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Edited Transcript of KRU.WA earnings conference call or presentation 6-Sep-19 1:00pm GMT

Half Year 2019 Kruk SA Earnings Call

Wrocaw Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Kruk SA earnings conference call or presentation Friday, September 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michal Zasepa

KRUK Spólka Akcyjna - CFO & Member of the Management Board

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Conference Call Participants

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* Jonathan Moog

Lizard Investors LLC - CIO & Portfolio Manager

* Marta Jezewska-Wasilewska

WOOD & Company Financial Services, a.s. - Co-Head of Research

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Presentation

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [1]

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I would like to welcome everybody at the KRUK's Second Quarter 2019 Results. My name is Marta Jezewska-Wasilewska, and I represent WOOD & Company, the host of today's call.

Let me now hand over to Mr. Michal Zasepa, CFO of KRUK. Sir?

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [2]

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Thank you, Marta. Good afternoon, everyone. Thank you for joining us for this conference. It's my pleasure to give you comments into our first half and second quarter results. I'll be using a presentation that is made available on the website and referring you to the number of slides I'm discussing.

I'm now on Slide #3. As you have seen, net profit for KRUK for the 6 months of 2019 was PLN 167 million. That is lower than we expected, and there's a few negative events that took place, especially in second quarter, that lowered that net profit. However, we think this is -- some of those are one-off, some of those are temporary problems we will be able to overcome. If you look at cash EBITDA, the picture looks much better. They were at -- this measure was at PLN 281 million at similar level like last quarter. Recoveries on total were good. And they were very good in some markets, they were below in others, and they totaled PLN 448 million. Investments were relatively low in second quarter. That was somewhat surprising for us, but we think there will be more investments coming forward.

On Slide #4 and 5, we give you an overview of the most important information. Net profit, our recovered -- recoveries were very good in Poland and Romania for the unsecured consumer portfolio part. We are below plan for the secured part of the portfolio. I will comment on that in more details on further slides. Investments, PLN 309 million, most of them in Poland and Romania. We were relatively careful to invest new money in -- on the new markets in this first half of the year. Likely more investments will come in the second half of this year. We remain to be a lowly leveraged company with a high degree of cash flow security, well funded to do good purchases in the future.

It is also the first -- I'm now on Slide #5. Our first results -- quarterly results where we consolidated a newly bought consumer finance business, Wonga. And there'll be a commentary to how are they doing over the first 3 months in our group.

And we are happy that we have, as planned, paid out dividend close to PLN 100 million in July, which was the fifth dividend that the company has paid in its history as a publicly listed company.

Now I'm looking at Slide #9 -- I'm sorry, #7, which gives more insight into how Poland is doing. The markets, as you see here in the first 6 months, there was a close to PLN 9 billion of nominal value of portfolios offered and sold. However, most of that is secondary markets and GetBack's transaction of their assets. If you take that away and look at the primary markets, so mostly where the banks were selling and other nonfinancial or financial institutions, this was lower than in previous year, and it was below our expectation. The banks, it seems, are more reluctant to sell portfolios than last year after the pricing has normalized in that market, and probably their provisions are not satisfactory to sell at what is normal level of pricing. We made a hypothesis that, that would change. The banks will start to sell again in the much larger volume. That has not happened in second quarter of 2019. And we still expect it to happen, but we are not sure whether that will happen still in this year or maybe some of those transactions will be delayed into the following year.

Anyway, the market outlook for Poland for second half of the year looks better than for first half of the year. Some of the banks have confirmed that they will be selling portfolios. Of course, it's unknown at what pricing and what eventually will be sold.

If you look at our results, so relatively modest investments of PLN 120 million. However, those investments were at very attractive returns. We are very happy about that. Actually, the investment budget described that NPV on the investments made in first 6 months is above -- it's done over 100% despite the fact that we planned much more investments, and we are surprised at that. And that's very good although maybe on a small not fully representative part of the market as some of the banks were not selling and maybe there will be more competition for their portfolios in the future.

In terms of recoveries, as I said, they were strong for Poland, and I mean the most important consumer unsecured part. Hence, positive revaluation on these assets in Q2 as well. The secured part of our portfolio underperformed somewhat. That is not a permanent issue. It's a nature of that business. It is more volatile in its results. And in Q2, there was a few million zlotys revaluation each for our corporate and mortgage -- retail mortgage portfolios, which dented the results somewhat. So you would have seen results better if it wasn't for the corporate part of the business. Overall, we had PLN 43 million of positive revaluation in the 6 first months of 2019, which gave 31% of profitability.

Romania on Slide #8. Good market, and we see a nice improvement over the past year where portfolios were not sold due to tax changes. Now the banks came back and sell more. We are a very important market player this year in that market again, buying both unsecured and some small secured portfolios. We expect the markets to continue as we see several deals coming up for the second half of this year. So what you see in the first half, close to PLN 150 million, is something we would plan, hope to close also in the second half of this year.

One important transaction that was signed and is already included in the value of transactions here in this PLN 150 million invested in first half is the purchase of GetBack's assets in Romania. This transaction is signed, but it's not yet closed. It turned out to be quite cumbersome and difficult in closing. We hope this will happen in the next couple of weeks. Recoveries on the Romanian market were excellent on the unsecured part of the portfolio. They were better than the quite ambitious plan. So we congratulate again to our Romanian people. They gave us rise to -- a reason to book a solid positive revaluation of the assets. And that is not all given the trend we're going on.

On the other hand, the corporate part of the portfolio, so the business that we have been doing in Romania relatively shortly, about -- for the past 3 years, noted a loss. And we booked a PLN 12 million negative revaluation. And this is partly the correction of our assessment of some specific target real estate and of the timing when the money will come to our account. But partly, it's an accounting method that told us we have enough history now to calculate that historically, we were recovering about 6 months later than initially planned. So let's assume that all the future payments will come 6 months later than we currently plan them. This is a prudent approach that our auditor and our finance group adopted. It is a simplification, of course, of the future at some assumption, but it does affect our Q2 numbers by this PLN 12 million. And it's not a business problem. Of course, the Romanian team corporate assets have the same targets, and hopefully, they will be able to show this time that they can retrieve this money earlier. But this resulted in lower positive revaluation. Overall, for the 6 months, this revaluation was about PLN 52 million.

Italy, we were not actively buying in these first 6 months. We decided to concentrate on the improvement in operations and waiting for the better and longer track record in the legal collection. The market in these first 6 months of 2019 was relatively silent. And there will be more portfolios coming in the second 6 months of this year, so it's maybe not so much of a pity that we haven't bought much. But it seems we are now in a better position to do it because of some important improvements in the operations process.

The first is that we have now garnered enough data to say that more of the cases that we have bought are ready to be processed in the legal stream of debt collection. And this is what we have done over these past, especially couple of months. We have sent a few hundred million zloty worth of portfolio in addition to the planned lots and instigated legal process. And that constitutes an upside versus our accounting assumptions and hopefully will lead to significant increase in future payments and raising the value of the assets as our -- as they are now booked in our accounts in the next 3 years.

The second important improvement is that there were some changes made to the organization and negotiation tactics of our field advisers. In addition, we started to go to the legal process and then come back to our customers in Italy and telling them, "Listen, we are serious about the legal process. We've just started it. We are going legal with you. How about we settle?" And this resulted in significant increase also in amicable settlement that we've been signing over the past 3 months. This, again, is an upside versus the history we've seen in the past 2, 3 years. And it looks good. It looks good. If this is continued, that also will improve our payments in the future.

On the other hand, if you look at the revenues, if you look at the recoveries, these were a negative revaluation. Of course, the Q2 results were below our expectations. Now why that happened? When we looked at the Q2 recoveries and also July numbers, we saw that one big portfolio that we bought in second half of 2018, after some 4 months of overperformance versus the planned amicable recovery, started to underperform, and this underperformance was in high single digits. And because the portfolio has been on our books already close to a year, we decided to write down the amicable stream as we do looking at the trend that is continuing. And that resulted in PLN 20-plus million negative revaluation for that single asset. What does that mean? Well, it means that even if we use statistical benchmark from Italy, which is not very wide, we still have a risk in valuing portfolios especially in the short term.

In terms of the accounting method that we use, the accounting method that looks at the short history does not take into account possible upside, does not take into account that we transfer some of the cases from amicable to legal process, and we write the portfolio down. It doesn't mean it was definitely wrong assumptions and valuations. It means now that the reality versus plan after 9 months is worse and we take a hit.

On the other hand, this is possibly the first quarter when we see positive trend and positive revaluations on the portfolios that we bought in Italy at the beginning of our venture into Italian market. The 2016 portfolios are performing now better than the accounting curve, which gives us -- gave us rise to positive revaluation, not big but signing a change in the trend, which is so well-known for us in the old markets, in Poland and Romania, where the old portfolios are usually overperforming, and sometimes the new portfolios are underperforming versus the curve that was assumed at the purchase.

The difference is that in Italy or in Spain, those big new portfolios are so big and are so few in numbers that of course, they stick out and we lag this long good history that is covering these possible problems of the beginning period. This seems to be changing now as the old portfolio is speeding up, accelerating, exceeding expectations, especially with those improvements into operations I've mentioned. I may say, I venture to say that the risk of negative surprises in Italy is now much lower than it was historically in Q2 or before.

Of course, the experience of this one new portfolio in Italy bought in 2019 tells us there will be a risk that even using good statistics locally, we will be off by a few percent or even more than 10% in the short term and that can -- it can still happen in the future that there will be portfolios that we'll be writing down in Italy after we purchase them, just like we do that in Romania or Poland. But in the longer-term horizon, after 2, 3 years, we usually catch up, and on total portfolio, we are able to recognize an upside.

So in that situation, we have negative results versus plan, versus our budget. We are disappointed, but we are positive about what's happened in operations over the past 3 months. We are very satisfied with the trend of number -- value of legal transfers and value of settlement that we've been signing over the past 3 months. And that gives us optimism to look into the second half of this year and the following periods. In Italy, we are determined to make Italy work despite these problems. We think we are now much closer to improving the results, and we want to buy some portfolios in the second half of this year and in the following quarters.

On Slide #10, it's the reminder of the debt purchase business. Some dropped, as we disclosed them in our reports. It's mostly Spain but also assets in Slovakia, Czech Republic and some assets in Germany.

In terms of markets, we see good market in Spain. And we were not very active from that market, but we did buy some corporate portfolios on that market. We will be looking at new investments in banking unsecured especially in the second half of this year. In Czech Republic and Slovakia, we also bought some portfolios, and we will be doing so in the future. Those expenditures for those markets still were below plan mostly because we have bought in Spain less than anticipated, but there's a chance to catch up in the second half of this year.

Recoveries on the Spanish market were below plan on the unsecured part of the portfolio. Here, a similar story happened like what I described in Italy. Two portfolios that we have bought in 2019, 2 but 2 large ones, underperformed on the amicable stream. One, it was the first of such a kind, a big banking portfolio. We used a simplified pricing methodology. Probably we overestimated the results. Probably it's partly our mistake. We write it down. But now the legal strategy kicks in. Maybe in 2 years' time, we'll be able to say we did better, and we can write this portfolio up. Second portfolio is going very close to the valuation, a few percent below, but this few percent since it's a trend, it was enough to write this portfolio down by this few percent. And since it was a big investment, it's a significant write-down, but there is no reason to say it was a mistake. We think we'll make good money on that portfolio.

On the other hand, the recoveries on some of the corporate portfolios we bought in Spain were much above plan. But that was not the reason to write the whole -- the rest of the portfolio up since those are single exposures, and statistics cannot be extrapolated to the rest of the portfolio. But the total recoveries for Spain in that period were actually over 100%.

In that picture, you also have Slovakia and Czech. And here, we have a one-off negative event. And this event is related to the inspection conducted at KRUK by the National Bank of Slovakia, which inspected the debt collection process on a significant portfolio from one financial entity that operated in Slovakia. And the National Bank of Slovakia ordered us to stop amicable process period. It said in this interim decision, "You cannot continue the amicable process, but you can continue legal process." And it said, "We believe that based on some regulations, that you should not collect more than principal, so no interest on part of this receivable. And actually, part of this receivable is invalid." We disagree because we believe what we bought at the time when we bought was all legally collectible. The law the National Bank of Slovakia cites was instigated later on and so should not, we believe, concern the receivables that we are collecting. However, the legal situation as such, then NBS is an authority which is giving us license. And if we disagree with the National Bank of Slovakia, they can -- and we are in conflict, they could even take this license away, which would actually close the business for us in Slovakia. So we're in a position where we are not interested to argue hard with NBS, and we are now in negotiations how to close that issue in a form acceptable to the 2 parties. And what we've done is we've stopped collecting on these portfolios as a result. We wrote down the future payments of this portfolio to 0. We are not going to pursue these cases in legal also, and we are likely to send information to the customers that we've stopped the process.

In addition to this loss coming from the write-down of future recoveries, we also created a provision for over PLN 4 million for future costs of informing people and possible legal or amicable settlements with some of them if that comes to it. We believe this is our best assessment of the financial implications of that situation. We hope to be able to continue to work in Slovakia going forward. The latest discussions with NBS show that they appreciate our cooperation with them and that this matter should be closed within the next several weeks. However, we tell you the fact, which is significant, PLN 23 million loss on the Slovakian business, which otherwise was performing, together with the Czech business, very well this year. And that is second reasons why you see negative contribution on that business this year.

If you look at Slide #11, you see a summary of the segment information. And you see that Poland and Romania had strong performance. Consequently, Poland, PLN 190 million EBITDA; Romania, PLN 135 million EBITDA. But Italy was negative, and the other segment, including mostly Czech Republic and Spain, was also negative.

Servicing business. Unfortunately, servicing business does not have a good year this year. This is mostly for 2 reasons. One is the market is difficult. There is a pressure on margins. Second is we lost one important customer in Spain as a result of restructuring of one of the banks. We hope to get this client back, but the results of this year will be lower. And eventually, we have unfortunate management issue in our Italian servicing business. Two of the key managers running the business left us or were dismissed, and we are now in a restructuring process and slowly turning business. Unfortunately, went into losses this year. We are recruiting a new leader for the business. There are some interim management now, cost-cutting exercise. And we hope to improve that situation in the next couple of months.

On Slide #13, you have Wonga. This is, for those of you who are not that well familiar, part of the Wonga Group. The company operated in consumer finance, which as the only, I think, well-managed business created in Poland, where the independent management board built a very good consumer finance business. However, it was subscale. When Wonga Group went into bankruptcy, we bought out the Polish business only and also the rights to the Wonga brand, and we bought this business in April. The business is going as planned. There was nothing that surprised us in how it's managed after we become owner 3 months ago. We grow the balance sheet as expected. We run a marketing campaign, which helps us grow the business as expected. The credit risk is under control and as low as we planned. We're happy with our cooperation with the management.

However, there is one negative development in legislation. About 2 months after we bought that business, the Polish government unexpectedly and suddenly decided to change their planned -- the amendment to the bill that caps total costs for consumer finance with the draconian assumption that is affecting everybody, including banks but also Wonga. And if that law is introduced in the future, probably will not be introduced before March 2020, it will mean that a significant part of Wonga's revenues will be reduced, and Wonga, to remain profitable, will have to build a significantly bigger customer base.

This is, of course, negative. This is quite surprising because this change in the law was very unexpected, came months after the government proposed something completely different. We think we will survive that change. However, we think most of the market of nonbanking consumer finance companies won't because the only business model that will be profitable under the new law will be very low losses and very highly efficient, cheap operational process. Wonga can have it, but to make it a significant business in terms of profit, it needs to be much bigger, several times bigger than it is now.

Will that be possible? We think so because the competition -- competitive market will be more favorable. Is this a challenge for us? Of course, it's a significant challenge. It's a lot of uncertainty how this market will really be after this new law changes. So far, we're talking about something that probably is likely to be passed, but it's not a fact. Please remember, it's just a proposal. This proposal now waits for European Commission opinion, who said it does -- it will not respond quickly and within a month, but it takes a usual -- the normal 3 months period for that. We don't know what the commission will -- response be. Of course, the industry here in Poland is saying, "Well, it's killing -- it's an idea that is killing most of the businesses," which is true. Eventually, what will be passed, we don't know. But we already build up a business plan that includes that negative change in the regulation. So in the worst-case scenario, we will have a business that will just be significantly less profitable but, I think, will survive these changes.

I will now go to the P&L on Slide #16. Most of the -- most important information, I think, I already covered. But if you look closely at our accounts, maybe a few additional comments should be, there was some increase in costs, most -- in Q2 versus Q1. Most of that is related to increased legal costs of the processes in Italy and somewhat in Poland. And there was some increase in the head count cost. That is mostly related to the additional IT head count that we have decided to add on the business to help us work on the improvement in operations, and the payback on these new people is very high, plus some additional people in Italy for the field force. There also was much higher corporate income tax in Q2 than in Q1, which affected, of course, the net profit. Please expect somewhere between 9% to 11%, 12% of an effective tax rate for 2019.

If you would ask me for the outlook for the full year 2019 in terms of investments, I think PLN 1 billion is an ambitious but still a target that could be realized. I cannot give you a target for net profit, of course, but please note that those couple negative events for Q2 does affect our outlook for the entire year. The results will be lower than we planned. We probably will not be able to make our budget net profit this year. However, over the summer, we also went over through the business planning process, looking for the next few years. And we believe there is a market and there is a good operational base to say that we'll continue to make good profit in Poland and Romania, we'll start making profits eventually in Italy and Spain, and we can come back to double-digit growth starting from 2020.

If you look at balance sheet at Slide #18, we remain a low-leveraged, well-funded company. I'm happy to tell you that we have extended our relationships with the banks even further. We extended the big consortium line for 1 another year, and we also increased that. We successfully placed several or a few issues of bonds on the Polish market recently to the retail investors close with over 50% reduction past a couple -- a few days ago. So if there is business, if there are some good business opportunities, we are ready for it. As I told you, the expected IRR of the portfolios that we have bought over the 6 past months is significantly better than what we've been seeing in the past 2 years. So even though those are small investments, our -- the NPV of -- expected from these portfolios is higher than budgeted. So this is possible -- so this is positive.

We remain fully concentrated on improving our operations, on learning how to better control the investment risk. And we're optimistic, although, of course, uncertainties exist, and we'll try to manage them as well as we can.

Thank you very much for listening, and now I invite you to ask questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from -- Marta, I'm sorry, would you like to say something before I take a question?

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [2]

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No, it's fine. I'll ask a question later.

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Operator [3]

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Our first question comes from Jonathan Moog, Lizard Investors.

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Jonathan Moog, Lizard Investors LLC - CIO & Portfolio Manager [4]

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Real quickly, on just that commentary you made about Q -- obviously the negative revaluations in Q2, some of them looked onetime, and you won't make your budget for the year. I'm a little curious, does that mean you expect kind of these negative revaluations to persist into the second half of the year? Or are you just saying that Q2 numbers will make it so that you won't be able to make kind of your budget for the entire year?

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [5]

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The latter. We don't expect the negative revaluations in the second half of the year, which means -- I cannot be 100% sure of that, of course, but it's rather unlikely that they would happen.

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Jonathan Moog, Lizard Investors LLC - CIO & Portfolio Manager [6]

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Okay. That was my understanding. I just wanted to make sure. And then I think the other question I have, I think I've asked you guys just before. Just on the Wonga side, I mean I think if you go back in Poland, I mean you can look at like the kind of the consumer, the consumer lending environment, and there's some public peers that have really struggled over time based on the regulatory changes in Poland, and it seems like it's been a really challenging area. Why continue -- and given the proposed law change, it just seems like this is an area that's going to be fraught with regulatory concern, legal changes and all the like for a long period of time. Why is this an area you guys want to deploy more capital into? And why not just focus on kind of the core debt collection side rather than the asset lending side or the consumer lending side? Or...

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [7]

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Sure. So the answer is the following. The consumer finance is something we have been doing for years in a sense of changing debt into settlements; and then secondly, through our NOVUM loans business, extending credits to customers who successfully repaid the settlements and were in need of cash and were blacklisted from the banking sector. And we continue to do that, and that's normal.

And then we looked at the consumer finance market in Poland, and we said, "If we find a professional, highly ethical company that has good discipline in credit risk, which has very good IT system, but if it's online platform, that is a niche that will be difficult for us to develop internally, but it's a niche that we would like to be in." Then came the regulatory changes, which we actually welcomed because the fact is there's over 400 nonbanking payday lenders or consumer finance, microfinance, however you call them, companies. And many of them are taking too much risk, are trying to go around the current legislation and are probably not doing a good product for the right customer. And we definitely don't want to be in that business.

But we thought, "If that regulation comes as presented 6 months ago, that would change the market, that would open the ground more for Wonga company and from a few others, and we'll be one of them." And like we did in debt collection, we created a new better quality for the debt collection as KRUK. We wanted to do that in consumer finance. Only what we didn't know is that the government would at last minute, 2 months after we make the acquisition, change their view and put a cap lock at 45% total cost, total noninterest costs over the consumer finance companies and banks above 20%, then they cut it in half. So the whole story held very well until the government unexpectedly changed their view unfortunately 2 months after we bought the company.

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Jonathan Moog, Lizard Investors LLC - CIO & Portfolio Manager [8]

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Yes, yes, yes. No, I understand. I mean I just -- I guess the question is, right, isn't the government always going to be tinkering with that sector a bit, which, I guess, is the concern?

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [9]

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Yes. But the current legislation is so drastic that it does affect the consumer finance for the bank. So we'll see if it holds or not. So I would say without that one regulation, this cap, the rest of the -- what government proposed as the new regulation, we are fine with. We actually welcome it. Now the government says, "You cannot lend more than x," which just cuts the market to only those very good customers who are quite unlikely not to repay. And this is fine as much as there will be enough market space for us.

You also asked the, I think, very rightful question, what about our capital allocation? Well, of course, we're not going to fund that business if that business has worse capital return expectations than our core business. Today, we are funding Wonga, and it has better returns than our core business. After these new regulations comes in, our assumptions is it will be comparable. If it's not, then maybe this company should have a different owner. But it's not our thinking now.

Second issue is, please remember, it's a relatively low exposure. We bought that business for PLN 100 million. We funded that business over the past few months with additional about PLN 50 million, PLN 60 million. That business needs to grow. Of course, we need to give it some more capital for the next, say, 12 months or 18 months. But then later on, that business will become cash generative itself. It would be a profitable business. If there is a good business idea to develop their balance sheet much bigger, then Wonga will need to be at some point independent in terms of their balance sheet. And that's another project. But now we're talking about exposure of, say, PLN 130 million on a balance sheet of PLN 4 billion today. So it's not a big bet currently. If it's going to a bigger -- to be a big bet, it means it's good profitability, but also, we have an idea how to make this business independent in terms of their capital needs from KRUK's.

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Jonathan Moog, Lizard Investors LLC - CIO & Portfolio Manager [10]

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Yes. And obviously, just one last question on kind of the pricing in Poland. And obviously, the market, the demand side has changed in Poland, I think, pretty dramatically over the last couple of years in terms of guys out there who can buy debt and the price they're willing to pay for the debt. Do you -- I mean in terms of the pricing and what your view of normal pricing is versus what the banks may want, do you think it's just the banks getting adjusted to the fact that this demand picture has changed a bit and they got to get used to this new pricing? Or I mean what are the banks' arguments for not kind of addressing this pricing? Or is it just literally accounting and they haven't reserved enough for -- to be able to sell at these prices?

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [11]

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We think the banks -- it's a process of adaptation to those new prices, which is just painful for the banks. We think banks may not yet fully take account for the new legislation in Poland, which makes it much more costly in terms of process and people to do this alone -- to do the process -- for example, legal process, to do the legal process alone for their older NPLs.

So our assumptions today is it's a delay. The banks will come back to the market because it will be best for their interest, for their NPV, but they are testing. They are testing maybe KRUK or their competitor, our competitor would change their mind, pay more. Maybe they can start to do this process themselves. Maybe it is cheaper than what they expect. We think that they will come back, but maybe some of them will persist and say, "Okay, now we want to do it alone." I don't think so because we -- what happened? We had a history when there was 3 years where that bank was buying at inflated prices, which obviously affected banks' models' provisioning systems. Before that, banks were selling to us and other competitors at reasonable prices. Legislation changed over the past year, which make it more difficult for the banks to collect and more costly. So there actually a -- from the legislation point of view, there is more reasons for the banks to sell earlier than before. And now maybe it does take a year for the banks to adjust to this new pricing and change their strategies. This would be the view that Piotr or other Board members, Urszula, responsible for relationship with the banks have.

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Operator [12]

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Our next question comes from Marta Jezewska-Wasilewska, WOOD & Co.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [13]

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I just wanted to have a small follow-up on Wonga. Assuming a stable legal environment, what is the scale of Wonga you're having in mind? Where could you be towards the end of 2020 in case the market stays as is? Because the regulation, as I understand, is drafted but hasn't really hit the parliamentary legislative process.

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [14]

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That's right. If Wonga stays in the same environment, it means that we compete with these 400 other smaller companies. We do what we've started in July. So we -- in May, we built presence in this upper segment of the nonbanking consumer finance. We will start to be profitable already somewhere at the end of this year. We could double the size of the business by the end of 2020. And we would continue to evolve and grow for the next couple of years to reach even PLN 300 million of balance sheet by -- in the horizons for the next, say, 3 years. Then it will give a question, how well do we feel with targeting near prime or maybe going with that business approach when we feel we've achieved a stable, very profitable position in Poland? So the base-case scenario and the scenario at which we bought this company at the current still legal conditions was calling for growing the business about 3x and growing profits to, say, up to PLN 50 million in the horizons for the next 4, 5 years.

Is that all the possibility that exists? No. I could imagine scenarios where we start that business in some other markets or we also target some additional niche. But that was not the business case when we bought it, and it's subject to discussion with the management but definitely not this year, maybe in 2020.

So it's a very good platform. It's a very scalable platform. We are -- today, we are managing -- there are 17,000 people going through that platform monthly. And it could be 70,000 people that goes through that platform some time ago with a very similar fixed cost. The question is, what will be the regulation? What will be the market? In that business, we won't -- we will not be interested to copy Vivus or Provident. We would like to concentrate on the niche of better clients, lower-risk clients. So in that sense, we will be limiting our appetite for the size of that business. But if there's a growing base of people who are ready to lend and pay back on time to Wonga, we'll be growing off them -- with them.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [15]

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Okay. Changing in topic, the investments in the first half 2019, they are considerably lower versus first half 2018. Second half of 2018 was also quite high in terms of the new investments. If we can get any guidance with regards to targeted investment levels and actually where we could see the investments coming through in the third and the fourth quarter, which geographies.

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [16]

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So as I said, PLN 1 billion is an ambitious but doable target for this year, full year. So that would mean PLN 700 million in the second half of this year. Where? Poland, Romania and some in Italy, Spain and a little in Czech Republic and Slovakia. So more dispersed, more diversified investments in the first half of this year.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [17]

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Okay. And I guess everybody wanted to speak about the negative revaluations, but I've noticed very positive ones in Poland.

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [18]

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Yes, great.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [19]

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Yes. And first of all, thank you for starting to provide the geographical split of those. So there were some nice positive contributions coming from Poland and Romania in the second quarter in particular.

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [20]

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That's right.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [21]

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How probable it is that this can continue in the coming quarters.

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [22]

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It's highly probable. Both the Polish and Romanian unsecured business are performing very well, there are no signs of weakness there, and the operating targets are significantly above the accounting assumptions, especially in Romania. And so if nothing bad happens in macro or legal environment, and there's nothing that we see, you should expect following positive revaluations in the following quarters.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [23]

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So basically, if recoveries turn out to be good in the third and the fourth quarter, we may expect Romania and Poland to continue to see the positive revaluations, am I correct?

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [24]

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Yes.

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Marta Jezewska-Wasilewska, WOOD & Company Financial Services, a.s. - Co-Head of Research [25]

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Okay. I think -- no, maybe one last question. The cost of segments -- the costs in the debt purchase segment, they jumped in the second quarter. If we try to filter this through other notes, this is mostly personal costs and some court cases. Can you give us the color whether this is a one-off or whether those court cases are probably coming from Italy and Spain? This is something that you submitted to all the portfolios, and it's going to disappear? Or it's -- this PLN 126 million is sort of a new run rate for the debt purchase segment?

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [26]

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I'll ask Tomasz Kaluziak also to come back to you in more detail. But from the top of my head, I think please think of personnel costs as a new benchmark for fixed because if we added operating people that probably are people in the field force for Italy, then they are to stay. Of course, if we had less business, don't do much investments somewhere else, the number of people will decrease. In terms of the legal costs, yes, they will continue to be high or even go up as a result of this positive development in Italy where we already are convinced that we have a positive NPV on the new hundreds of millions of cases that we transferred to court, and we will be incurring legal costs for that. And that is an asymmetric situation where these costs will be going through the P&L in the following quarters, but we will not be fully reflecting that in recoveries -- in future recoveries through positive revaluation because who are conservative on that. So that is some asymmetry that is denting the current results especially in Italy and Spain, but it's a very good investment. And the current plan calls for significant legal costs in Italy in the next at least 4 quarters.

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Operator [27]

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(Operator Instructions) We have no other question. Dear speakers, back to you for the conclusion.

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Michal Zasepa, KRUK Spólka Akcyjna - CFO & Member of the Management Board [28]

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Thank you very much for your time today. We are committed to grow the value of that business. Despite some of the mistakes we've made and the unexpected circumstances that occurred in Q2, we have a stable, well-funded and profitable business with, I believe, good prospects to growth for the next couple of years even if 2019 will not be the best year in terms of EPS growth.

Thank you very much for your time, and I hope to talk to you and see some of you in the coming months.

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Operator [29]

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Ladies and gentlemen, this concludes our conference call. Thank you for participating. You may now disconnect.