Earnings Call: Q1 2019

Apr 26, 2019

And with me today is our CFO, Joakim Manodrom and our Director of Corporate Communications, Torun Litzen. We will start by taking you through a presentation of the results released this morning. And after that, we're happy to answer any questions you may have. Please now turn to Page 4, where we have provided you with a summary of the key highlights for the quarter. In the Q1, we saw solid operational performance in our companies and a strong recovery in Kinetic's net asset value. Zalando announced an ambitious plan to become the starting point for fashion in Europe, and Millicom made one of the largest acquisitions in the company's history in Central America. In addition to the investment in MatHem that we made in February, we made follow on investments in Kolonial and Budbee, both in the Nordics. This is in line with our strategy to double down in our private companies where we see strong performance. Our net asset value at the end of the quarter was SEK84.3 billion, rebounding by 20% compared to the end of previous year and corresponding to DKK306 per share. Our net debt position increased by DKK1.1 billion to DKK4 1,000,000,000, mainly due to the investment in MatHem, resulting in leverage of 4.5 percent of portfolio value by the end of the quarter. Please turn to Page 5 for an overview of the performance of our large listed companies. Our large public assets all had solid starts to the year. Zalando presented its 2018 full year results at the end of February and hosted a Capital Markets Day to present its strategic priorities going forward. It was rewarding to see the company making a strong comeback in the Q4, growing revenues by 25% with a 7% EBIT margin. And in the beginning of April, Zalando also updated the market of its Q1 EBIT, expecting an adjusted EBIT in the single digit €1,000,000 This is clearly above market expectations and further supports the rebound in the Zalando share price, which has almost doubled since the beginning of the year. I will go through the highlights of their strategic update on the next slide. But first, let us look at how our T and T companies performed in the quarter. Millicom delivered solid KPIs and organic growth in line with full year targets. In particular, the significant investments made in Colombia and Bolivia over the past several years are now beginning to produce faster revenue growth and rising levels of profitability. Also, the recently acquired Quebelonda in Panama is performing very well. Tele2 had yet another very strong quarter with underlying EBITDA growing by 8%, driven mainly by cost reductions. Since the merger with Com Hem, Tele2 has introduced several new growth drivers such as cross selling mobile into the fixed consumer base through Com Hem mobile, selling fixed into the mobile consumer base and reducing churn through FMC benefits and refocusing the B2B business on profitable growth. The company has also started executing on the planned cost reductions, making progress toward the ambitious synergy targets. Now let us turn to Page 6 for an update on Zalando's strategic priorities. Zalando's management is set on one clear goal, to become the starting point for fashion and thereby reaching Zalando aims to deepen its relationships with customers by tailoring its offering and focusing on building an even better shopping experience for its most loyal customers. The company also clarified its ambitions with its partner program, where brands can sell directly to customers through Zalando's platform. In 2018, more than 250 partners were integrated with Zalando's partner program, accounting for about 10% of gross merchandise value. And Zalando aims to increase this share to 40% by 2023, 2024. Zalando also announced that Kristina Stenbeck is proposed to return as Chairman of the Supervisory Board at the company's AGM in May. This is excellent news for both Zalando, Kinnevik and both companies' shareholders. With Cristina at the helm of Zalando's Supervisory Board, she will support Zalando to see through their bold vision. The Board will focus on long term value creation, including an efficient capital allocation framework, continued creativity and innovation, building deep partnerships and investing in Zalando's platform strategy. Now let us turn to Page 7. With Millicom's acquisitions in Panama, Costa Rica and Nicaragua, the company is now firmly positioned as the leading fixed mobile convergent provider in the region. This position is important because strong FMC capabilities has previously proven to be a catalyst for performance improvements, driving Net Promoter Score and revenues per user. Millicom also expects to achieve significant synergies from cross selling mobile services to cable customers and vice versa as well as increasing revenues due to reduced churn. Now let us turn to Page 8 for an overview of the performance of our private companies. Growth, strategic partnerships and product development remain priorities for our private companies. And I will touch on Global Fashion Group separately, so let us look at the performance of some of the other companies in the private portfolio first. Quikr generated just over $60,000,000 in annualized cash revenue by the end of March with an annual growth rate slightly under 70%. Having now demonstrated its ability to achieve group level profitability, Quikr will now reinvest in initiatives to improve user experience and accelerate growth. And over the last year, Quikr has seen its managed rental marketplace grow over 4 times to become the largest such business in the country. The company also strengthened its position in the used goods segment with the acquisition of CFO, a transactional marketplace. Our microinsurance company, BIMA, is growing its customer base at a yearly rate of 20%. BIMA is focusing on broadening its product platform and its mHealth product won the prize for best mobile innovation for health and biotech at the GSMA GLOMA Awards of 2019. It's also worth highlighting Livongo, where the member base grew to over 160,000 members after another record setting year, expanding the client base to more than 650 clients. Livongo is also broadening its product range and reported positive results from its first major clinical study of its hypertension management platform. The company launched the 1st cellular enabled blood glucose monoclonal system powered by Amazon Lex, allowing members to ask any of their Alexa enabled devices to provide their blood glucose readings and health tips. This is innovation at its finest and a great example of how technology can help people to live a healthier life. Let us now turn to Page 9 to have a look at the Global Fashion Group's performance. As you've seen in our net asset value, the value of Global Fashion Group rebounded by almost 25%, following the rerating of fashion e commerce on the public markets. I would, however, like to focus on positive operating momentum in the company that we now see after a year under the new leadership of Christoph Barshewitz and Patrick Schmidt. In 2018, GFG delivered accelerating top line growth with full year net merchandise value growing by 22.5 percent to 14 €53,000,000 on a constant currency basis and adjusted EBITDA margin of minus 4.3% for the full year. That is an improvement by 4.6 percentage points compared to the year before. What we see here is a great combination of increased growth and improved profitability. GFG also announced that it has sold its 40 7% stake in Namshi in the Middle East to the majority shareholder, EMR Malls, for EUR 114,000,000 Together with the closing cash position at the end of Q4 2018 of €105,000,000 Global Fashion Group had a solid financial position to support future growth. Please turn to Page 10 for an update on investment activity in the quarter. Last year, we invested in 10 new companies across our focus sectors, And our largest investment this quarter was MatHem, which I spoke at length about when we reported in February, including the presentation of our food vision. Our ambition is to support our new companies and over time, increase our stakes as they grow and perform. And in line with this strategy, we have invested further capital in 2 of our Nordic companies, Budbee and Kolonial. Since our initial investments in 2018, Budbee has tripled its numbers of delivers in Sweden and expanded to Finland and Denmark. With additional capital raised, Bugbee is planning to continue its geographic expansion into the Netherlands, and we look forward to continuing to support the Bugbee team on its exciting next steps. Our commitment to invest another NOK 300,000,000 in Kolonial is supported by the excellent progress we have seen in the company since our initial investment some 9 months ago. Kolonial has successfully completed the installation of their proprietary warehouse automation solution and returned to a strong growth trajectory. And we continue to see significant upside in the market opportunity, and we have a strong conviction in the team's ability to execute on it. I would now like to hand over to you, Joakim, for an update on our financial position. Thank you, Georgi. On Slide 12, we present the key contributors to the NAV development in the quarter, which was led primarily by strong share price performance in Zalando and Tele2 and the valuation uplift of Global Fashion Group. Our NAV increased by 20% over the quarter to SEK84.3 billion and NAV per share increased to 306. As per yesterday, our NAV was up a further 8% to SEK91.3 billion or SEK 331 per share. The value of our unlisted portfolio increased by 2,300,000,000 and ended the quarter at 14,200,000,000. This increase was driven both by the investment in MatHem of 889,000,000 and the change in fair value quarter on quarter by SEK1.3 billion. The value of our ownership in Global Fashion Group increased by SEK785 1,000,000 to SEK4.1 billion based on a sales multiple of 0.7x the full year 2018 revenues compared to the 0.5x at the end of the year following the significant rebound of listed fashion retailers on the public market during the quarter. Please turn to Page 13 for an overview of our balance sheet. On the left hand side of the slide, you can see a breakdown of the SEK1 1,000,000,000 we invested in the quarter, the majority of which went into MatHem. On the right hand side, you would note that we ended the quarter in a net debt position of SEK4 1,000,000,000, which corresponds to a leverage of 4.5%, which is well within our policy of staying below 10%. This quarter, we will, subject to AGM approval, pay out the first tranche of our annual dividend DKK4.25 per share. This is estimated to happen around the 14th May. The remaining SEK 4 will be paid out in November. With these remarks, I would now like to hand over to you, Georgi, to sum it up. Thank you. To sum up, we continue to execute in line with our strategic priorities with a long term view and an investment strategy supported by strong conviction in our portfolio companies and their teams. It was very rewarding to see the strong recovery in our largest public and private assets in the quarter. And I very much look forward to continuing to execute on our strategy, and I hope to meet many of our shareholders on May 6, when we will host our Annual General Meeting in Stockholm and tell you more about how we aim to continue to create value for our shareholders. Thank you for listening. And now let's open up for questions. Operator, please go ahead. The first question is from Joakim Ganel from CMB Markets. Please go ahead. Portfolio. In conjunction with the Q4 call, you had mentioned that we'd hopefully see some progress in 2019. Repeat the question. Absolutely. Can you hear me now? Yes. Now we can hear you. Perfect. So what efforts could we expect for this year in terms of increasing the market's understanding of the values that could crystallize from your new digital winners in the private portfolio? In conjunction with the QR code, you mentioned that we'd hopefully see some progress in 2019. Yes, that's correct Joakim. I mean, again, we are also looking for to find more proof points and numbers, KPIs in our private assets. And we still have the view that during 2019, we will definitely be able to demonstrate how value is being created in the private portfolio. We'll have to come back to that more specifically when we have more information, but our ambition remains the same. During 2019, we will show you more. Lovely. Okay. So given that you're obviously focusing accelerating your winners as we saw in this quarter, I guess it would be a firm to assume that you would continue to deploy more capital into your winners, so to say. So of this, which holdings would you say are close to another financing round? We talked about Babylon in Q1. Also, we note there's some impressive figures here for Betterment. They should be taking market shares among the independent U. S. Players. Perhaps a follow-up then on Babylon and Betterment in terms of capital need. I mean, first of all, maybe I can answer the question by saying that the capital need is very much related to the strategy of the company. Sometimes companies pivot into new business areas, new verticals and then, of course, there might be a need for capital raise. If we believe in that, let's say, change or update the strategy, we will be there as long term investors. But we also know that there are companies that have a quite long journey still in order to reach profitability. And you mentioned a few of those or one of those. Babylon is currently looking to raise money. And as a large shareholder in that company, we will be supportive. Understood. And just a follow-up then on Babylon, just if you could put some flavor on it. Financial Times, I believe, wrote that Babylon had revenues of approximately $10,000,000 for 2018. So with the Prudential tariffs and then Samsung here in the number, I mean, could you provide some sort of like revenue impact for those deals in 2019? Unfortunately, we cannot disclose any other revenue targets. But as you say, I mean, looking at Babylon's business model, you have the B2C services and you have the more platform services B2B2C, which is driven by agreements like Prudential's. With those agreements, we believe in a growth of the revenue in the coming years, a significant growth, I should add. But we have no more, let's say, numbers than what has been disclosed so far. Maybe important to say that even though the value of these contracts can be high, the numbers will be seen in the revenue in the company's revenue as the products are being rolled out. Understood. Two more questions. You made perhaps this one is for Joakim then. So you made some minor changes to the fair values of the Bayport Gas and Babylon supported by, as you call them, complementary valuation methods. What are these? Yes. As you know, we look at both the latest transaction value. And when they are kind of outdated or getting old, we also do kind of supplemental valuations based on multiples or DCFs. So that has been the case on these companies. Clear. And just a final question here then. As your financial objectives state that you will make buybacks if the shares trade at a significant discount only when there's a net cash position. But I mean, currently trading at a considerably higher discount than you have done in the past 5 years, so you're slightly more geared now. Can you just provide some updated flavor on your view on buybacks at this stage? And the reason why I'm asking is obviously that it would signal to the market that could be a pretty efficient way to allocate capital for your shareholders, I assume. Yes, absolutely. I mean, if you read the policy, there are 3 criteria, and one of them is clearly not met, being the one where we say that we should be in a substantial net cash position. So buybacks is not really on the agenda as of now. Very clear. Thank you very much. Thank you. Hi. Next question we have from Magnus Zomer from Handelsbanken. Yes. Hi. Thank you, Magnus Roman, Handelsbanken here. And I'd like to turn your attention to your ambitions in the Nordic grocery retail market. Do you see any potential synergies between the two companies you have an ownership in now, for example, in the back end in terms of shared sourcing, IT development and so forth? Yes. Hi, Magnus. We definitely see potential with synergies among the countries in the Nordic space. I mean, that's it's not a coincidence that we have been looking at these leading players in both markets. It's too early to say how we will extract those synergies. But one thing is for clear already now to understand the potential inefficient automation in the warehouse that we have been experiencing in the Colonial helps us to understand the potential also in MatHem. I mean, going further, of course, there will be discussions like joint procurement. There could be definitely scaling, positive scaling in technology, etcetera. We have not taken any decisions yet since these are pretty recent acquisitions. But of course, the potential is there and that what we had in mind from the start. Excellent. Also, when you look at the market and the players, do you identify any potential further investments apart from follow-up investments in these 2 companies to further strengthen this push that you are making? Yes. I mean, of course, now we have taken these bets in Norway and Sweden. We think that the grocery market, as we laid out last quarter, is so substantial. I mean, we talk about EUR 73,000,000,000, EUR 70 €4,000,000,000 in the Nordics only. So I think the market is really vast and creates a lot of potential. But as we also said, when we have this high frequency online business where you meet customers up to once a week, of course, you can expand that into other products and create a platform. It could be other type of parcels, it could be other type of services. And that expands the food vision into something more equivalent to a platform vision. And we also believe that the Nordics could be interesting from that perspective because it's a region where you can almost kind of ring fence and create this platform in order to see it more like an infrastructure play. That's something that we've been thinking about and capturing the home in the Nordics is something that we are very keen to explore even further. And it's also aligned with our views looking at the merger between Tele2 and Com Hem moving into the home at a greater extent. Highly interesting. Then maybe also I could just ask you a more specific financial question there on post the April investments in Kolonial, if you can make any comment on the ownership change there? And possibly, I mean, I guess, half of the investment could be converted to shares in the future, but the estimated ownership level post the investment? Unfortunately, it's not easy to say today since our investment is now partly convertible and there are other kind of options, opportunities and so forth in the cap table today. So we don't know how they will be exercised. It's too early to say. But one thing is clear, we will go up from our current 14.5 percent ownership to something higher. Some a quarter of the company or somewhere around there? It's difficult to say today, Magnus, because it's dependent on other shareholders and how they will react. But as we've said before, we always not always, but we kind of aim to have a large stake of the company, I would say, north of 20%. And that's also how we see our development in Kolonial. Great. Thank you. Then just finally a question on GFG. You mentioned in the presentation here the good positive operational momentum that you see in the company and then the solid financial position after the divestment of the residual holding in Namshi. So are there any other advantages for the group to go public near term that you see now that it doesn't seem to be needing any further cash contributions in the foreseeable future? I mean, I think the interest of GFG has been increasing over the last year, generally, I would say. And of course, that's an opportunity to allow new shareholders to enter this company. We believe that a company that is a clear market leader or has the chance to become the clear market leaders in these markets with a good healthy growth is always attractive as a candidate on the public stock market. That has not been decided yet. But as company communicated already last year, we are evaluating different options. Even though the company has a, let's say, strong cash position now, we have much higher ambitions for the growth and the long term potential of DFG. So in one way or another, capital injection, I would say, would allow the company to continue its growth trajectory. That's basically the view right now that we have. Right. So a possible listing would likely entail a broadening of the owner, the ownership in the company, if I got it right? I mean, it's too early for me to say, but that would be at least an option. The point we make Sure. Thank you very much. The point we make in this report, Magnus, is that with a strong cash position after the Namshi Put option, we're not in a situation where the company has to go public, but it's an alternative. And that's a very good position to be in. I think that's right. Thank you. Thank you, Magnus. Hi. The next question is from Yes, I am sorry. I am. I didn't hear it with my name. Sorry. Yes, I have a question follow-up question on Kolonial. Could you maybe say something about how much of the warehouse you've automated or what has been done? And also, if you have any first experience in efficiency improvements, any metrics that you could provide us with? And also, as I understand it, they just have one warehouse today. And how many of Norway's households can you serve from that warehouse? Okay. So when it comes to the investment in Kolonial, we before we did our first investment and deployed capital in 2018, we were very intrigued by the plan they had when it comes to automation. So the company has developed a proprietary system, which is a combination of, I would say, software and hardware and how to automate the central warehouse. And with after our post our investment, this project was launched and was basically completed by end of last year with very positive result. There's always some fine tuning after you have implemented this, but the significant uplift in efficiency measured in UPH, the units per hour, is really exciting. And it tells us something that you can improve the profitability at large implementing these kind of system at a relatively low, I would say, CapEx need. That's the interesting piece with their system. So it's not a fully 100% automated warehouse. It's a combination of finding the best possible way of combining conveyor belts and so forth in the warehouse with a clever and efficient software. The numbers have not been released so far by the companies, so I can't disclose any more figures. And I would like to maybe postpone that question to a later session with the company, hopefully during 2019. When it comes to the reach, you're right, there's one warehouse now And you can, of course, have long haul shipments from a major city to smaller city. We believe that in the future, you might actually need one warehouse or at least a hub around the largest the 3 to 4 largest cities in the Nordic countries. So in Sweden, as an example, it will be one most probably in Stockholm, Gothenburg and Malmo and then you can reach Maladol in the Stockholm warehouse and then you have the West Coast by Gothenburg and the South in Malmo. That's the type of infrastructure rollout plan that we see. It's not decided yet how it will look in Norway exactly, but I would assume right now that the picture will look more or less the same over time. Okay. Could you maybe say something? You said very small CapEx. What's very small? I mean the CapEx we've seen from the other retailers has been very, very big for their warehouses. I would say the difference is significant. It's more to oneten of the investments that I've seen in other solutions. Okay. Thank you. Thank you, Lena. Thank you. The next question is from Johan Guldahl from Bank of America. Hello. Thank you. I have three questions. First of all, I would like you to if you could talk a little bit about how you're thinking in terms of your financial target of a 12% 15% total return over a business cycle. Could you say something about how you think about the total returns within the listed holdings and in your unlisted holdings, I. E, what type of returns target you're looking for when you're making an unlisted investment? Thank you. Hey, Johan. So I'll take that. So yes, the methodology that we're using is that we do a kind of bottom up approach where we look at all the individual assets in our portfolio, think about the cost of capital in what region and then sum it up or consolidate that into total portfolio minimum required return. I would prefer not going to all the details of all the companies, but obviously, more mature companies in more developed markets such as Germany and the Nordics, obviously has a lower cost of capital and then by that also is obviously lower than the 12% to 15%. Then it depends on where these companies operate, the newer companies, where they operate and stage. But if you take an average, if you look at your unlisted holdings, I mean, it's 85% roughly of your portfolio is listed. So I guess your return requirements in that is probably much, much, much lower compared with the unlisted. But just as an average, when you're looking at your unlisted portfolio, not just that, yes, what type of No, no, you're right. I mean, in the listed portfolio, the target is probably somewhere between 7 and 12%. And the unlisted is probably more in 12% to 20%, 25%. Okay. Good. Thank you. My second question to you, Georgi, here. I mean, you made a lot of investments or at least a number of investments during your time as CEO. But in terms of exits, there have not been that many. Could you say a little bit about your when you look at the analytic portfolio, you talked about the GFG here. But do you see other candidates which could potentially, without naming anyone, but do you see like exit candidates in your unlisted portfolio right now? And could you say something also about a little bit I understand that price tag has come up also for your investments, but I guess that also that means that your the price tags have come up for potential exits from your portfolio as well. Could you say something a little bit about your exit strategy in downlisted as an average? Yes. So I mean, first of all, there are 2 different type of exits. We, of course, will look at our portfolio continuously and see companies that may be not performing as our expectations and where we have tried to change that development but not succeeded, we might be the wrong owner for those assets. I think you need to be fair to yourself and conclude that sometimes as well or basically companies that do not fit into our strategic roadmap. And we have done several exits during 2018 that we've not been talking too much about, but smaller divestments kind of to prune our portfolio. That's one kind of bucket of divestments, Lineal being one example. I think that what you're asking is not really that. You're asking about companies with larger kind of exit potentials or significant exit potentials. And there, it's too early to say. What I said when I joined a bit more than a year ago is that I will scan the product portfolio for the potential winners. We have been talking about a few brands from time to time and we will follow these and see how we believe that they will perform with additional capital. And of course, we will come back to divestments in those exits in the old companies as well, but I think it needs to take a bit more time before we understand the full potential. Got it. I got it. When I look at your Page number 11, your quarter report upon the unlisted holdings, I summed that up to 17 holdings which you are naming. But how many are there in total in this? I mean you have a lot of other, so to speak. How many unlisted holders do you hold in total? Yes. We don't have a specific number there, but that is there are some more in the portfolio. And it's likely to assume that some of them also are on the kind of list, one of the buckets that Joergi mentioned. So candidates that we might look to exit. But are we talking about like 40, 50 companies in total here or what? No, it's not. Say a handful maybe. Okay. And out of the 17, which you are mentioning, Georgi, here, what how many without naming anyone, but how many of these would you say are like future winners? I mean, I can guess a few, but how many just a rough figure here out of these 17, how many are like, as you see, like, hey, we want to stick around with this company for quite some time? I would say, like Johan said Joakim said, if we have a handful in the other that we would like prune, there is most probably a handful in the other category as well where we see that we really we find we see the great potential. I mean, we all need to say that we will find the next Zalando in the coming years, but that's, of course, easier to say. But what we believe is that there are 5 companies perhaps in this portfolio that we truly believe can move the needle for Kinnevik, one to one and definitely all together. And that's what we mean by companies that are potential winners. That's fantastic. I mean, I think I asked that last time. I think it will be extremely useful and very good for your perception of you as a share yes, if you were to start to provide some details about these 5s. But then that's just a pure thought from my side here. Michael It's a lot of sense. And as we said, we said that in the end of Q4 with the ambition to do it under 2019, and that remains. That's great. My second or my last you've seen discount obviously come up here to pretty high levels. We saw the discount increasing in Q4 when you had this big turbulence in Zalando as well. Now Zalando is back, but the discount is not back, so to speak. I guess investor what I hear from the Investor Oil is a bit word about the portfolio. I mean the concentration of your listed holdings within the 3 big ones, basically translate into 8% to 5% of your total portfolio. How do you think about the portfolio optimization going forward? And could you share some thoughts about that, please? I mean, we share the same kind of view, of course, that's facts that the public asset stands for 85%. And of course, when one of those shares is volatile, it has an impact also for Kinnevik. However, we have to remember that these companies have been growing because they have been very successful, not to mention Zalando the least. So it was maybe not the plan from the start to have one company representing almost 40% of the portfolio. That's kind of a luxury problem. Absolutely. We can't say now what we think to do about it, of course. But over time, I mean, take it in the long term perspective, the idea has always been to kind of reallocate capital into new potential winners, as we have said in this call, and that will also happen. It has happened in the past for Kinnevik and it will happen in the future. But right now, we are more kind of busy with making these company performing and be a good active owner than trying to alter the portfolio concentration in the short term. Got it. Thanks for your answers. Thank you. Thank you, sir. Thank you, sir. There are no further questions at this moment. Please go ahead, Victor. Okay. Thank you very much. Thank you for the questions. Thank you for listening. And as a reminder, just to finish up this call, we release our report for the Q2 on 19th July. Thank you very much. Have a nice day.