Investor Day 2018

May 29, 2018

Slides

Ladies and gentlemen, good afternoon. Welcome and thank you for joining Exor Investor and Analyst Call. Please note that a presentation is available for the download on Exor's website, www.exor.com, under the Investor Relations, Documents and Presentations section and any forward looking statements Exor management makes are covered by the Safe Harbor statement included in the presentation material. As a reminder, all participants are in a listen only mode. Later, there will be a brief question and answer session. Please note that this conference is being recorded. At this time, I would like to turn the conference over to our host, Chairman and CEO, Mr. John Elcan. Sir, you may begin. Thank you. Good morning, good afternoon and good evening. Today we will be speaking about an overview of Exor, our businesses, gross debt, our Board of Directors, the newly announced Partners Council, our continuous research on family businesses before we close. We use the same format to give you an idea through numbers of Exor, which has a market cap of close to US18 billion dollars with our NAV of $25,600,000,000 We have a loan to value close to 13%, kept our cost well under 10 basis points. The overall scope of Exor businesses generate $162,000,000,000 revenues of U. S. Dollars with 350,000 employees in 180 countries, which make us the twentieth overall corporation on Fortune Global 500. 2017 was a very strong year for us. We were able to achieve our best year since we started in 2009 with 57% NAV per share increase beating our benchmark, the MSCI World Index. All our businesses achieved and most exceeded their financial targets and we were able to take our debt down by 25% since we acquired Partner REIT and S and P upgraded us our rating outlook. If you look at Page seven, it gives you a good idea of our net asset value and our overall performance, which is the one we measure our NAV per share. Over the close to ten years, we've generated 22.4% returns, which exceeded by 10 percentage points our benchmark, the MSCI World Index in dollars. In terms of total shareholder returns, this decade has been a very strong decade. We were able to generate over 1000% close to 30% compound annual growth rate, which was split between share price appreciation, which is the big bulk of it and dividends distributed. Now the reason of our performance has mainly been through NAV performance that is what has driven our performance. But also within this decade, we were able to half our holding discount, which was 60% back in March 2009 to 30% today. I'd like to highlight our businesses who ultimately are the reason of our performance. Our first business in terms of value is FCA, who had an extraordinary year in 2017, doubling its market cap and producing cash. The years ahead have a lot opportunities coming. FCA is having its capital days on Friday. So today I will not address any questions around FCA as it will be treated properly this Friday by Sergio Marchione and the rest of the leadership team. Partnering had despite one of the highest insured loss year, good underwriting results. We were pleased to see also that the investment returns made Partner Re perform in the top quartile and Partner Re was able to reduce its operating cost by 25%. As we look forward, there's a continuous effort in strengthening the organization and a focus on being always better on the underwriting and trying to be good at risk selecting, not aiming for revenue growth for itself, but making sure it's profitable in order to make book value growth as our objective. Ferrari had a great year. It is now within its luxury peers among the top performer. It was able to anticipate the $1,000,000,000 EBITDA figure by two years ahead of what was announced during the IPO. In September, there will be a Capital Markets Day, who will be the opportunity of telling you the exciting future Ferrari has ahead and we're seeing good progress on the F1 side. CNHI had a good year and the main focus is really to try and find a successor to the CO in order to increase the standards of performance of what is a very strong potential company. Juventus was able to be among the tenth largest football club by revenue, which was a great achievement. And that is also to be credit to the performance on the field. It was able to win its seventh consecutive league title and fourth consecutive Italian Cup title. It has been able and will continue in the future to strengthen and diversify its revenue mix. And the important thing for sports franchise is despite winning to make sure that you maintain that willingness and the abilities to continue to win. The Economist was ranked the most trusted news source among U. S. Readers, which is key for a business like The Economist where the real value is the quality and the independence of what it does. This has allowed and enabled to continue to increase the subscribers and pricing. We have good news with a new Chairman coming in, Paul Dighton, and a continuous effort from changing the business from an advertising to a subscription based business. A lot of work has been done by Enrico Velano and his team. And I would like Enrico to tell you about what has been achieved in the last eighteen months with our gross debt. Thank you, John. Good morning, good afternoon to everybody. Bringing our balance sheet back to a solid position has been our main focus since acquiring Parnary. We have reduced our debt by €1,100,000,000 since March 2016, both through cash collected from disposals and ordinary cash flow. Transaction helped by the increase in the value of our assets brought our LTV ratio from nearly 30% back to below 20% in less than twelve months, representing an earlier than estimated achievement of our target LTV ratio. At the end of the year, the LTV ratio was 14%. In addition to reducing the debt, have also been very active in optimizing our debt structure. In the first two months of 2018, we have taken advantage of an attractive market window to issue €700,000,000 in bonds on the long end of the curve. This has allowed us, first of all, to pay down the remaining portion of U. S. Dollar loan facility linked to a partner acquisition, refinance short term bank debt on a long term basis at favorable rates. Thanks to those actions, our average cost of debt has been lowered to 2.8% and our average maturity further extended to above seven years. It's also important to mention that no material refinancing will be required to service our debt. Since 2019 and 2020 maturity will be covered by ordinary cash flow. Moving forward, the LTV ratio will continue to be a metric that we will carefully monitor and assess. In addition, we also want to make sure that we use debt rationally and that it stays within reasonable limits. So we will monitor its amount and not only in relative to the value of our assets, but also in absolute terms. Thank you, Elico. I think that what has been achieved by Enrico and his team shows on one side how despite we went over a threshold to finance the acquisition of Partner E, we were effective in restoring our LTV ratio. I would also like to add that what Enrico said that it is important as our gross asset value increases and has increased that we monitor not only the LTV, but also the absolute value of our gross debt. I'd like to tell you about the evolution of our Board of Directors. We have been doing a lot of work on governance and that will be very important as we approach 2019 and our thinking about the right framework of governance for our companies. The evolution we've had for Exor is a blueprint. And this gives you an idea of how from 2009 to 2018, we have been able to simplify our board. And I am very proud and have great comfort that we have a strong board made of very talented individuals who have deep knowledge and a global view, which is very well suited for the nature of our businesses, for the nature of Exor. We've also announced recently the Partners Council. The Partners Council has the objective of structuring with very strong business leaders with whom Exor over the years has been in business to try and see how we can increase the overall knowledge, the learning from them and also the business opportunities that derives. I also want to reinforce that we have George Osman as Chairman, which will give us a different viewpoint from only the business one. He will bring us also the opportunity of having a viewpoint from his political career that he has had in the past. Last year we spoke about diversified holding companies and we had done a lot of work in trying to assess how diversified holding companies performed, really to have a better understanding of a peer group. We've done work on family businesses that we've defined with two criteria. Businesses where a family has relevant voting power more than 20% or businesses where the CEO or Chairman holds relevant economic interest above five percent. This number of companies have within the last twenty years outperformed by a big margin, the overall market, in this case the MSCI World Index. Now what is interesting of what we've studied is on the back of the financial crisis in 02/2008, 02/2009, we've seen a much stronger recovery of these companies. We've tried to assess and understand where the outperformance was coming from. And what is interesting to share with you is that the earning capability has been much stronger. Family businesses have proven to be able to earn more money and faster than the market. And secondly, their capital structure was also lower. The combination of the two explains their over performance, but also why they bounce back much faster. From a practical standpoint, we think that continuing this study is important for us. Firstly, because it seems that there might be an opportunity of creating instrument in which we can invest as a financial investments for partnering and for Rexor, which would give us an ability of if we did have market dislocations to be able to have something in which we have strong confidence of the potential returns, it would we would benefit from. But secondly, and this is a very important point as we complete our first decade as Exor, it also helps us to learn to understand what are the competitive advantage, why these family businesses outperform and try and apply that to ourselves and our businesses. Before I take questions, I wanted to reinforce that we have not changed our quantitative objectives and we don't foresee changing them. But we wanted to add this year what in terms of qualitative objectives we are focused on. First of all, we're really spending time in trying to assess our corporate culture as we think ultimately that is one of the reasons of competitive advantages in terms of performance for companies. And as we approach our first decade and it's been an incredible decade, we want to make sure that we learn from what has happened and we try and capitalize on that. Secondly, we have done a lot of work on our own governance and we'd like to put more thought around what would be a good governance framework as we think about the changes we will be doing to our companies where we have different boards that are coming up for renewal in 2019. Finally, we will continue to study family businesses, because we think that there's a lot we can learn from, but also more practically, we think it can be a very interesting financial investment opportunity. We're not foreseeing really as we advance in 2018 to look at any transaction. We are exploring opportunities, but they're more around opportunities like Welltech, which are growth opportunities. But where we are really focusing our time and attention is fundamentally on our businesses, trying to make sure that they perform, trying to make sure that they have clarity around their objectives, that they're well led, well governed and fundamentally trying to strengthen our own balance sheet and their balance sheet. Because we do feel that if we enter in territories of uncertainty, we will be much better off being with strong capital structures and balance sheet. I thank you all very much for the attention and I look forward answering questions. For what involves Partner E, which announced its Q1 results, we won't go into a lot of detail because as you know Partner E has two moments during the year for the full year results and for the half year results where it will speak directly with investors and analysts. I thank you very much for your attention and looking forward to your questions. Thank you. Thank We will now take our first question from Elizabeth Miliatis from Bank of America. Please go ahead. Hi, good afternoon and thank you for taking my questions. My first one would have to be on Partner E and just getting an update on the broad strategy there. So what are you thinking in terms of potentially making bolt on acquisitions like you did with Oregon? And also in light of what multiples some assets are currently selling at, so you're looking at 1.5x book. Are you considering divesting the asset anytime soon? Yes, generally, what's the strategy there? Thank you. We're very happy about Partner E. We think it's been performing well. 2017 results were solid. We think there's still a lot of work to be done and excited about the strengthening of the organization that is happening. We are looking closely at the Life business. We made an acquisition of origin as you recall. And we will be open if there are opportunities within the life space. We feel we have a good P and C and specialty business, but are always open to make them stronger. But it's but I look at bolt on acquisitions more in the Life space. We also are doing a lot of work on third party capital. And we think that organically from our capabilities and what we have, we are really putting a lot of effort in building a business out of that. Have no we're not envisaged sorry, Elizabeth? Sorry, continue. We have no plans of listing Partnere and no plans of divesting from Partnere. But we are happy that some of the transactions that occurred and as you said, very different multiples validate the acquisition that we've done a couple of years ago and happy about the valuations that we were able to achieve then. Okay. Thank you. And if I may, can I ask another question on maybe on buybacks? At the Capital Markets Day in October, you mentioned that if debt levels are better than they were at the time, which they are, if the discount is still wide, you may consider a buyback. So are you able to give us an update on that? As I mentioned last year within our capital allocation, we will continue to look at our businesses in which to invest, look at new businesses and buy back shares. We definitely have priority in strengthening our balance sheet and we'll be in a position as we strengthen our balance sheet to think more concretely about that. I want to add that we have two of our companies who will be public FCA this Friday, Ferrari in the fall about their future. And we feel it's important to have information in the market about what the opportunity set for them is before we engage in any transaction with our own share. Thank you. And if I can ask just one final question and then I'll jump back in the queue. There's been a lot of speculation about Sergio Marchioni and whether he'll stay with XSOAR or the investee companies. Are you able to give us an update if Sergio will stay with Exor or any of the investees? Sergio has been the largest contributor to our performance. He has been with us in EXOR and the Board and as Vice Chairman and has been part of all our decision making and will continue to be so. He has responsibility of Ferrari, which he has committed to stay and will present Ferrari's plan in the fall and is Chairman of CNHI and is very active in the search for a CEO. And it is his very strong ambition to make sure that CNHI gets to the same performance level as SCA is and CNHI is. Okay. Thank you. I'll jump back into the queue. Thank you. We will now take our next question from Patrick Hummel from UBS. Please go ahead. Yes. Thanks. Good afternoon. My question relates to FCA. We'll get the new five year business plan from Sergio and the team on Friday this week. And the company has clearly turned into, as you say on your slides, from a cash burn into a cash generator. And Sergio said in a quarterly call that the company is now in good shape to survive on its own, so it's no longer relying on a merger. I'm just interested in your take for the next five years. We'll get the stand alone business plan. How important is it for you still to see FCA in some sort of merger scenario in order to create even more value? Or are you actually happy for FCA remaining a stand alone company? And will you support that company and retain the shareholding throughout that next five year period, no matter if there is a transaction or not? As I mentioned before, I really would like to reserve questions for FCA Friday. It is an important day Friday. It is a realization of what has been extraordinary journey. And there is exciting things ahead and I'd like to speak about that on the back of Friday. Okay, fair enough. That was my only question. Thank you. We will now take our next question from Massimo Fecchio from UBS. Please go ahead. Good afternoon. Two questions from my side. The first one is on your family business analysis, which is quite impressive. Know it's not the first time that you show those figures, but still every time I look at it, I'm impressed. So my question is, does the scenario changes if you change the time horizon? Reason for the question is that probably not all of the institutional investors have a twenty years time horizon. So I was wondering if you do we go on the time, if it's five years, three years or seven years, if it changes massively the result? That's the first question. So I'm happy to answer on that first question. We've thought it and it always outperforms. So you go back three, five, ten, fifteen, 20, 25. So it's consistent. Okay. That's quite impressive to say and surprising. Second question is on the dividend policy versus the buyback. Now obviously, you are in phase of deleverage, so it's not a question on your 2017 results. But generally speaking, how do you decide between buyback and dividend? Is there a what kind of logic you assume? That's a very good question, Massimo. And we have always tried to make sure that we have a minimum dividend in order to have certainty that we pay a dividend. And we really try and make sure that the free cash flow we generate is higher than that dividend we pay. And the thinking is that we want our shareholders to be able to be serviced a dividend, but we are not a dividend yield stock and we will never be. We feel that there are opportunities within our businesses, within new businesses and buying back ourselves, especially with variability around discounts that are a better source for our capital than distributing a dividend. And assuming we have an increase of the dividend inflow from our businesses that will not change. So we want to keep a constant small, but growing dividend over the years in order to make sure that that's something that our shareholders, whatever happens can count on, but we don't want them to be investors of Vexor for that reason. That reason. Okay. That's very clear. Thank you very much. We will now take our next question from Martino De Ambroggi from Equita. Please go ahead. Yeah, thank you. Good morning, good afternoon, everybody. The first question is on Magneti Marelli. Since in a few months, you will receive a majority stake. Should we consider it a core asset in the medium term? So I will just repeat what I said before. What all what's related to FCA, I won't speak today as Friday is really very close. Okay. Although it was referring to point of view. But the second question is on Exor, the loan to value, because you mentioned your priority remains the financial strengthening of the group structure. But what is the loan to value level at which you will start to think about the new relevant diversification initiatives different in size from wealth tax, which was quite small compared to the net asset value overall? So two answers. One is that we've proven with Partner E that if we think there's something compelling, we will be able to go over our loan to value, but with the commitment of making sure that we deleverage on the back of that. And I'm happy that we have been able to achieve that and execute this properly. Now in a normal steady state, I think that having 10% LTV is we think is a good number. But I also want to be cognizant that LTV is a metric based on our gross asset value. And so hopefully as our gross asset value develops, then we need to be also aware that the quantums, the amount of what that represents becomes bigger. And we want to be cautious that we don't stick to just criterias, but we also have an understanding of the absolute number of debt. Okay. Thank you. And on Partner Re, I understood that there would be a public event for Partner Re, but in one of your Not previous a public event. We have two occasions where Partner Re speaks with investors and analysts on the back of its full year results and half year results. There won't be a Capital Markets Day FCA is organizing or like Harry is organizing. It's more of an earning call. Yes, clear. Two questions on Partner Re. Last time or maybe two conference calls ago, you mentioned still on acquisitions that there were no acquisitions because there were no opportunities for complementary deals. Is it still the case? Or based on what you commented before, something changed? We will look at add ons like Origin is a good example and Life the Life business is a part of the company that we are spending time on. So that could be an area where we could do eventually more. We don't foresee at the moment any opportunity to do something else. Okay. And the return on equity for the current year, can we assume the medium term target 8% to 10% as a reference point for the current year? Yes. We are comfortable that within a cycle that is achievable. Okay. Perfect. If I may just follow-up on the buyback, just to have a better understanding. You will start eventually the buyback. Your decision depends on the discount at which the stock is trading or the level of loan to value connected with the previous question you answered that you are comfortable with loan to value in the region of 10%? So in terms of decision making loan to value, so strength of our balance sheet. Second, the conviction on our businesses, so their valuation relative to where we think they can go. And thirdly, the discount. And the discount as I recalled before, we used to have 60% discount. So we have that, right, within a decade. But we've seen that in moments of volatility, those discounts do increase. So that's how we would be thinking about this. Okay. Thank you very much. We will now take our next question from Andrea Bellini from Mediobanca. Please go ahead. Hi, good afternoon everybody. My first question is about CNH. Previous CEO, Richard Tobin, commented about the possible spin off of some division such as truck and FPT in order to unlock some value from CNH. Assuming such a scenario, which is your commitment on these two business? Do you believe the track and FPT may be strategic for EXOR as the rest of CNH? So I think that these are conversation that the new CEO of CNHI will be having. Our belief also based on what we've lived in FCA is that there's still a lot of room for CNHI to improve its operational performance and strengthening its balance sheet. And ultimately, the way you really create value is through having businesses who perform well within the industries in which they compete. And we don't think spin offs or in general transactions are a way of creating that value. I think ultimately there's really substantive way of creating value that is through having companies perform better. Then if strategic reasons make spin offs or transaction make sense on that merit, they need to be seen. But we feel that CNHI has a lot of potential in the way it can be and will be run. Okay. My second question is again about CNH. When do you think to appoint a new CEO? And on top of that, do you think CNH will present a new business plan in the short term? I'm asking about that as the previous one was presented in 2014 together with FCA that will present a new one at the end of this week. So that's the reason why I'm asking. Yes. I think that we want to take the time to be able to find the right CEO. And so we don't foresee any urgency in terms of time. And I'm sure that when the new CEO will be appointed, he very well could be thinking about having a Capital Markets Day and exposing the market to what he thinks CNHI could do. But that is ultimately a decision he will take. And for us, it's very important to make sure that we have the right person. Okay, clear. And very last question is about JD. You didn't put JD among the XOR main business in your presentation. I was wondering why, what's the reason for that? It's just a matter of size because JD is far below the size of the other main business? Or you might consider in the future to sell the stake in this company? It's because of its size. The value today of JD for us, it's close to EUR 13,000,000. So we feel that it's not material. The businesses that we've included in the six ones are all above 2% of our gross asset value. Okay, many thanks. We will now take our next question from Andrew Hollingworth from Holland Advisors. Please go ahead. Hi. It's Andrew Hollingworth from Holland Advisors. Just a quick question, if I may, on sort of targeted rates of return. I think one or two entrepreneurs in The States have talked about sort of certain degree of magnetism towards these, whereby setting higher targets makes sense at almost a greater chance of them being achieved. And I think certainly, you've done that with EXOR in terms of your targeted return against MSCI. I'm just slightly conscious that with the good underwriting ratios and combined ratios of Partneree, having an internal and external target of returns that's still eight to 10%, is that really sort of I understand why you might have done that at the point of purchase, but is that really a suitable stretch target for those people, both owners of Partneree and the operators inside the company as well? We think that over the cycle, having a more competitive partnering than the one we acquired, we've actually reduced its cost structure by 25% and that's still there's still work being done there. We've reset the investment organization and it's now performing in the top quartile. And there's a lot of work being done to improve the underwriting. Now pricing, as you rightly hinted to is not something that can be determined. But there is a choice that you can make with at what returns are you ready to underwrite. And that's the balancing act that the leadership team of Partner E is working on. We are confident that over a cycle, Andrew, which doesn't mean yearly base, but let's take a cycle within this next decade. We think it's reasonable to think that the return on equity that Partner REIT can achieve would be between 8% to 12%. Okay. So if I may just come back, that's a slight improvement on where we were. I fortunately couldn't attend the Capital Markets Day last October. So I know you started at eight to 10%. Was that the case last October and now you're giving me a little bit more movement in that by way of the case? Or had you changed it before? No. We've always been looking at that number. The average between an 812% is 10%. So if we were able to do if we would be in that band, that would be something that we'd be happy. The management team of Partner Re Indian hinted to 810% over the next three, five years. What I told you was 8% to 12% over the next ten years. Okay. And can I just follow-up with one more question on that, which is that just an observation that obviously, if I look back in the history of Partner E being run arguably slightly less efficiently than you're running it today with a more prudent returns in terms of investment returns or investment policy than you've got today? It obviously made higher returns in that over the course of the cycle. So that does suggest the level of quite notable prudence in your targets. You would accept that point? Andrew, the world back then was a different one. And the pricing back then was very different. And we can explain that for multiple reasons. There's today more capital within the industry. There's more competition from alternative sources, which compete in the cat business, which has been historically the more profitable one. So I think it's very difficult. And the reason why in general the industry is not that efficient is because it has had historically very high returns. What was going to go what returns can be expected going forward will depend on how the pricing resets. We haven't seen that materially change after the losses of 2017. I think the management team feels reasonable that within the next three, five years that 810% is achievable. I think within a decade, if we take that band between 8% to 12%, that's what we would expect. Okay. That's kind. Thank you for taking the question. Our next question is from Emmanuel Bargetti from Intermonte. Please go ahead. Yes. Good afternoon. Two questions from my side. First one is more strategic and is about your investments portfolio. So assuming that you will have the war chest to go for an acquisition a mid sized acquisition, What kind of industries you would like to get exposure to compare to your current portfolio? And secondly, just a confirmation on the buyback. I got I don't know if I got it correctly, but you said that you won't go for a buyback until all the information regarding your subsidiaries will be made public or I got it incorrectly? Thank you. No, no, you got it correctly. We feel that it's very important to have the market know about what are the plans for FCA and Ferrari. And it's important that on the back of that information being disclosed, we will be looking at buybacks, which again as I said before is A, a function of where we stand in terms of our balance sheet B, in terms of the confidence we have on the business' future, which all of you will know about with the plans and where they sit in terms of valuation relative to that. And thirdly, where a discount is within a band of possible discounts. In terms of acquisitions, we're not looking at acquisitions. If we were to engage in acquisitions, we would need to have a stronger balance sheet because ultimately an acquisition for it to make a difference needs to be a big acquisition. What we will eventually look at is what I described in my shareholders letter in twenty for twenty sixteen when I was mentioning Welltek. So these are more seeds where we feel that there are good companies generally run by strong entrepreneurs where our capital is not only valuable as capital, but also as contribution to make those businesses better. And so these are businesses, which would have faster growth rates than the ones we have. And we look really at them as seeds. And these seeds hopefully will give us the opportunity of having big trees coming up in the medium to long term. Okay. Thank you. We will now take our final question from Elizabeth Miliatis from Bank of America. Please go ahead. Hi, and thank you for taking some extra questions from me. A couple of months ago, there were reports suggesting that XSOAR was entertaining discussions with the Chinese buyer for FCA. Are you able to comment on that? And is FCA something that you may want to eventually divest? Elizabeth, I'm sorry, but I will not comment in on any SCA related questions. Okay. Thank you. That's fine. That's okay. And then if I can, I do have just a further question on investments? So it seems for the short term, you're not really looking at any investments. But when might you start to think about buying something sizable? Is this something maybe in maybe 2019 seems like a bit of a push, but maybe 2020 you might start looking at a new asset to add to the portfolio? It will be a function of the strength of our balance sheet. And so that will derive ultimately by producing more inflow from our companies. So that will be I think that in terms of real acquisitions, we would be envisaging in being able to invest a sizable amount in order to make a difference and that's what we've always stated. And so ultimately, it will be a function of having enough resources being generated by our companies or as we've have done in the past, swapping one company for another one. We've divested as you know by SGS and Cushman and Wakefield. There are no intentions today in divesting from none of our businesses. We think that they are in very good shape. They have great trajectories ahead. Now for smaller opportunities, which as I said are more seed like, those are not really acquisitions. Those are investments. And the reason why we would be doing them is if we think that with a high probability, we can have very interesting returns on our capital invested. Okay. Thank you very much. That will conclude Thank you. Our Q and I'd like to hand the call back for any additional or closing remarks. Thank you very much to everyone and thank you for your support to Exor and to all of my colleagues and myself. Thank you. Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. You may now disconnect.