Kinnevik AB

STO:KINV B

Earnings Call Transcript 2018-Q2

[Georgi Ganev, Chief Executive Officer]

Good morning, everyone, and welcome to the presentation of Kinnevik's results for the second 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. If you please turn to Page 4, where we have provided with a summary of the key highlights for the quarter. Kinnevik's strategy builds on active ownership, which requires us to be flexible in order to deliver on our long-term vision. To support our strategic initiatives, we announced continued transformative developments in our public portfolio as well as new investments into 3 exciting private companies in our focus sectors during the quarter. When we announced our support of the merger between Tele2 and Com Hem in January, we also committed to affecting pro-competitive measures if necessary to complete the merger. And to honor this commitment, Kinnevik will distribute its shares to MTG to the shareholders in mid-August. We're also fully supportive of the clear board's strategic review and decision to split the company to 3 independent companies. I'll be returning to the rationale of these developments later in the presentation. Within our private portfolio, activity level was high during the quarter. Home24, the European home and living e-commerce platform was listed on the Frankfurt Stock Exchange in June, an IPO that was met with strong investor interest and resulted in a value uplift in the Kinnevik net asset value of SEK 0.7 billion in the quarter. We also made 3 new investments within our focus sectors: Budbee within e-commerce, Pleo within financial services and Cedar within healthcare. Now moving on to our financial position. Our NAV increased by 3% during the quarter to SEK 96.4 billion, led by a strong performances from Zalando and Tele2. Our balance sheet remains strong, with a leverage of 3%. And as of yesterday, our NAV was up another 2% from quarter end, reflecting positive share price reactions following our listed companies' reports. Now please turn to Page 5, where we have laid out the performance of our large listed companies in more detail. Zalando reported first quarter figures in the beginning of May. The company continued to capture market share and grew revenues by 22% and remained breakeven. Growth remains management's top priority. And as you already know, this is a strategy we fully support. The company will publish its second quarter results for 2018 on the 7th of August. Millicom saw continued strong momentum and reported broad-based improvements across countries and business lines. Notably, mobile revenue growth in Latin America continued its recovery to 2%, with Colombia delivering close to 6% growth. A record number of homes were passed in the first half of 2018, and Millicom raised full year 2018 guidance to 400,000 from 300,000 net adds. Both Tele2 and Com Hem had very strong operating performance in the second quarter, with Tele2 reporting sales growth of 5% and EBITDA growth of 12% like-for-like. Com Hem saw steady growth in the quarter and first half of the year on the back of product improvements and price adjustments. Com Hem launched the TV Hub for both the Com Hem and Boxer brands, and initial signs looks very positive. With 9% organic sales growth, MTG delivered its eighth consecutive quarter of organic sales growth in excess of 5%. Notably, MTGx grew sales by 25% organically, and recorded its third consecutive profitable quarter. However, a muted outlook on growth and profitability in MTGx for the second half of the year caused a negative share price reaction on reporting day. Now moving on to Slide 6, where we have some more details on activities in our listed companies. On 16th of July, an extraordinary general meeting in Kinnevik resulted distribute our shares in MTG to its shareholders. The distribution aims to facilitate the EU clearance on the merger between Tele2 and Com Hem. And at the same time, and to the benefit of our shareholders, the distribution would deliver an extra dividend in kind to Kinnevik shareholders of a total around SEK 4.3 billion, or SEK 16 per Kinnevik share. The distribution also gives our shareholders the opportunity to become direct shareholders in MTG, and eventually, Nordic Entertainment Group. Strong companies with attractive market opportunities. We're also fully supportive, as I mentioned, of Qliro's board decision strategic review to operate Qliro Financial Services, CDON marketplace and Nelly as 3 fully independent companies. And we share Qliro Group's view that these 3 companies have begun to reach sufficient signs of maturity to operate on standalone basis. And by separating these companies, Qliro creates the best conditions for strengthening and competitiveness of each individual company, which will highlight and create further shareholder value. If you turn to Page 7, we have summarized the key development in our private companies during the quarter. We saw a good growth momentum in our private companies during the second quarter, and I will come back to GFG in a short while. But in the meantime, I'm happy to note that the company now have reached a milestone of having above 10 million active customers, an important achievement. Quikr's verticalization strategy has allowed it to meaningfully improve both engagement and monetization on the platform, and the company continued to execute its cross-category strategy, and registered the second consecutive quarter, during which all categories generated positive contribution margins. And Betterment had over 365,000 customers at the end of the second quarter, growing with 35% year-on-year, on assets under management grew by 43% to USD 14.1 billion. Similarly, Livongo has grown its membership base by 100% year-on-year, and Babylon's GP at hand, offered in collaboration with NHS, continues to grow, and now has close to 45,000 new user applications across London. BIMA grew active customers by 31%, excluding discontinued products, and signed a global framework agreement with Orange to drive expansion in African markets, and further strengthen its footprint in the region. If you flip to Page 8, you'll see an update on Global Fashion Group. GFG maintain its solid growth in net revenue and net merchandise value on a constant currency pro forma basis. Dynamics within the regional companies were quite fragmented, with Lamoda's revenues being impacted by a late-season switch from winter to summer, whereas Dafiti saw stronger growth, driven by solid marketplace performance in Colombia. And Zalora and Iconic also continuing to accelerate sales. Strategic initiatives to improve customer experience continued throughout the group, including improved delivery propositions in Lamoda, and into using Apple Pay in the Fiji and express deliveries services in Zalora. Please turn to Page 9, where we have highlighted the successful IPO of Home24, a liquidity event which also resulted in a significant valuation uplift in Kinnevik compared to the last quarter. Home24 was listed on the Frankfurt Stock Exchange on June 15, and the company has in recent years refined its customer proposition, resulting in an acceleration of revenue growth. Strong momentum in Latin America has also contributed to this growth. The IPO generated high investor interest, and was multiple times oversubscribed. Kinnevik remains strong and large shareholder of 12% of the shares post-IPO, and the market value of Kinnevik stake at the end of June was close to SEK 1 billion. As you know, driving growth and value in a private portfolio is a key strategic priority, and during the first 6 months of 2018, we have intensified our investment activities. In addition to the investment in Budbee in April, announced in the first quarter report, we've added 2 new companies to our private portfolio during the second quarter, Pleo and Cedar. Both are great examples of our commitment to realize our mission and to build digital businesses that address material everyday consumer needs. With Budbee and Pleo based in Sweden and Denmark, respectively, we have also intensified our Nordic focus as planned. And in May, we completed investment of SEK 67 million for a 30% stake in a Danish company, Pleo. Pleo has developed a new way of managing company expenses by offering smart payment cards to employees. Through new technology, Pleo reduces administrative complexity, and eliminates expense reports and simplifies bookkeeping for companies. And in June, we invested SEK 141 million for an 8% stake in Cedar, our third investment within healthcare. Based in New York, Cedar has developed a payment platform for patient billing. And Cedar uses machine learning to generate payment plan and preferred method of payment for every patient. Health care organization use the platform to manage patient engagement and to monitor financial activity and also track payment metrics. In May, I went to New York to see the team, and I must say it's a fantastic team with a great vision. This is a multi-trillion dollar business in U.S. healthcare such, representing a bit more than 18% of the total G2B, so a fantastic sector in terms of size. And there's lots of cumbersome processes within this sector. And I think technology can really help, and this is a good example how we can improve the customer experience and the underlying processes. I would now like to hand over the call to our CFO, Joakim, to comment on the financial position.

[Joakim Andersson, Acting CEO & CFO]

Thank you, Georgi. So on Slide 12, we present the key contributors to the NAV development in the quarter, which was led by strong share price performance in Zalando and Tele2, and by increased investment activity but offset by a lower end-of-quarter Millicom share price and increased leverage. As a consequence of the IPO, we have now excluded Home24 from the private portfolio, and it's worth mentioning that the valuation uplift of almost SEK 700 million this quarter was driven both by the removal of the liquidation preference structure and the high evaluation in and after the IPO. The value of Global Fashion Group amounted to SEK 5 billion. This is down by SEK 253 million compared to last quarter, mainly driven by lower peer group multiple, but maintained discount levels for the local GFG entities compared with last quarter. The contribution -- with the contribution from new investments, the total value of our private portfolio increased slightly and ended the quarter at SEK 12.6 billion. Our total NAV increased by 3% to SEK 96.4 billion, and NAV per share increased by SEK 11 to SEK 350 in the second quarter. As per yesterday, our NAV was up further 2% to 98.7%, or SEK 359 per share, and our portfolio value was over SEK 100 billion for the first time ever. We are also noting the positive share price reaction this morning on the Millicom's second quarter results, which obviously has not been included in our post-Q2 reporting NAV. Please turn to Page 13 for an overview of our balance sheet. Our investment activity was high during the quarter. In addition to making 3 new investments, we also invested SEK 345 million in Livongo, increasing our ownership to 8%. The net cash flow from the dividends this quarter was SEK 1 billion negative, but you have to remember that both Com Hem and Millicom now pays dividends twice a year, and we have, since the end of the quarter, received an additional SEK 102 million from Com Hem, and will get around SEK 440 million from Millicom in November. As a consequence of this quarter's cash flow, our net debt position increased to SEK 2.9 billion at the end of July, which corresponds to a leverage of 3% of portfolio value. We are very pleased with our total shareholder return, which remains well above our financial target, and amounted to 17% for the last 5 years, and 21% 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. Looking back on the strategic priorities we communicated at the start of the year, I think it's fair to say that activity level has been high during the first 6 months, and that we are making good progress on all 3 pillars: active ownership, acceleration of the private portfolio with new investments and increased Nordic focus. And we are very excited to join the right of Budbee, Pleo and Cedar and to continue supporting our current investments ranging from larger companies like Zalando to younger challengers like Livongo. Thank you very much for listening. And let's now open up for questions. So operator, please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Joachim Gunell from DNB Markets.

[Joachim Gunell, Junior Analyst]

You hold equity stake of some 20% to 40%, because your holdings, whereas your latest portfolio additions as well as your current ownership then in Home24 is somewhat below the trend. So I was wondering, are we seeing a new trend in terms of what percentage ownership in your holdings you assess adequate as an active owner?

[Georgi Ganev, Chief Executive Officer]

Thank you very much for the question. I would say that we still believe that long term a good range would be around 20% to 30%. However, that builds up over time in some companies, and in some companies we might not even reach that level at all. So I think that generally, just because we are, let's say, below that range or over that range in some companies, doesn't mean that we have changed our mindset but rather that we, right now from a capital allocation perspective, thinks it's the best balance.

[Joachim Gunell, Junior Analyst]

All right. So in my view, the MTG -- export of MTG was a perfect long-term fit for your portfolio in regard to your investments criteria. So could you just help me here, was this all mandatory to get clearance from the commission? Or does it reflect more a concentrated focus to other investment sectors you mentioned, e-commerce, fintech and [ the real ] healthcare?

[Georgi Ganev, Chief Executive Officer]

No, it has nothing to do with, let's say, the strategic focus. As we've said before, we both find MTGx and Nordic Entertainment to be 2 very interesting companies. However, I mean, as you pointed out, and I said in the presentation, we committed to Tele2 and Com Hem to do what we can to basically from a regulatory perspective. And in regards of timing of the transaction of Tele2 and Com Hem, this basically is the conclusion from are our end. So it has more to do with our efforts to make sure that the transaction between Tele2 and Com Hem can close as fast as possible.

[Joachim Gunell, Junior Analyst]

That was very clear. And also you invested an additional plus SEK 100 million in Babylon in the quarter. Does this stem from a new financing round, or how should I think here giving that your ownership remained unchanged sequentially?

[Georgi Ganev, Chief Executive Officer]

Yes. it's -- no, it's not a new financing round. So it's a bridge financing that was put in place during the quarter.

[Joachim Gunell, Junior Analyst]

And just finally then, regarding the valuation of GFG, I know that we've covered this topic quite comprehensive in the past quarters here, given different risk profiling, cost of capital, et cetera, but losses are once again reducing rapidly and margins are approaching breakeven. So could you just comment on how we should think about the discount to the peer universe once GFG's model can prove itself to be profitable in, let's say, some 3 to 4 years' time?

[Georgi Ganev, Chief Executive Officer]

I think this year's -- sorry, this quarter's valuation of GFG is more, let's say, from my point of view, technical, it's we keep the same discount, and it's more movements in peers and currency that changes the valuation slightly down for us. We have said before that we believe that, with the 2 new co-CEOs in place, we've seen some really strong improvements, but it's too early to say when the timing would be to change, let's say, our valuation and the discount on GFG. We're still very committed that this company can grow profitable over time, but as you also pointed out, now there is -- they are still on their -- on the journey to basically more prove its business model on a general basis to see that we can, let's say, drive profitable growth.

[Operator]

Our next question comes from the line of Marie Scheja from Nordea.

[Marie Scheja, Analyst]

I wanted you to comment on the dividend post-MTG distribution, as MTG stood for 10% of the incoming in dividend in 2017, and that you already had a small dividend gap, and also an uptick in the gearing as of now?

[Joakim Andersson, Acting CEO & CFO]

Marie, it's Joakim. So I'll take that question. I mean, as we've said before, and as you point out -- rightly point out, we've have a negative cash flow coming out of the dividend season. So that obviously is now increasing based on, call it, pro forma this year. We are not worried at all around that or around for that because we think that in the future, there is a good potential both for Millicom and Tele2 to pay out higher dividend than what they did this year. Furthermore, if you look at the leverage and our balance sheet, we think that we have both ample of room to make more investments and continue with our commitment towards results.

[Marie Scheja, Analyst]

Okay. Could you also tell us a bit about your pipeline? What sectors you're looking at and the market sentiments and also regards to valuations as of now?

[Georgi Ganev, Chief Executive Officer]

Yes. Marie, Georgi here. I think that -- our focus sectors remains the same, basically. So we are already, as everyone knows in TMT, and we're looking in new investments there as well. We're looking in financial services, healthcare and e-commerce marketplaces. And I think I'm not the first one saying that valuation at this time of the cycle, they're pretty steep. So obviously, we need to look at many cases and to invest in what I would call quality companies. Maybe that's something you always intend to do. But of course, when the valuations are higher, it's even more important. We have a very good pipeline of new companies. I think we have proven this quarter and the last quarter that we can increase the activity if we want to do so. And I'm not worried that we won't find new opportunities within our core focus sectors. But again, since valuations are high, we're also careful where we allocate our money.

[Marie Scheja, Analyst]

Okay, super. And also, if you could comment on your long-term ambition with Home24 as it is listed now, will you – yes, what's your ambition with that company?

[Georgi Ganev, Chief Executive Officer]

We don't comment or speculate, let's say, in future transactions. We are still shareholders, 12% owners of Home24. We believe that company has great potential going forward. They have a clear value proposition, and they have managed to, I would say, crack the code when it comes to large furnitures online, that's quite complex process. I mean, I know from my previous life that, that delivery of, let's say, large goods requires 2-men handling, and it's a different kind of customer experience when you order a sofa compared to order a T-shirt. So I think what they have done is really impressive, and it's a very data-driven company, so they have good, let's say, track on the customer demands and what type of sales will generate. That's also why I think we are confident when the management goes out now and say that their, let's say, long-term targets and midterm targets are, let's say, remained unchanged, even it was a, let's say, somewhat softer Q2 in terms of revenue. So again to summarize, Home24 is a interesting company, and we are relatively large order as of today and there is no other plans than that.

[Operator]

[Operator Instructions] And our next question comes from the line of Magnus Råman from HSB.

[Magnus Råman, Research Analyst]

Yes, this is Magnus Råman here at Handelsbanken. You now announced several new smaller unlisted investments and previously you talked about making some more sizable investments, how should we think here?

[Georgi Ganev, Chief Executive Officer]

Magnus, Georgi here. I think if -- what we said is that we would like to increase the activity in the private portfolio as well as, let's say, having a more focus on the Nordics. That has led to a few, let's say, smaller investment. We don't count investments as such that we need to do a certain number of investments over a year or so. In this period, we've had a some, let's say, higher activity in terms of number of investment, and that might go down, let's say, going forward. But I think this is more a result for us wanting to be more active in the Nordics, that has resulted into these slightly smaller investments. When it comes to, let's say, the bigger bets, we are constantly working on those as well, but then it goes back to finding, let's say, the company that where we have true conviction on and also as mentioned earlier here in the call, it's also matter of valuation. So by going a bit earlier into these, let's say, A,B rounds, so we have manage, we believe, to get a, let's say, significant ownership in these companies with slightly less, let's say, capital allocated in that direction. But as I said before, wait and see.

[Magnus Råman, Research Analyst]

All right. Could these big events potentially also be you becoming a larger shareholder in some of your leading and listed investments such as GFG?

[Georgi Ganev, Chief Executive Officer]

Yes. I don't see why we shouldn't be able to do that.

[Magnus Råman, Research Analyst]

All right. I have one final here. I believe you owned 7% -- 17% in Home24 ahead of the listing, can you update us here on how much you've divested in the IPO and the proceeds from that?

[Georgi Ganev, Chief Executive Officer]

Yes. We didn't divest at all, but we didn't participate in the primary either. So that was the data dilution basically when the company raised capital in the IPO.

[Operator]

And our next question comes from the line of Elizabeth Miliatis from The Bank of America.

[Elizabeth Miliatis, Research Analyst]

The first one would have to be on the Tele2, Com Hem deal. Are you able to give us an update on that? Are you still in discussions with the regulator? And if you're then also looking also at the TV market and the mobile market, are we broadly done with procompetitive measures of the TV market, and is there still work to do on the mobile market?

[Georgi Ganev, Chief Executive Officer]

Yes, Elizabeth. So basically, there are 2 things basically that to touch up on when it comes to Tele2 and MTG -- sorry, Tele2 and Com Hem transaction. Firstly, of course these companies are working as much as they can to prepare the integration. And as much as they are allowed, I would say, the report I get, I mean, through the market communication is very positive. The second is our commitment to ensure and to facilitate this merger, and we have now taken the decision to distribute our shares in MTG, which basically mean that at the time of the filing, when Tele2 files for EU clearance for the deal, there won't be an issue from a TV market perspective. So I would consider, let's say, that piece accomplished and checked. When it comes to the mobile and fixed, obviously, there is a filing to the EU clearance, but we have not heard anything so far that would make us, let's say, worried about the transaction. It's always a matter of timing, and there's job that needs to be done. But we are confident at this moment in time that this transaction will happen during the second half of 2018.

[Elizabeth Miliatis, Research Analyst]

Okay, great. And then one more question in terms of investments, and I don't know if you'll give us color or guidance as to forward investment in terms of quantum, but if you can, that would be great. But if not, are you able to give us color as to relative to maybe FY '17 or '16, which were quite large investment years, are we looking at similar sort of levels or are we looking at lower levels? Any sort of color would be awesome.

[Georgi Ganev, Chief Executive Officer]

We don't do any forward-looking statement on either number or, I would say, size of investments. But as we've said before, I have stated that we want to increase activity, and we would also like to do some big bets. I mean, a large investment for us is, we've said before, it's around, I would say, EUR 50 million to EUR 100 million, that would consider to be larger investments, and we are looking at those cases. And again, going into companies we always try to reach significant ownership. Sometimes that will be accomplished over some years, and sometimes we have the ability to do it, let's say, at once. Maybe I should just add also, as Joakim pointed out, that I mean, we have a leverage today on around 3%, so -- and a target that should be around 10%. So when it comes to capacity, we're not worried. It's more about finding the right opportunities. And we should be, I would say, excited about new opportunities out there, but we should also be careful with our capital allocation.

[Operator]

Our next question comes from the line of Nizla Naizer from Deutsche Bank.

[Fathima-Nizla Naizer]

Just a couple more question from my end. Firstly, when you look at our private portfolio, apart from GFG that is sizable, what are the other companies that you can maybe identify to us that are on that path of potentially being a listed participant in the market sometime in the near future in your view? And secondly, on Global Fashion Group after Q1 there was this concern that they might run out of funding at some point at the rate at which they consumed cash and that was explained very clearly, I thought. But in your view, do you think that the company can reach breakeven levels without needing to raise additional funding? Just to get some color on that. And my final question is on the dividend gap that you addressed. Do you think that at this point of time, you're also looking at your portfolio and seeing or reconsidering a capital allocation to the public portfolio, et cetera, to perhaps be bit more comfortable in terms of bridging that dividend gap? Or are you also looking at your dividend policy a bit differently? Just to get some color on that, that would be great.

[Georgi Ganev, Chief Executive Officer]

I'll take the 2 first questions and then hand over the dividend gap to Joakim. When it comes to companies within our private portfolio, I would say it's too early to say which of those would, let's say, go for the next IPO. There are, of course, companies that would fit very well on the public markets, given the high interest there is in our focus sectors. I mean, that goes for e-commerce as well as financial services and healthcare. If we look at companies that is already offer significant size, I've mentioned that before, that Betterment and Livongo are 2 of those companies. We believe that they can grow much further in a private environment, but of course, theoretically they could fit very well in a public soft market as well. And there we've also said that we are committed. In Betterment, we own 16%. In Livongo, we increased our ownership to 8%, and we have an ambition to continue on that journey. When it comes to GFG, that is a company that is, as we know, active in emerging markets and in highly competitive environments. We should not forget that the position that GFG or the companies within the Global Fashion Group have, they are very strong. We are typically the #1 payer, ensuring good customer quality and a very good, let's say, assortment. That work is ongoing as well to further increase its market position. But that said, driving this type of business requires a lot of cash, and we should expect that companies like Global Fashion Group will require cash for quite some years. I think when I said that we need to further see some improvement in the business model and also some proof of concept, it's rather to, let's say, go into a breakeven situation and to have an EBITDA level above 0%. And that is something also that a company has been doing for some time. And if we look back, let's say, 3 quarters, 4 quarters even, there has been a quite significant improvement in that area. So, let's say, more proving the business model, continue to do so, continue to, let's say, secure the strong positions in the market, but also being, let's say, very clear about that drive future growth within this industry and also within these markets, will it require cash.

[Joakim Andersson, Acting CEO & CFO]

And if I pick up on the dividend gap question. I guess you've heard what I said before on that, but I think what we are doing – we're not that worried about the dividend gap as such. But we more look at a total cash flow position and on the parameters that have an impact on total cash flow, and obviously, dividend is part of that. But we can look at dividends and investments and divestments and keep the capital reallocation within our portfolio. But as just Georgi mentioned, we have a framework that says that we should be below 10% in leverage, we're around 3% today. So we are not worried at all on the total cash flow. And if your question perhaps more related to rebalancing of our portfolio to more dividend payers, I would say that we don't think about that at all.

[Operator]

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

[Georgi Ganev, Chief Executive Officer]

Thank you very much for listening in, and also for all the questions. And as a reminder before we hang up, we would like to inform you that we will report our results for the third quarter 2018 on the 25th of October. That said, I wish you all a great summer. Thank you very much.