Earnings Call: Q2 2017

Jul 21, 2017

Good morning, everybody, and welcome to the presentation of Kinnevik's results for the Q2 of 2017. I'm Joakim Anderson, Acting CEO and CFO. And with me today as for previous quarters is Chris Kichot, our Senior Investment Director and Tuvan Litzian, our Director of Corporate Communication. We will start today by taking you through a presentation of our results and key achievements during the Q2. And after that, we are happy to answer any questions you may have. Turning over to Page 3, we have summarized the key highlights of the Q2 of this year. Our operating companies had a solid quarter and focused on delivering profitable growth. Our fashion e commerce companies continue to invest in their customer offerings to fuel growth while implementing efficiency measures to improve profitability. Our communication companies, Tele2 and Com Hem saw strong momentum as they continued to execute their strategies. Millicom had a somewhat challenging quarter reflecting weaker conditions on some of its markets. In the entertainment segment, MTG remains very well positioned to benefit from the shift in consumer video consumption towards on demand and online. Our companies in financial services and healthcare are leveraging strategic partnerships to reach new customer groups. We made total investments of SEK 3,900,000,000 in the quarter, whereof the majority into Com Hem and total divestments of $3,100,000,000 attributable to the sale of our remaining stakes in Rocket Internet and Lazada. Furthermore, this morning we announced a follow on investment of $65,000,000 investment as part of a $70,000,000 extension of last year's financing round. In conclusion, our net asset value was up 3% in the quarter, driven by strong performance from Zalando and Tele2 in particular and 6% up when adding back the dividend we paid out in May. Our total shareholder return for the 6 months was 22%, a result that we are very pleased with. As of yesterday, our net asset value was 82,600,000,000 dollars largely flat from quarter end following the mixed market reactions on our company's 2nd quarter results. We have a continued strong financial position and ended the quarter in a net debt of $800,000,000 corresponding to 1% of the portfolio value. We also took advantage of the favorable interest rate environment and issued in total appointed Georgi Ganev as new CEO of Kinnevik. Now I would like to take this opportunity to once again extend a warm welcome to Georgi, who will be joining us at the beginning of next year. Let's now turn to the first section of this presentation, starting on Page 5 with more in-depth information on the performance of our larger public companies. The public part of our portfolio accounts for 86% of our portfolio value and is therefore a major driver of value creation. In line with its stated strategy, Zalando continued to invest to fuel growth, while new initiatives on customer satisfaction and tech innovation. The company delivered around 20% growth in the Q2 and a margin of around 7.5% according to the preliminary numbers released earlier this week. They also maintained their guidance for the full year for both revenue growth and profitability. Millicom had its best quarter ever in terms of net subscriber additions in Latin America, which resulted in increased long term ambitions for number of homes passed. The company's financial performance, however, was weighed down by challenging market conditions in Africa and regulatory changes in Colombia. Tele2 and Com Hem progressed in executing their strategies and as a result saw healthy growth momentum in the Q2. In particular, we were encouraged to see an acceleration of Tele2's operations in Kazakhstan and the Netherlands and that commenced investments in customer satisfaction is paying back in record high ARPU and lower churn. MTG reported its 4th consecutive quarter of at least 5% organic sales growth, driven by strong performance in the Nordic business. Overall, we are very pleased with the development in our public companies during the Q2 and we continue to support them on their respective value creation journey. On the next page, Page 6, we have summarized the key takeaways from Zalando's Capital Markets Day. Zalando is Kinnevik's largest company, accounting for almost 40% of our portfolio value. The company hosted its annual Capital Markets Day in Berlin in June to provide analysts and investors with better insight into its strategic agenda and the future for digital fashion retail. Among the key messages were that Zalando aims to double in size by 2020 and also aims to achieve a long term EBIT margin of 10% through its wholesale business alone with upside potential from its partner program and B2B services. With their ambition to lead the digitalization of the fashion industry, Zalando continues to build on its position as the operating system for fashion. To achieve that, the company has identified 3 drivers of growth. The first is to improve customer satisfaction through better assortment, improving the digital experience and to provide more convenient payment and logistics services. The second is to build the infrastructure to empower fashion brands and in effect becoming their digital strategy. And the third is to leverage new technology to meet rising consumer expectations that is set to accelerate with the continued digitalization of the fashion industry. We are very pleased with what the Salamba team has achieved so far, and we are excited to continue being part of their journey going forward. We will now spend some time on the performance of our private companies. And as such, I would like to hand it over to Chris Bischoff, our Senior Investment Director. Thank you, Joerke. As Joerke mentioned, this has been another significant quarter of activity for the private portfolio. Picking out on a few of the highlights by company on Page 7. At GFG, we saw solid growth in revenue and improved operating margins resulting in markedly reduced losses for the quarter despite the challenging economic conditions in certain markets, notably Argentina, Brazil and Saudi Arabia. I'll touch on some of the highlights of the regional performance on the next page. At Quikka, we saw continued growth in Replies by listing and monetization. At BIMA, we're excited to welcome Axiata as a core shareholder. Participation by Axiata will aid the company to extend its reach into large markets in South and South East Asia. I will go through the operational update and betterment and the transaction in detail on the subsequent pages. At Babylon, we were delighted to participate in the Series B funding round, which confirms Babylon as the best capitalized start up in the consumer digital health space in Europe. In the quarter, I would highlight continued strong growth in registrations and the positive results to date from the NHS partnership. We are pleased with the progress at Livongo. There was an enormous need for the diabetes management services it delivers and client growth continues to accelerate. The product suite is expanding and the business is taking the first steps to drive medication optimization. Let us move on to the GFG regions on Page 8. A number of operational initiatives contributed to solid performance at the individual company level, including the rollout of new brands, better product assortment, improved buying, which allowed the companies to invest in more competitive pricing and increased warehouse automation. We wanted to call out the strategic partnership with Ima Miles. As with the investment by Axiarty and BIMA and the earlier partnership between Elia and Zoloa in the Philippines, this demonstrates Shinnevik's ability to attract and introduce value added regional partners into our multi country businesses. Investment will accelerate Namshi's development in the region and allow it to continue to flourish as the region's preeminent fashion e commerce destination. Miles will support the company to access additional fashion brands, further develop its logistics infrastructure and expand its geographic footprint. Moving on to the further investment in Betterment on Page 9. In the last year, Betterment has grown AUM by 95 percent to nearly $10,000,000,000 It's grown customers by over 100,000 to over 270,000 and during that time, the average customer balance has increased by almost $10,000 Overall, Betterment is the digital market leader in the U. S. In terms of attracting customers new to the wealth management sector. Turning on to our follow on investment on Page 10. ADEM continues to distinguish itself by its product offering. Since the company's last financing, it has launched a series of new product innovations, including access to licensed financial experts on the phone, advanced tax efficiency tools, portfolio personalization and a range of other features. The investment case remains consistent with what we articulated to you last year. This is a large and growing market with a shift to digital advice accelerating. Federman is the market need amongst independents and is attracting more first time customers than any other platform due to its focus on being the only financial partner that consistently works to maximize its customers' money. Customer acquisition, servicing and retention is efficient and drives high lifetime value. While a significant amount of capital remains in the last round, this financing will enable Betterment to continue to aggressively grow its business and increase product development in line with the faster development of the market. As a result of the round, Shinobit will become the largest shareholder in betterment building on our strong relationship with the Betterment team. This is also consistent with our investment strategy of deploying more capital in fewer strong performing businesses over time. I'll now hand back to Joakim to go through the investment management activities. Thank you, Chris. So on Page 12, as previously mentioned, we have made a sizable investment into the quarter to become the leading shareholder in Com Hem. We also made a follow on investment in Babylon, increasing our ownership stake to 20%. As Chris spoke about just now, we also signed an agreement to invest $65,000,000 in Betterment, showcasing our continued support for the company. We made 2 successful divestments in the quarter, selling our remaining stakes in both Rocket Internet and Lazada. On Page 13, I will go into a bit more detail on the Com Hem investment. You will recognize this slide from when we announced the acquisition in conjunction with the Q1 report of this year. I will not repeat myself too much, but as I said then, Com Hem is a very good complement to our existing mobile and media companies in the Nordics. Com M has a strong market position in the Swedish broadband and TV market and offers attractive growth and cash flow. On the next page, Page 14, we have put together an overview of Kinnevik's partnership with Rocket Internet. Rocket was founded in 2007, and Kinnevik made its first investment in Rocket in 2,009. Together, we have founded and built a number of strong businesses together that are now leaders in their respective markets. Kinnevik's partnership with Rocket has been instrumental in broadening our investment focus and in building a large and successful vertical within e commerce, which now accounts for almost half of our portfolio. Our investment in Rocket Internet is one of our most successful to date, generating an IRR of over 90% and 6x return on our invested capital. Turning to Page 15, we have an overview of our investment in Lazada. In June, we sold our remaining stake in Lazada to Alibaba for SEK 1,000,000,000. The transaction was the 2nd step in a 2 step process initiated in April last year when we sold slightly less than half of our stake to Alibaba. As you can see from the chart, our investments in Lazada was made over a number of years as our confidence in the business grew and resulted in a return of almost 3x our invested capital and an IRR of 33%. That concludes the investment management part of this presentation. And starting on Page 17, we will provide a summary of our financial position. The valuation of our business is driven by 3 components: operational development, general equity market conditions and translation of foreign currencies. Now that we have covered the operational performance, I'd like to turn over briefly to the equity markets and currency developments. To the left on this slide, we see a generally flat development of the key equity indexes over the quarter. On the right hand side, we have a selection of currencies of relevance for our companies that almost all point to substantial weakening against the Swedish krona towards the end of the quarter in particular. With this backdrop, solid performance in our operating companies and generally flat to negative equity and currency markets, I will now go on to talk about what this meant for the valuation of Kinnevik's assets in the Q2. On Page 18, we have outlined the detailed information on the valuation of the largest private companies. On a consolidated basis, you can see on the bottom line that the fair value of these assets again remained stable during the quarter and amounted to SEK 11,300,000,000. The only substantial change from the Q2 came from the sale of Lazada. At the top, we have our largest private asset, Global Fashion Group. And in absence of any material GFG level, we continue to value our shares in GFG, mainly on a weighted average and discounted revenue multiple of 1.3x for this quarter. On Page 19, we have laid out the key changes in the quarter that led to the 3% increase of our net asset value. The value of our public companies increased by almost $4,000,000,000 including dividend received of $1,800,000,000 Net investments in the listed companies added $1,600,000,000 to the portfolio value, which includes the investment in Com Hem and the divestment of Rocket Internet. Our NAV per share came up from SEK 2.89 to SEK 2.98 during the quarter as the total NAV increased from SEK 79,500,000,000 to SEK 81,900,000,000 at the end of the quarter. Adding back dividend paid of SEK 2,200,000,000, the value increase was 6%. As of yesterday, our NAV remains at largely the same level as at quarter end at 82,600,000,000 and the NAV share NAV per share, sorry, was SEK 300. Turning to Page 20. The final slide in this section is, as usual, the summary of our activities and the overview of our financial position. We made net investments of SEK804 1,000,000 during the second quarter. Adding that amount to our dividend net and our operating expenses, you can see on the right hand side of the page that we ended the quarter in a net debt position of SEK 800,000,000, which corresponds to 1% of our portfolio value. We issued a total of SEK 1,900,000,000 bonds during the quarter, taking advantage of the favorable interest rate environment. Total shareholder return amounted to 33% for the last 12 months and 19% for the past 5 years, which is well within our financial target of delivering annual total shareholder return of 12% to 15% over the business cycle. Let's now conclude this presentation by summarizing the key priorities for 2017 on Page 22. You will recognize this slide from previous presentations as our priorities for 2017 remain unchanged. Our large public companies are the main drivers of value creation at Kinnevik. And as such, our top priority is to grow and protect our value. We have seen solid financial performance and strong customer growth during the first half of the year for our companies, and they are all well positioned in their respective markets to continue growing in a profitable way. Each company has a clear strategic agenda which they are executing, and we will continue to work hard together with them during the rest of the year to support them on their respective journeys. Similarly, our investment team remains firmly focused on driving sustainable growth in our private portfolio as well as implementing best in class standards for governance, risk management and compliance. Furthermore, a key priority for 2017 is to identify and invest in new exciting businesses that complement our existing portfolio, and we are very pleased with the additions so far this year, Com Hem and Livongo. We have an ambitious agenda and delivering on that agenda will only be possible with a strong team. Therefore, we seek to attract, retain and reward talent in line with Kinetic's value creation. This year, as decided at the AGM, we have launched 2 long term incentive plans designed to align the interests of our employees with those and culture through proactive and transparent communication with all our stakeholders. In short, we can look back on a strong first half of the year during which we have continued to execute our strategy at a high pace. And we have the first question from Elias Porsche from Nordea. Please go ahead, sir. Thank you. Elias Porsche from Nordea. You have been offloading noncore assets such as Metro Sweden, Black Earth Farming, Seamless and so on recently. How much more do you have in the pipeline? And when do you expect to come down to the 15 to 20 holdings that previous management said was the target? And is this still the target? Thank you. Good morning, Elias, and thank you for the question. We will continue to work on our portfolio. We don't have a specific number targeted and we don't have a specific time set out for that non target. So we will continue to work with the aim of focusing our resources on a fewer number. There is still, call it, a tail with smaller businesses and we will probably continue to try to find new homes for them, but you will probably not notice it. All right. Regarding the valuation of the unlisted assets, over time, the discounts that you apply to the peer multiples have been quite volatile from a 20% premium in Global Fashion Group to now a 43% discount and smaller but still significant moves in the other holdings. These discounts seem more stable now over the past few quarters, but the calculation of them are still quite opaque to us. How do you calculate the 43% in Global Fashion Group, for example? And how should we think about these going forward? Should we expect a gradual decline towards 0 or steady at the current levels? Thank you. Yes, it's a good question. Thank you. So as you know and remember, during this period, we've talked about GFG and the shift from the premium valuation to discount valuation. I think you also remember that the market perception was that going from a premium valuation for growing companies in developing markets to a discount valuation and more focus on the more developed markets and more mature businesses. So during that period of time, we also shifted obviously our mindset and followed the market trend in our assessment of the fair values. How we come to the exact number of the discount in GSG is simply that we do bottom up some of the parts analysis where we look at each of these businesses within the Global Fashion Group. And we try to assess what the discount level should be if you compare, for example, Russia with the peer group that we have, Western Europe, more mature companies and profitable companies. So it's to a certain extent, an assessment of the counter risk and then also an assessment of the discount level for being more immature and not profitable. We have an ambition to be transparent. We have an ambition to be conservative and consequent in the way we look at this. So we haven't gone from a $0.20 premium to a $0.43 discount over a quarter. But it's been a journey over probably, whatever, 10 to 12 quarters, right? So that's the thinking about it. Certainly. But regarding the future development, should we think about these as slowly going towards 0? Or should we expect them to remain at these levels for the coming few quarters at least? Yes. So as they develop and as they become profitable, you should expect the discount to come down. As long as we keep the peer group as it is, as long as the peers trade and is valued the way they are today And as long as we get closer to them in terms of financial performance, yes, it should go down. Okay. On Betterment, the assets under management per customer has, since 2014, grown on average by 6% per quarter sequentially or 22% year on year, which, given the high number, must indicate negative churn. Could you please help us understand the mix between performance and negative churn in this development? Thank you. Sure. Thank you. I'll pass it over to you, Chris. Absolutely. So you're right in suggesting that the business has negative churn and indeed one of the core engines of growth of the business and the reason why there's very strong forward visibility is that customers, once they're on the platform, not only stay on the platform, but they continue to deposit on the platform through historically both positive and less positive market conditions. As we grow the base, that's clearly going to be a more and more substantial part of the business. And that is why we're focused on accelerating growth. It costs us to grow because we have to pay for those customers upfront. But once on the platform, the CAC2 LTV is very, very attractive. So I would say that that is a core engine in the business. Clearly, as we think Betterment is the only automated platform out there that can serve all customers on the market. So we have customers who are millennials and they're, I mean, their first account and we have customers who are putting $5,000,000 to $10,000,000 onto the platform who are retirees. So we're really across the spectrum. I think our sweet spot is customers with over $100,000 of investable assets. And we are looking to grow their share of wallet over a period of time. So we expect I guess in summary, we would expect assets under management per customer to continue to grow. But should we take the historical growth? Is it roughly half in asset growth and half in negative churn? Or mean 22% on an annual basis is, of course, not only performance? Yes. I think we continue to attract by number of customers. We continue to attract those savers and initial investors as a large as our largest number of customers. So it's going to be impacted by the mix of customers we attract at the time. But I think you can continue to assume that sort of growth rate in average customer balance, but it will be impacted by a number of factors that are hard to predict. Okay. Thank you. Thank you, Elias. So we have another question from Magnus Raman from Handelsbanken. Please go ahead, sir. Yes. Hello. This is Magnus Rohman. Thank you. I have a question regarding the Lazada divestment. I guess, Lazada was the Asia based business, of course, was largest general e commerce business model that you owned. But you also own 1 in Latin America, Lineal and 1 in Africa, Congo. So after the divestment of Lazada, should we view general e commerce as still being sort of a core e commerce sector for you or not? Thank you, Magnus. So I think what you should what you see in our report as well is that we work with these general e commerce businesses and try to convert them into marketplace models, which I would say is a general theme out there. So we continue to work with Lineon Conga, trying to drive revenue, trying to drive the conversion from an inventory based model to marketplace model. And we try as we do for all companies to create value out of the businesses, and we'll continue to do that going forward. Regarding the future and the future potential steps for these companies, I will probably pass on speculating about that. Sure. Okay. Then on the home and living retailers, you raised your valuation of Home24 by over SEK100 1,000,000 or the value of your ownership stake of 17% sequentially here in Q2. Can you give us a bit more color on that adjustment, please? So on Hem 24, I'd say, well, this is more a bit technical actually because you remember this liquidation preference structures that we have in many of our companies. And for Home24, we are at the stage where any shift in full equity value would have quite a substantial impact on the fair value of our shares. So if you remember, a couple of quarters back, we had substantial write down of the fair value of our SRAXANOVA24. And now we are coming back and climbing back on this steep liquidation preference curve, if that makes sense. It's complicated, but it's a big shift. We see some improvement in the equity value of $124,000,000 and it has a bigger impact on our fair value. Okay. Thank you. And I mean, you own 17% in both Home24 and Westring, the 2 home and living retailers. Maybe that is perhaps a bit below the ownership level that you prefer in the long term. So I guess the question is a bit the same on the home and living retailers. I mean are they a continued core part of your e commerce investments or I mean, which is otherwise very fashion centric or may they not be? Yes. Yes. Thanks. I understand the question. Yes, I mean they are part of our e commerce segment. They've been through some different challenges, and we think they are in a good position now where we hope we'll see a turnaround and some good development going forward. So we will work hard with both of the companies and continue to drive value there as well. So that's the end no further questions. We have no further questions, sir. Okay. Thank you. So thank you very much for listening and for the questions, Elias and Magnus. As a reminder, we would like to inform you that we will report our Q3 results on the 26th October. Thank you again, and have a nice day and a great summer. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.