaker #1: Banks are selling faster, competition is higher. Banks are definitely more effective at collections today than they were a few years ago. So, that progress is there.
Speaker #1: On the other hand, this progress is there for all of us. Today we are in a situation where we are paying quite high prices, right?
Speaker #1: A good, unsecured bank portfolio in Poland is priced closer to 30 percent today or more, in Romania it's 40 percent or more, so we are already assuming relatively high levels of effectiveness, which leaves little room for error and is, of course, burdened with slightly higher risk should any macro risk emerge in the coming years that prevents us from achieving the assumed effectiveness.
Speaker #1: So, as if. More demanding prices mean that there is less room for upside. That is the reality we live in. But we do not yet see the effects of the AI revolution in collections and we hope that it will come to us sooner than later.
Speaker #1: I mean, regarding these questions, is there anything we haven't actually addressed? Yes. There is also a quite valid question that we didn't mention anything about the strengthening of the euro against the zloty.
Speaker #1: Ladies and gentlemen, this is a positive. I didn't mention it because it hasn't significantly impacted our results yet, unlike the Romanian leu, where we have a situation where the revaluation in a given month fully enters our P&L statement as a non-cash item and can also be reversed if the leu strengthens in the future.
Speaker #1: Yes, in the case of the euro, our investments in euro, there is no such revaluation. These changes pass through revenues gradually. The fact that the zloty is closer to 4.40 rather than 4.20 today means that in future periods, we will gradually realize higher margins and higher revenues on our investments.
Speaker #1: But please remember, this cash difference in practice is at the tail end, it is in that margin. Because we finance all our purchases in the euro zone with euro denominated debt.
Speaker #1: Of course, there is that translation effect, and it will also be counted in the tens of millions of zloty positively, but it will be spread over the next few years, still, it is a positive.
Speaker #1: So, we have a hedge here where the weakening zloty, in fact, causes an increase in our revenues from Spain, Italy, and France. We also have a question regarding what we currently believe the money multiple levels are in the market.
Speaker #1: We are sticking to that "two times plus a little bit more" as you can see from our historical data, we show it was around 2.1, 2.2, 2.3.
Speaker #1: Perhaps it will be a little less, meaning a 2 in front, but a bit lower this year. As for the market, we don't know their assumptions, but in our opinion, they are lower than ours.
Speaker #1: Closer to 2 or even slightly below 2. Of course, to put it directly, ladies and gentlemen, we aren't just looking for reasons why we lost more than we thought, because we didn't expect to win everything or the majority, we just wanted to win a bit more, in the fact that our competitors accept a lower return, perhaps they have better recovery forecasts, right?
Speaker #1: So, it means there is something on our end that we are not doing well enough. I remember, and I will refer back to 2017 again, you know what I am talking about.
Speaker #1: The first thing we did then, and what I and the board ordered, was a total review of our processes to see why we started losing so much to another competitor.
Speaker #1: It was only after that dozen or so weak process review that we formed our opinion. Okay, so we are not able to win. Today we are still before that exercise, that is, we are also looking for the reason on our side, because perhaps someone is able to recover faster, more, and cheaper than we can.
Speaker #1: Up until now, for 30 years, Kruk has always had very good operations compared to our competitors, not falling behind in terms of quality. Here is a hint from IR.
Speaker #1: The further depreciation of the leu cost us 14 million in the third quarter alone. As you can observe, the leu continues to depreciate in October, so it looks like there will unfortunately be some negative effect there as well.
Speaker #1: The problem with the depreciation of the leu is that it is depreciating for certain reasons, and it is depreciating for macroeconomic reasons. And in Romania, we have a forecasted half percent recession, meaning GDP at minus 0.5.
Speaker #1: Well, we'll see. But the forecast for next year is already higher, that there will be minimal growth. We are seeing fewer repayments than we planned on portfolios that were doing well until now, as people are either losing their jobs or moving into the shadow economy.
Speaker #1: It is not a huge deviation. But as you know the magic of numbers, the whole problem we are having is a 4 percent deviation, meaning a year ago, while planning the budget for the new year, we projected a volume of 3 billion, but it turned out to be 4 percent.
Speaker #1: Percent less, and that is why we see all of this today. It is the effect of that shortfall. Are there any other questions? You right here about this 2.7 leverage.
Speaker #1: Compared to the history. That is quite a high level. Yes, for some time now we have not been calling ourselves a very low debt company.
Speaker #1: Of course, compared to the competition, we have the highest rating overall. In terms of credit among all the companies that have submitted to this rating.
Speaker #1: We have a good financial situation, but indeed after 2020, when before COVID our main problem was a lack of enough projects to invest in while our balance sheet allowed for it.
Speaker #1: We hit the gas and leveraged the company, changed our results, raised them, and we are now at a higher level. But it is still a very safe level.
Speaker #1: And Mihal mentioned it. Now, what we need to determine well is how to distribute money to shareholders versus having the chance to hit the gas when it happens, and it will happen, right?
Speaker #1: So, how to manage that. And the good news here is, I think this should reassure some of our shareholders, that as founder, CEO, and a relatively large shareholder, I truly understand this, I am in this world, and we will play on both pianos as best as we can.
Speaker #1: Meaning how to ensure the company's further growth, because that is important, but also how to pay out or distribute value to the shareholders. Yes.
Speaker #1: Because please remember that we are not saying today, I don't know, we have no ideas for growth, nor are we saying, the market is competitive.
Speaker #1: we actually fell quite short of the operating plan in the third quarter, 4 percent over 9 months, but we still believe we have a chance for significant balance sheet growth, not to mention that at some point we will return to the idea of foreign expansion, and you need capital for that.
Speaker #1: So, if we were to say today that, no, we are now significantly increasing transfers to shareholders, that would mean we do not want to pursue that growth and that expansion.
Speaker #1: We want to, but there might be room to meet halfway and actually take advantage of the fact that the level of these investments is lower than we planned.
Speaker #1: But please also remember that we believe the best way to make money in this business is by being prepared for a crisis. Our experience shows that our best investments are made when some of our competitors in the market run out of money, or in trouble, and risk levels are higher.
Speaker #1: The winner there is the one who is better prepared, has a stronger liquidity position, and takes a long-term view rather than a quarterly one.
Speaker #1: And those who think long-term are there. And that is where we are. All right, Mihal, I'm looking, and basically, there are no more questions.
Speaker #1: I thought there would be a barrage of curveball questions here. So, I'll make a joke at the end. Ladies and gentlemen, thank you for this meeting.
Speaker #1: We are at your disposal. IR as well. If any shareholder wishes to meet with the board, including me, I am at your disposal. Absolutely.
Speaker #1: Excuse me, try refreshing, because I still see a few more questions. Oh, okay. Let's go back to that then. All right. So, I've refreshed it now, and I see a question.
Speaker #1: What will the profit level in 2070 depend on? Is it highly dependent on you, or on external factors? Both. Well, the profit level in 2070 will, of course, primarily depend on the repayment trajectory we expect our portfolios to follow, and that, as always, is the most significant element.
Speaker #1: Also, what the cost level will be, which we also have a lot of influence over, and, of course, the level of competition and how much we will be able to acquire by the end of this year and in the next year.
Speaker #1: It's a mix, as always, of those few factors. You are also asking about the risk associated with the CJEU ruling from April. Could this negatively impact our collection and loan business?
Speaker #1: We do not identify any significant negative impact on our businesses at this stage. You are also commenting here on what I said about the buyback.
Speaker #1: We will read those comments with attention. You are also asking what would have to happen macroeconomically or in the market for the competition to be forced to limit their risk.
Speaker #1: They would have to see that they aren't achieving the repayments assumed for those portfolios. Whether that happens or not, we don't know. Because perhaps some of our competitors have overly ambitious targets set in their valuations, or perhaps they are accepting significantly lower returns than we are.
Speaker #1: We don't know that for sure either. You also asked about the fact that labor costs increased slightly by 1 percent year on year. Is this already the effect of the transformation or utilization?
Speaker #1: Yes and no. And when this effect does appear, it will likely be much clearer. You also asked for an update on the French market.
Speaker #1: Do you feel it is worth entering there on a larger scale before scaling the business in the US or UK? Yes. We already treat the French market as the one where we have made the decision to develop it.
Speaker #1: And we are planning further steps to lead to this in 2027. For now, we are not doing that yet, meaning we are still working in a model where we act as an investor that currently employs two servicers to manage our portfolios.
Speaker #1: You ask how the digital transformation will translate into cost reduction. Will it be mainly related to the scale effect with limited employment growth, or would you be more inclined to accept higher prices for portfolios after the transformation is finished?
Speaker #1: We see the effects of digital transformation primarily in the fact that the process will be done more efficiently and that we will reach the client faster, cheaper in terms of process, but we will also have a more effective collection process because we will press the right button at the right time.
Speaker #1: And that is one important element: more from the revenue and time side. Another element is that we will probably be able to do it using fewer internal resources.
Speaker #1: So yes, this will also involve limiting the number of people involved in this process. And now, if we significantly increase these other investments, you will observe a slightly falling or stable level of employment.
Speaker #1: If there are fewer of these investments than we assumed, and they are more stable, then of course it will likely involve fewer people in the loop, because technology will be able to partially replace them.
Speaker #1: You also ask how long, based on our past experience, the period of increased competition on the market might last. It could last several years.
Speaker #1: It has already been a good year and a half. So, we don't really know. But it might be that it will last for quite a few more quarters.
Speaker #1: I mean, for this to be clearly understood. We. Do not say outright that there is heightened competition in the traditional sense of the word.
Speaker #1: It is just that, most likely, this is our view today, our thesis, our competitors are accepting lower returns and, with our acceptance and our policy, we cannot come to this table and take this hand.
Speaker #1: Now we have, as I said, a choice. Either accept this fact or wait a little longer. And now. We say, let's choose to wait a little longer, and now, if we are wrong, we lose an opportunity.
Speaker #1: Right? Because we waited unnecessarily, but if we are not wrong, we have much more to gain, because we won't invest capital in low-yield projects, but will have that capital available to invest in higher-yield projects.
Speaker #1: And of course, we don't know that yet, it remains to be seen. And. This is that kind of game. Well, there has always been a lot of competition.
Speaker #1: One person always buys the portfolio, so you have to beat all the other bidders. It has always been this way, and KRUK has always handled it well.
Speaker #1: And furthermore, it's not like we only have 1.2 billion, it will probably be more. That would be a solid year, as all of you would have said 4 years ago, but our appetite was greater.
Speaker #1: We thought that the level of expenditure we were achieving with returns that were attractive to us would hold, but that didn't happen. We are now verifying this thesis, because our competitors are moving to a lower level of expected return, and we can absolutely be at that level.
Speaker #1: It's just not the right moment for us yet. We have to wait a little longer, watch what happens, and confirm it for ourselves. You see, what happened is that even with the portfolios we had and knew, when budgeting last year, we were off by 4 percent.
Speaker #1: It is materializing, and today we are having a long conversation about why we are dissatisfied with the result. This is a business where you take on risk.
Speaker #1: And now, not knowing these portfolios, buying them on the primary market, you really need to have super tools. We have them too, to be able to say how much we will pay, but we must have room for risk because it can materialize.
Speaker #1: And we say, in Romania it materialized, okay, but we still earn well, because that buffer. We lost some of that risk buffer, but we are still earning well.
Speaker #1: If we go much lower, that buffer will be even smaller, and then you have to manage it much more precisely. So we want to wait.
Speaker #1: We also have a question, and this one is a bit more pointed. That due to competition we say we choose investment discipline at the expense of lower IRRs, but looking at the reports, it seems that IRRs have gone down as well.
Speaker #1: So, my answer is this: the level of repayments that you observe in the third quarter, or over 9 months, concerns in over 90 percent the portfolio we already started the year with.
Speaker #1: Because that's just the sheer volume and proportion of those repayments. So what we are talking about, those 4 percent, that 4 percent fully concerns the portfolio from before, right?
Speaker #1: 2006. And. We are maintaining investment discipline. The IRR is slightly lower than what we had assumed. It is actually lower, but only slightly. The difference is, I don't know, a point.
Speaker #1: A percentage point. So we are telling you, we are telling you that we are not falling significantly, we are not dropping by a good several percent from our expected IRR.
Speaker #1: The question is, what if current market conditions persist for the next few years, perhaps the market will change permanently, then what? Perhaps we will have to find our way in an environment of lower profitability.
Speaker #1: We cannot, of course, rule that out. And what will our response be? Firstly, to look at ourselves critically and find ways to be even more productive on the operational process side, thanks to technological transformation, and also thanks to being a leaner organization, we will need fewer resources to produce what we produce.
Speaker #1: We have some room to accept lower profitability. Of course, this comes at a cost, as we will not significantly increase our debt in this business model.
Speaker #1: So this will come with a negative effect of a decline in our ROE, but it will still be a profitable business. Because today our investment policy sets this minimum IRR significantly above the weighted average cost of capital.
Speaker #1: We want to maintain this margin. Of course, it is possible for us to give up this margin if necessary, if the market stabilizes at a lower margin level and higher interest rates.
Speaker #1: And we assume that in the long term it will head in that direction, it will head in that direction and will be overlaid with some cycle that occurs from time to time, but one that is more or less shocking.
Speaker #1: And that is where we want to be, but that does not mean we should react nervously after just one or two quarters. This is something we have seen many times before, we must approach this calmly.
Speaker #1: Nihal, I think that is everything. Yes, from what I can see, we have answered everything.
Speaker #2: Thank you, then. I won't repeat myself. We are at your disposal and see you soon.
