CapMan Oyj

OMXH:CAPMAN

Earnings Call Transcript 2020-Q1

[Joakim Frimodig, Chief Executive Officer]

Good morning, everybody, and welcome to CapMan's Q1 result presentation. My name is Joakim Frimodig, I'm the CEO of CapMan. We live in an unprecedented market situation. The corona pandemic is affecting us all as individuals, as businesses and as societies as a whole. And it's also affecting CapMan and some of its effects are also visible in our first quarter results. But overall, in the midst of this turmoil, CapMan stands strong. Let me start my presentation by giving you some of the highlights from the first quarter. It's a twofold story. On one hand, we see a very continued strong performance of our Management Company and Service businesses. On the other hand, we see significant adjustments to our fair values in our Investment business. We saw good top line growth in the first quarter. Despite of the market conditions, our turnover grew by almost 30%. And also, our fee-based profitability continued to grow. It's growing now for the 14th quarter in a row and we are at an all-time high of EUR 15 million on a rolling 12-month basis there, so a solid growing performance by the Management Company and Service businesses. Then asset values as a whole have decreased in the market as a result of the crisis. This means also that we have adjusted our fair values of our own investments, on average, by 7% and minus EUR 8 million in our first quarter results. I would like to highlight that these are not realized values, they are calculatory values, and I will give you more details of what's behind this figure later in the presentation.I said at the beginning that CapMan stands strong and we have financial strength, we have a very good liquidity, liquid assets of over EUR 50 million on our balance sheet. We have good solidity. We have book equity of about EUR 100 million, and our equity ratio stands at about 50%. We are also strengthening our financial position by making certain cost adjustments to support our profitability this year. Our strategic projects, they are advancing. We are talking about fundraising projects and other new strategic initiatives. But due to the prevailing market conditions, we see some delay in these projects. But however, they are advancing. The personnel is CapMan's key asset, and I'm really happy to say that we are healthy and we have a fully operational organization and that we have really learned a lot about distance working in the last few weeks. And in our line of business, we are very functional also in that mode. CapMan is also a responsible owner. We take a long-term view. And I would say that in this market situation, these claims and these values are truly tested. And we try to act according to them, be it in supporting our portfolio companies, for example, with their liquidity or supporting the management. Albeit in supporting our tenants in our real estate business and showing flexibility there, we try to act responsibly in this difficult situation. Before I go into details regarding our results, I would just like to remind you of our business model and the way that we report our figures. We report 3 different segments. We have the Management Company business where we are managing EUR 3.2 billion of assets. Those assets are being invested in our products and our strategies on the private equity, real estate and infrastructure. And through our different funds, they are invested in about 110 different objects and the money comes from about 250 different clients. From this part of the business, CapMan receives management fees and carried interest income. We have a Service business consisting of 3 units, CaPS procurement services, Scala Fund Advisory services and JAM reporting and wealth management services. From this part of the business, CapMan receives service fee income. And then we have our Investment business where we are making investments from our own balance sheet, mainly into our own private asset funds. And from this part of the business, we have returns from investments and fair value changes. And as I report the details of our results, especially in this quarter, it's good to understand the different sources of income because their impacts are very different in this situation. If we then go into the different segments and look at our performance in the first quarter, we can see that the Management Company business saw healthy growth. It grew by 12% in the first quarter in regards to top line. And when we look at EBIT figures, the growth was very significant, growing from EUR 800,000 to EUR 1.9 million in the first quarter. That's a growth of 130%-plus. It means that the top line growth is showing in the profitability figures. It means that our cost control has been effective. And as I also alluded to earlier, we are supporting our cost efficiency this year through certain cost-cutting measures, however so that we are not reducing the number of employees but finding the savings otherwise. We have several ongoing fundraising projects to support our growth of this business this year. And as I said in the beginning, they are advancing although slowing down somewhat due to the prevailing market conditions. Our Service business saw a strong turnover growth of 66% in the first quarter. And in line with that, our earnings grew by 70% from EUR 1.8 million to EUR 3 million in the first quarter. And we see contribution from all 3 business units here. CaPS has signed on several new customers and the cost control has been very good there, and the profitability has increased in the first quarter compared to last year. Scala, we saw new deals and success fees affecting positively the results of the first quarter. And JAM Advisors, there, the focus has been on growing the recurring revenue base, and that is advancing well. And also in the Service business, like in the whole organization, we are adjusting our cost base. So if you combine the fee-based part of our business, growth in turnover of 28% and growth in the fee-based profitability from about EUR 2.5 million last year to EUR 5 million this year, so doubling that. Then we have the Investment business. And there, as I said, we are adjusting the fair values of our own holdings, given the big change in the market during the last few weeks. The return on average of our own investments, minus 7% in the first quarter, which corresponds to minus EUR 8 million in monetary terms. I would like to highlight that these are changes in fair values that are mainly not -- that are not mainly realized in the first quarter. In fact, what we have realized in the first quarter was positive in terms of fair value change. Also, as you might recall, CapMan has historically had a fairly significant market portfolio that we have been selling down. And we managed to sell almost all of it before the crisis hit. We currently have only about EUR 1.5 million left in our market portfolio. So that reduction, that liquidation is essentially done. So to summarize, as I said, a twofold story. On the other hand, a solid well-performing fee-based business and then a strong impact on our own investments due to the market conditions. And if we look at the breakdown of EBIT, you can see the same in numbers. So our management fee profit up from EUR 700,000 to EUR 1.8 million in the first quarter so a change of plus EUR 1.2 million there. We booked minor carried interest income in the first quarter this year, in line with last year. And our service fee profit grew from EUR 1.8 million to EUR 3 million so a growth of EUR 1.2 million there as well. The realized fair value changes were positive EUR 2 million. But then, as I said, a big adjustment to our overall balance sheet holdings, minus EUR 10.5 million unrealized fair value changes. Then we have other costs and eliminations. That's a growth of EUR 1.5 million from last year, but that change is a onetime item explained by the termination of the Performance Share Plan 2018 that was done in the first quarter this year. So that change explained by this nonrecurring item. But overall, when you add this together, we end up with a negative number of minus EUR 6 million as EBIT for the first quarter. And if we compare the development to last year, top line, of course, looks good, but due to these fair value changes, operating profit significantly below last year's level. The fee-based profitability, this is the development by quarter during the last 4 years, and you can see a positive trend. And as I said, we are at an all-time high of EUR 15 million at the moment. Going forward, this year, we foresee continued growth both in terms of fees and in terms of fee-based profitability. We will see some variations between quarters, and we will also see the share of fee-based profit from the Management Company business growing in relation to the Service business. Here, you see some more details about the fair value changes in the first quarter. There's, of course, a big difference between the different asset classes that we hold. The biggest adjustment has been made to the private equity side, minus 20% of our own fund investments there, whereas infra and real estate, the adjustments are smaller but still negative. Given the shock that we have faced in the market, it's affecting virtually all asset values. So on average, minus 4% in infra and real estate and on total, minus 7%. As a comparison, the Helsinki Stock Exchange in the first quarter decreased by about 20%, so in line with private equity. So we have really made quite a significant quick adjustment to our fair values to reflect also the very sudden and rapid change in market conditions. Further on our balance sheet, you can see here that we have EUR 162 million of own investments. Of that, EUR 54 million is in cash and liquid form, and that means that we have a very strong liquidity on which we can stand and develop our business. Our private market investments, EUR 106 million in total, and the share of investments into the private market has grown from last year's 52% to 66% and is approaching our target of 80%. We have significant outstanding commitments that will drive this change, and that will also mean that a lot of the capital will be deployed over coming years in potentially very attractive market conditions for investments. I said in the beginning that CapMan stands strong in the midst of the market turbulence. If you look at our balance sheet figures, we have equity of about EUR 100 million. Liquid assets, I just mentioned, over EUR 50 million. Our equity ratio just below 50%, a positive cash flow from operations and investments and available credit limit of EUR 20 million. We drew EUR 20 million of our credit limit in the first quarter, which is reflected in our liquid assets. That's really to be able to take advantage of the foreseeable investment opportunities and be able to respond to all commitments going forward. Our balance sheet allocation has also changed in recent years. As I said, we have sold down our market portfolio and then allocated a big part of that capital into new strategies, new products in the real estate and infrastructure space so that we have private equity, real estate and infrastructure quite evenly balanced in our own investments. All of this combined gives us financial stability to weather the ongoing market storm. Then maybe to summarize still that what does this corona pandemic, what are its impacts on CapMan and our earnings? And I split this into our different earnings components that I presented earlier. If we look at management fees, these are of long-term nature. They create a good stability for our business and the impact, therefore, is minor on this earnings component. What the situation impact is the ability to grow, and there we see some slowdown in our growth efforts in our fundraising processes, but they are all still moving well forward. We foresee growth in our assets under management and management fees this year. In terms of service fees, CaPS and JAM have a high degree of recurring revenues, a growing share of recurring revenues. Scala's business is project-based. It's impacted by fundraising market conditions. But there, we saw a strong performance in the first quarter, and the pipeline is still solid but affected by the fundraising market conditions. In terms of carry, due to uncertain market conditions, some funds probably will take longer to reach carry. And if the situation prolong or worsens in our business model, it might also lead that the absolute number of carry received may diminish or vanish altogether. Fair values are a volatile part of our earnings model, as you can see in the Q1 result. There, we can foresee continued volatility. But I would like to emphasize, as I've said before, that we are in no hurry to realize these values. We are long-term value creators. We have value creation plans for our individual objects and we follow those. Then if we look at what the activity has been in the first quarter in the portfolio, I would say that despite of the market conditions, there's a good level of activity, both in terms of new acquisitions and also exits. On the infrastructure side, we closed the deal of Valokuitunen to invest in fiber connections in Finland. This is a joint effort with Telia Company. Infra also made a new investment into district heating in Norway. Nydalen Energi was acquired to the fund. On the buyout side, we made a new investment in the PDSVISION, a Sweden-based SaaS business and buyout also exited INR, a bathroom equipment business, a Nordic one. On the real estate side, the Nordic Real Estate I fund made its 13th exit just last week from Skutkrossen, a school property in Sweden. And also, we published rental reprieves for our tenants in the restaurants and cafes in Finland, and this is part of the, let's say, long-term social responsibility angle of our business that I alluded to earlier. New deals for Scala already mentioned and a good inflow of new customers to CaPS and JAM. We expect our assets under management and fees to grow this year, and what's driving this is many ongoing fundraising projects. We are raising capital for all of our investment strategies this year. As said, there has been some delay in these projects, on average, between 0 and 6-month delay due to the ongoing crisis. The fundraising environment is more challenging than it was a couple of months ago, but there still is healthy investor appetite towards our products. Carried interest, I mentioned it earlier, it's really affecting timing. Many of our funds have a long-term value creation plan, and many of the funds are in early stages when it comes to creating the value and the carried interest isn't expected for many years. For some funds, it's expected more in the short term. And there, we see some timing impacts in practice delays in receiving carry. If the crisis prolongs or worsens, it might also affect the absolute level of carry that we are able to realize from these funds. But that is too early to draw conclusions from yet. Our vision that we actively work towards is to be the Nordic private assets powerhouse. Being Nordic, that's part of our DNA. We are global when it comes to fundraising, and we want to invest broadly into the private asset space and also have supporting related services. And we, as a powerhouse, want to see that our impact goes beyond just turnover and balance sheet. This vision remains unchanged. We operate in an attractive market where the fundamentals have not changed. Our growth drivers still remain. Private assets historically, looking over long term, looking over cycles, have given the best returns to investor and investors are still interested in this market. It's a growing market, it's diversifying, it's giving good returns and it's attractive -- attracting new investors. And we have taken a lot of actions in terms of strategy to achieve our vision and we have a lot of actions ongoing. The projects are being advanced. And you can see on the slide a slight delay being drawn in there, but still, as I already mentioned, expecting to advance all of these during this year. These are our financial long-term objectives. We are looking for over 10% growth on the Management Company and Service business, over 20% return on equity, over 60% equity ratio and our dividend policy is to pay out an annually increasing dividend. Last year was a strong year. And in terms of growth, this year has continued on the same path. But of course, the return on equity figure is very weak for the first quarter and the background being the adjustment in the fair values there. Equity ratio, although lower than at year-end, still very strong. And to summarize the themes for this year in terms of fee-based business, growing assets under management, growing fees, growing fee-based profitability. As before, we are not giving any guidance for carried interest income or our investment business, but we have mentioned that the ongoing crisis is likely to impact the timing of carried interest and impact it, of course, negatively. And in terms of investment business, we see continued volatility in fair values and really, in this situation, driven by market conditions. We have made no changes to our dividend policy. Here, you can see our outlook estimate for this year. As before and as in previous year, we do not give numerical estimates, numerical guidance, and we have not made changes to these estimates from what we presented in conjunction with our Q4 results earlier. So this is the summary of CapMan's first quarter. I would like to thank you for your attention. I'd like to say to you that you should have a good spring despite of the market conditions, and please stay safe, please stay healthy and let's meet soon. Thank you.