Kinnevik AB

STO:KINV B

Earnings Call Transcript 2018-Q1

[Georgi Ganev, Chief Executive Officer]

Good morning, everyone, and welcome to the presentation of Kinnevik's results for the first quarter of 2018. I'm Georgi Ganev, Kinnevik's CEO. And with me today is our CFO, Joakim Andersson; and our Director of Corporate Communications, Torun Litzén. 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 might have. Please turn to Page 4, where we have provided you with a summary of the key highlights for the quarter. The first quarter of 2018 started with the announcement of 2 large transactions in our Nordic TMT portfolio: the merger between Tele2 and Com Hem and the merger between MTG Nordics and TDC. And as you know, the latter did not materialize as TDC became the target of a bid. However, in March, MTG announced the intention to split its business, a transaction which I will turn to just in a few minutes, together with an update on the proposed merger between Tele2 and Com Hem. You might remember that one of our priorities for 2018 is to identify and accelerate our key private assets. And as part of that, we led a financing round in Livongo during the quarter, and I will also return to that with more details on the transaction. I'm also very happy to announce today that we have agreed to invest SEK 80 million for a 20% stake in the Swedish last-mile logistics company, Budbee, which is in line with another of our key priorities for 2018, to increase our focus in the Nordics. Budbee operates a modern, customer-centric, last-mile logistics platform, specialized for e-commerce businesses. E-commerce continues to grow and as such, we see great potential and a significant market opportunity for the business. I'm very excited to take part and support Budbee's growth journey going forward. Now moving to our financial position. Our NAV increased by 3% during the quarter to SEK 93.3 billion, led by Zalando and Millicom, and our balance sheet remains strong with a leverage of 1%. And as of yesterday, our NAV was up another 2% from quarter end, reflecting positive share price reactions following our listed companies' reports. During the quarter, we also announced 2 new key hires to Kinnevik's investment team: Andreas Bernström, who joined on the 5th of March; and Lars-Åke Norling, who will join us the 1st of September. Both Andreas and Lars-Åke have strong operational backgrounds and they are a testament to our commitment of being an active owner and support our companies in the best possible way. They will be a good complement to a strong team already in place, and I'm convinced that we are now in a better position than ever to identify future opportunities and as well, to be a great partner to our companies. If you turn to Page 5, we have laid out the performance of our large listed companies in more detail. Zalando had a strong finish to the year and delivered on its full year revenue and margin guidance, despite somewhat challenging conditions in the beginning of the fourth quarter. And as previously stated, Zalando's key focus is to gain market share through continued investments, a strategy that we fully support. The company will publish its first quarter results for 2018 on the 8th of May. Millicom saw continued strong momentum and reported broad-based improvements across countries and business lines. Notably, mobile revenue growth in Latin America recovered to almost 1%, with Guatemala delivering more than 4% growth, representing a significant improvement, compared to the drop in revenue of 5% reported in the first quarter of last year. A record number of homes were passed in the quarter and Millicom is now on track to pass 15 million homes in the medium term. And both Tele2 and MTG had very strong operational performance in the first quarter, with Tele2 reporting sales growth of 5% and EBITDA growth of 6% like-for-like. MTG delivered both record sales and higher profits. Notably, MTGx grew sales by 27% organically and turned last year's EBITDA loss into quarterly profits. Com Hem successfully implemented price adjustment in the quarter, following product improvements in 2017 and thereby, laying the foundation for full year growth. The company also made progress in its network expansion program, having now increased its footprint by 45% since the start of the expansion less than 2 years ago. And overall, I'm very pleased to note that all our large public companies had a strong start of the year. On Page 6, we have provided you an update on the Tele2 and Com Hem merger. In January, Tele2 and Com Hem announced the intention to combine their operations to create a leading integrated connectivity player in the Baltic Sea region. The transaction is on track and in anticipation of the proposed merger, which will combine 2 highly cash- generative businesses, the companies have also announced an updated shareholder remuneration and leverage policy. And as output in the policy, the combined company is expected to distribute over 100% of equity-free cash flows through a combination of dividends and share buybacks, and we believe this is a very strong financial framework which will enable the combined company to offer competitive shareholder remuneration and value creation. Let's now go to Page 7 for an overview on the announced split of MTG. On the 23rd of March, MTG announced its intention to split into Modern Times Group and Nordic Entertainment Group. The transaction will create 2 separate listed companies with clear business and investment profiles that are both well positioned to capitalize on consumer trends, capture growth opportunities and generate sustainable value for owners, customers and last but not least, employees. The split will be done by distributing all shares in Nordic Entertainment Group, comprising MTG Nordic Entertainment, MTG Studios and Splay Networks to MTG's shareholders. The remaining MTG, comprising primarily e-sports and online gaming, will become a standalone, pure play digital entertainment company. And we agree with the company that this makes strategic, operational and financial sense and we're very supportive of the transaction. Please turn to Page 8, where we have summarized the key developments in our private companies during the quarter. Growth remained a priority on our private portfolio, with for example, Betterment increasing its customer base by 42% and its assets under management by 62% year-on-year. And since our initial investment 2 years ago, Betterment has grown from managing around $4 billion to almost $14 billion in the first quarter of 2018. Similarly, Livongo has grown its membership base by 112% year-on-year, and Babylon has doubled its number of registration to 1.5 million. Babylon's GP Service offered in collaboration with the NHS, continues to grow and now has over 40,000 new user applications across London. Quikr's verticalization strategy has allowed it to meaningfully improve both engagement and monetization on the platform, while reducing marketing costs. And as a result of this, the company registered its highest ever revenue and margins during the quarter. This was further supported by strong traffic growth as the rollout of low-cost 4G services in the country is enabling more people to come online. BIMA grew active customers by 19%, excluding discontinued products, and is focused on cross and upselling its existing customer base to improve customer lifetime value and profitability. And during the quarter, the company announced the launch of the global partnership agreement with Telefonica to drive expansion of microinsurance in Latin America. Now please flip to Page 9 for an update on Kinnevik's investment in Livongo. As announced in April, during the first quarter, we led a financing round of USD 105 million in U.S. digital health care company, Livongo. Kinnevik invested a further USD 41 million and increased their ownership to 8%. This investment clearly underlines our ambition to identify and accelerate the key assets in our private portfolio. It also shows our continued belief in the opportunities of the health care sector and chronic disease management in particular. The prevalence and cost of chronic disease is increasing globally as a result of rising obesity rates, lifestyle and dietary changes, as well as an aging population. The U.S. has one of the world's largest populations of people with diabetes, amounting to 1 in 9 adults and it's expected to grow to 1 in 3 by 2050. Livongo provides a technology-enabled solution, with a proven ability to deliver more convenient and cost-effective care, which is consistently improving patient outcomes. Since our first investment a year ago, Livongo has grown its membership by 2.5x and reinforced its position as a leader in the management of chronic conditions, starting with diabetes and hypertension. We're very happy to be part of this journey with Livongo. Now, let's turn to Page 10 for an update on Global Fashion Group. GFG delivered continued topline growth and improved profitability during the full year of 2017. And in the fourth quarter, GFG grew both revenues and net merchandise value and improved their adjusted EBITDA margin. All regions continued to focus on cost saving activities and as a result, EBITDA losses were reduced by 25% year-on-year. The gross margin declined slightly due to investment in price and product mix effects. Lamoda show healthy growth, despite a challenging price environment in Russia and the rollout of enhanced customer service initiatives continued, such as more customer pick-up location and the introduction of 15-minute delivery slots across Russia. The strong growth in Dafiti was driven by a successful Black Friday campaign, especially in Brazil. Increased price investment, especially to support Black Friday promotions and Christmas trading events weighted somewhat on the gross margin. And Zalora and Iconic accelerated its growth in the fourth quarter. Margins declined somewhat, largely driven by stock clearances, product mix effects and a promotional pricing environment. I would now like to hand over to our CFO, Joakim Andersson, for the next section of this presentation starting on Page 12.

[Joakim Andersson, Acting CEO & CFO]

Thank you, Georgi. On this slide, we present the key contributors to the NAV development in the quarter, which was led by strong share price performance in Zalando and Millicom. Our NAV increased by 3% to SEK 93.3 billion, and our NAV per share increased by SEK 10 per share to SEK 339 in the first quarter. As per yesterday, as Georgi mentioned, our NAV was up further 2% to SEK 94.8 billion or SEK 345 per share. The value of our unlisted portfolio increased slightly and ended the quarter at SEK 12 billion. The value of Global Fashion Group increased by SEK 61 million to SEK 5.3 billion, based on a sales multiple of 1.2x. As you can see from this page as well as in our report, we have combined the 2 sectors, communication and entertainment, into a new sector named TMT from this quarter. Please turn to Page 13 for an overview of our balance sheet. Our investment activity was low in the quarter. And as such, our net debt position was stable at SEK 1.1 billion at the end of March, which corresponds to a leverage of 1% of our portfolio value. We are very pleased with our total shareholder return, which remains well above our financial target and amounted to 19% for the last 5 years and 30% for the last 12 months. Georgi will now take you through the last slide of this presentation on Page 15.

[Georgi Ganev, Chief Executive Officer]

Thanks, Joakim. We have a clear set of priorities for 2018 and I'm very glad to say that 3 months into my job, I think we have already made some very good progress in the line of our priorities. The announced merger between Tele2 and Com Hem as well as the split of MTG shows our commitment to active ownership and value creation in our large listed companies. And our investment in Livongo shows our commitment to identifying and accelerating the companies we believe in across our private portfolio. And the agreed investment in Budbee is a first step to expanding our Nordic presence. The addition of 2 new key hires in the investment team, both with strong operational backgrounds, will enable us to become an even better partner and adviser to our companies, listed and private. It will also help us to identify future opportunities in our focus markets, including the Nordics. And in summary, we have started the year with a very active quarter and with the continued strategic developments in a portfolio coupled with a strong pipeline of interesting opportunities, I surely expect that 2018 will be an exciting year for Kinnevik. Thanks for listening. And now, let's open up for questions. Please go ahead.

[Operator]

[Operator Instructions] And our first question comes from the line of Magnus Råman from Handelsbanken.

[Magnus Råman, Research Analyst]

Firstly, on Budbee, a few questions. Can you help us with some financial disclosure here? Budbee reported revenues, I believe, of around SEK 20 million and SEK 5 million operating loss in 2016. But the company has mentioned around 300% year-on-year growth in deliveries at the start of this year. Can you help us here to get a grasp of the current financial performance of the company?

[Georgi Ganev, Chief Executive Officer]

Okay, Magnus, Georgi here. So I mean, Budbee is obviously a company that's in a pretty early stage compared to some of our other investments. And we also know that they have developed their value proposition over their, let's say, the last couple of months or last year. So their true customer offer that we see attractive right now is to provide a world-class, last-mile logistics service for e-commerce players. And this is a relatively new business still for them, so we expect a, let's say, fast uptake and strong growth in, let's say, the coming year. We would not like to disclose any other financial figures of the company right now. But I don't think the revenue that you brought up from 2017 is that relevant, to be honest.

[Magnus Råman, Research Analyst]

Okay, that's clear. You mentioned for Lamoda, that has a proprietary delivery apparatus in Russia and is it -- for Budbee, is it pure delivery services and fast deliveries that they aim for? Or do you look to drive innovation, such as has been the case in Lamoda, for example, with instant try on and direct returns and such developments of the service?

[Georgi Ganev, Chief Executive Officer]

Yes, I mean of course, with our great experience in e-commerce as such and my personal experience being CEO for an e-commerce or online-based company, the team and I personally know that last-mile service and experience is instrumental to the complete online experience. And there's also a lack of alternatives for these last-mile logistic services, not only in Sweden and the Nordics, but across Europe and in other markets as well. And we believe that Budbee has a very strong team and strong position to provide this, let's say, superior customer experience. We know that their ratings is extremely high, so in the high 4.9, 4.8 out of 5, showing that they have done something that's really appreciated. And going back to your question then, of course, we see a lot of different last-mile services within our portfolio, and we believe that Budbee over time can and will develop its customer proposition. Again, it's too early to say today but this part of the experience within e-commerce, a growing segment, will be more important going forward.

[Magnus Råman, Research Analyst]

Right. So I guess, Budbee is a Swedish business today but you also see opportunities for better services across Europe, if I got you right. And then just finally here, should we expect logistics around e-commerce to be sort of the new target investment sector for you or is this more of a one-off?

[Georgi Ganev, Chief Executive Officer]

I think it's too early to say. I mean, this -- an very adjacent category to our e-commerce sector. We have said that e-commerce marketplaces is one of our focus areas. And within that kind of ecosystem or environment, we see different kind of solutions that are important for this business, last-mile logistic being one. So now we go in Budbee, it's too early to say if that is something that we will look to -- look into in other markets. When it comes to the expansion of Budbee, I think obviously, this is a let's say, local business and expansion, you do it city-by-city, country-by-country. But we see of course, potential to grow this business to become really large and also including outside Sweden.

[Magnus Råman, Research Analyst]

Okay, that's clear. Then, on GFG and the path to profitability for that company. Do you expect continued operating leverage or a recovering gross margins to be the main driver on that journey?

[Georgi Ganev, Chief Executive Officer]

I think it will be a combination, but for sure, we expect over time, more operational leverage. The company has been focusing a lot on growth in the past we know. And clearly for a few quarters ago said that now it's going to show the path to profitability and that will come in both improved gross margin and improved operation initiatives efficiency. When it comes to gross margin, we also know that, that's the biggest tradeoff to growth. So obviously, as I said now in the successful Black Friday campaigns, Christmas event and other, let's say, environment, we know that from time-to-time, the gross margin can have a hit. But in general over time, we will see a combination.

[Magnus Råman, Research Analyst]

Right. The final one for me, if I may. On group cost, I mean, you mentioned here that you strengthened the team with a few names recently. And I noted in Q1 that you have an increase in administration costs, a quite steep increase here to SEK 67 million from SEK 30 million last -- same quarter last year. Are there any one-offs in this number? And connecting to this, you're pacing now at around 0.3% management -- trailing management cost to total assets. Can you provide us with the view of what could be a fair level for cost going forward?

[Joakim Andersson, Acting CEO & CFO]

Magnus, this is Joakim, I'll pick this one up. So the explanation to date's Q cost increase this quarter is, as you rightly say or alluded to, is a one-off related to recruitments and combine, I would say, combined with a higher estimated cost for our outstanding long-term incentive plans. So it's a combination this quarter, but you shouldn't expect that number to be the same for all of the quarters going forward. However, as we build up the team with the senior people, obviously, the cost will come up slightly compared to last year.

[Magnus Råman, Research Analyst]

Right. So essentially, what you're saying is that around 0.3% cost to total assets is a level that you're comfortable with. But seeing it rise to, for example, 0.5%, you won't be comfortable with?

[Joakim Andersson, Acting CEO & CFO]

No, no. Yes. No, correct.

[Operator]

And our next question comes from the line of Derek Laliberte from ABG.

[Derek Laliberte, Lead Analyst]

So a follow-up question on the Budbee investment, which certainly seems like an exciting one, but it is quite small in size. So I was wondering if you could explain how you landed in this specific Swedish investment system and a rationale a strategic one, where you see synergies with Zalando and a Qliro, et cetera?

[Georgi Ganev, Chief Executive Officer]

Yes, I can take that. Obviously, this is the first, let's say, Nordic investment that we've done in a while, and it's a way for us also to strengthen our focus in the Nordics, our community networking. We truly believe that Budbee could be a bigger company than it is today. It's a fantastic team in place already and they have a strong value proposition. So from that point of view, it's not a coincidence that we did choose Budbee. It's definitely selected as one interesting company in the Nordic space. But of course, it won't change or move the needle for Kinnevik as such. When it comes to -- right now. When it comes to synergies, we believe that we have a lot of experience, a lot of interest in the e-commerce portfolio that we will somehow use in our way of being an active owner in Budbee. It's far too early today to say anything of, let's say, cross fertilization between our portfolio and Budbee.

[Derek Laliberte, Lead Analyst]

Okay, that's very clear. I was wondering also if you could break down this increased discount versus developed market peers for GFG, the valuation. Which of these geographies that they operate in do you see them? Or have you decided to assess increased discount?

[Joakim Andersson, Acting CEO & CFO]

Yes, I'll take that one. So, no, we would prefer not to go into all the details around that. But as you can imagine, certain geographies earn a higher discount in a way towards the developed market peers because of the geographies as such and the risk premium related to those geographies. So in that sense, you could understand that the discount level for the Iconic is probably somewhat lower than what it is for our Russian or Brazilian businesses. But -- well, I would prefer not to go into the details on that.

[Operator]

And our next question comes from the line of Marie Scheja from Nordea.

[Marie Scheja, Analyst]

I was wondering with regards to your investment pipeline, what type of sector or industry would you say stand out at the moment?

[Georgi Ganev, Chief Executive Officer]

I would say we have a quite evenly distributed pipeline between our 3 segments that we're currently looking at. And that's e-commerce marketplace, it's health care and financial services. Again, since e-commerce marketplace being a sector that we are quite heavy in today with investment in GFG and Zalando, we're obviously focusing a bit more on the financial services and health care when we're scouting new opportunities. But I would say, it's quite evenly distributed in this pipeline.

[Marie Scheja, Analyst]

And also, could you give a rough estimate on your investment capacity during 2018?

[Georgi Ganev, Chief Executive Officer]

I mean, as we said before, we have a very strong balance sheet. The financial situation is as follows: that we have 1% leverage to our portfolio value; and we have a target of 10%, financial target of 10%. So we have good room for investments.

[Marie Scheja, Analyst]

But if you would give like a outlook for 2018, what do you think?

[Georgi Ganev, Chief Executive Officer]

We would not like to give any investments outlook. In that case, we basically -- we are ready to invest when we find the right companies.

[Marie Scheja, Analyst]

Okay. And also, one last question regarding Budbee. Could you give a brief comment on the investment process? Did you find them or did they approach you?

[Georgi Ganev, Chief Executive Officer]

I would say it's a combination. We knew about this company from some time ago, and we also know that this company have had dialogues with some of the companies within our portfolio. And in my old life, I also had a dialogue with this company. I mean, that's then where I was CEO, had only 5% for consumers and 95% for B2B, so it was not really as relevant. But we had a good grip of this company and especially the team in place. So I would say from that perspective, they were known but they also approached us. And I think it's quite fair to say that when we said that we are focusing more in the Nordics now, we already did that in the beginning of the year. We have seen quite a high increase of deal flows of incoming opportunities. So that's, of course, very positive. So we have now the, let's say, the ability to choose the companies we want to engage with and Budbee is one of those.

[Marie Scheja, Analyst]

Okay, super [indiscernible] is the remaining 80% owned by the founders or are there other investors also in the business?

[Georgi Ganev, Chief Executive Officer]

The founder owns today a significant share of the company, being the largest investor, but we are the second largest investor of Budbee with this investment -- or we will be, sorry.

[Operator]

Our next question comes from the line of Elizabeth Miliatis from Bank of America.

[Elizabeth Miliatis, Research Analyst]

I have a quick question on investments. You mentioned that it's fairly low this quarter relative to historical. Is there any particular reason why it's low, a lack of deal flow or interesting opportunities or just due to change of management? What's your view there?

[Georgi Ganev, Chief Executive Officer]

No, I mean, we are actively looking at new opportunities. And basically, as I said, there's a lot of incoming opportunities to Kinnevik right now. We have established, when I joined the company, a new way of looking at investments but in general, there's no particular reason for not announcing more investments in the Q1. We are constantly looking at our pipeline and taking decisions.

[Elizabeth Miliatis, Research Analyst]

And also on the unlisted assets, we've talked about this before about potentially focusing the portfolio and divesting some of the smaller assets. Are you able to give us maybe a bit more insight as to what you might definitely want to keep and things that are not as attractive?

[Georgi Ganev, Chief Executive Officer]

No, but as I said before, we have a clear priority for 2018 to identify the companies within our private portfolio that we really want to double down on, Livongo being one of those companies. I mean, that's an investment of USD 41 million as said, and it's a clear signal, I would say, that we really believe in Livongo being one of those companies. More than that, I don't want to go into today, but that is also something that we have been at working actively with during Q1, obviously.

[Elizabeth Miliatis, Research Analyst]

And if I can just ask one more final question. My understanding was that you were looking to more focus the portfolio to have fewer assets which are also larger in terms of size, but yet Budbee is quite small relative to the existing assets. Are you able to reconcile those 2 points there? Obviously, Budbee is quite an attractive asset but I would have assumed you would have looked to more sizable companies to invest in.

[Georgi Ganev, Chief Executive Officer]

As said, we're looking at many companies and I think that now, we went forward with this one. It's mainly because I would say, it's also aligned with our increase with Nordic focus, so it's not -- so maybe it's not -- would have been as likely to invest SEK 80 million in a company in another region. So for that reason, it was more interesting to continue now with our Nordic approach. But of course, we're looking at all different companies. And when it comes to consolidation of the portfolio, I think this is not a onetime -- is a one-off thing you do, you need to do this constantly. So there will be a, let's say, incoming flow of companies coming into the product portfolio. And at the same time, we need to make sure that we do exits.

[Operator]

[Operator Instructions] And our next question comes from the line of Nizla Naizer from Deutsche Bank.

[Fathima-Nizla Naizer]

I just have two after all those questions before me. The first one is on your investment strategy. I know you mentioned a lot about it. I just wanted to understand, are you all happy at the moment with the split in your portfolio between the public assets and the private assets? Or do you feel at some stage that, that sort of portfolio mix should change going into 2018 to focus on one over the other or to balance it out a bit? And my second question on that is, when you look at your investments such as criteria, are you feeling that there are more opportunities globally or do you think that Europe would be more interesting in terms of investments going forward, especially since you increased your Livongo stake and this is primarily a U.S. company? So just wanted to understand how you look at the world in general when it comes to interesting opportunities. My second question is on Global Fashion Group. With the new management in place, including a former investment manager from Kinnevik itself, what is their priority going to be? Is it going to be breaking even by the end of this year or how should we kind of look at the company's sort of move forward given that you own close to 35%? So just a couple of questions there.

[Georgi Ganev, Chief Executive Officer]

I mean the first question regarding our investment strategy, we have said before that today, the private portfolio is relatively small compared to the listed one. And we will actively engage with more companies within our private portfolio to increase our exposure to that part and we will also look for new opportunities. But we do also have to remember that one reason for this being the ratio between listed companies and private companies is that our listed portfolio has performed very strong during the last year. So I think it's a very bad reason for, let's say, selling down something in the private portfolio -- listed portfolio in order to change the ratio, and we will not do that. At the end of the day, we need to see how we can allocate our capital in the best possible way. So if we have, let's say strong winners in our listed portfolio, we are happy, but we will still then try to, of course, grow in absolute numbers, the NAV in the private portfolio. And the investment strategy, I think we will definitely look in all our markets. Perhaps in the past, we have looked in companies, in emerging markets, in quite newly or let's say, less developed tech sectors, and that has been a combination that can be challenging. It can also show a great reward, but we will most probably look in more mature markets on tech investments going forward. But definitely not only in Nordics and Europe but in markets where we feel that there's, let's say, interesting opportunities to find companies with great potential, good team and a large enough addressable market. I think Livongo is a clear example that we chose to continue to invest in that company because we really believe in the team, the position and also the market opportunity.On GFG, I mean, as you said, we have 2 new co-CEOs, Christoph Barchewitz coming from Kinnevik, and has been also working a lot with GFG in the past. So he knows the company well. And the other person is Patrick Schmidt, earlier the MD or CEO of the Iconic, one of the best-performing companies in the GFG Group. And I believe that these 2 people have exactly what's needed to execute on the strategy that we have in GFG. And as communicated before, it's really about showing the path to profitability and to prove the model, but we want to do that at the same time as the company is growing, because there's a huge opportunity to capturing the market, thanks to the offline to online shift. So of course, it's a -- I would say, this is not even a tradeoff because there are so many efficiency initiatives that we can run in parallel in GFG in order to improve the profit and at the same time, being able to grow according to those figures that we've seen in the last quarters. So, we don't have, let's say, a strict deadline, say that should be breakeven by the end of the year, but we want the company to show good progress in improving margin and at the same time, remain a growth company.

[Operator]

[Operator Instructions] And as there are no more questions registered, I now hand back to you, speakers, for closing comments.

[Georgi Ganev, Chief Executive Officer]

Thank you very much, everyone, for listening and for all the questions. And as a reminder, I would like to inform you that we would report our results for the second quarter of 2018 on the 20th of July. So thanks again, and have a nice day.