Kinnevik AB

STO:KINV B

Earnings Call Transcript 2019-Q3

[Operator]

Hello and welcome to the Kinnevik Q3 report 2019. [Operator Instructions] Today, I'm pleased to present the speakers of the conference. Please go ahead with your meeting.

[Georgi Ganev, Chief Executive Officer]

Good morning, everyone, and welcome to the presentation of Kinnevik's results for the third quarter of 2019.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 may have.Now please turn to Page 3, where we have provided you with a summary of the key highlights for the quarter. As previously announced, we have taken 3 clear steps to pivot our portfolio towards growth: the sell-down in Zalando, the distributions of Millicom and a revised shareholder remuneration policy. I will go into more depth on each of these later on.During the quarter, we invested a total of SEK 1.8 billion into building our health care portfolio. Firstly, we invested further capital into Livongo and Babylon, 2 companies we believe are only at the beginning of their respective growth journeys. Secondly, we made a new investment in VillageMD, a leading U.S.-based provider of primary care. And I will return with some more details on these investments later on, but I believe they clearly show our conviction towards the opportunities of the health care sector and how technology and new innovative business models can make a true difference in disrupting the industry. In terms of our financial development, we increased our net asset value by 3% to SEK 92 billion during the quarter. This was mainly driven by strong share price development in Zalando and Tele2 and partially offset by weaker share price development in Global Fashion Group and Millicom. As a result of the sale of Zalando shares, which generated SEK 5.9 billion in gross proceeds, and the extraordinary dividend of Tele2 of SEK 1.1 billion, we decreased our net debt by SEK 4.9 billion and ended the quarter in a net debt position of SEK 0.8 billion. That corresponds to a leverage of 0.9% of the portfolio value.Now before we go deeper into the performance of our operating companies, please turn to Page 5 for an overview of the 3 important announcements I mentioned earlier.During the quarter, we announced a sell-down in Zalando. We've been proud owners in Zalando since 2010. And due to its success, it has grown to become our largest assets. Zalando remains our largest assets and the company continues to fit squarely with our ambition to be the leading publicly listed, growth-focused investor in Europe. The divestment should be seen in the light of our ambition to maintain our own pace of investment to continue evolving our portfolio towards a larger share of private growth companies. We also announced that we aim to distribute our shareholding in Millicom to our shareholders. Kinnevik has a long and successful history of systematically reallocating capital from companies where we believe that our tenure as owner is over into disruptive growth companies. They are the leading consumer businesses of tomorrow.The decision to distribute our shareholding in Millicom entails a significant distribution of value to our shareholders and is a material step towards increasing our portfolio's shares of capital invested in growth companies. And as a result of our distribution of Millicom and the step change that means for our portfolio composition, we have amended our shareholder remuneration policy. Going forward, we will use dividends received, primarily from Tele2, to fund and accrete our ownership in the companies we believe are tomorrow's winners in our private portfolio. And we will cease to pay an ordinary cash dividend, but instead we will seek to return excess capital when we make successful exits. We will provide more detail on the Millicom distribution and the amended shareholder policy later on in this presentation.Moving to Page 6. And here you will recognize this page from our Capital Markets day in September. We have laid out how we aim to invest our capital over the coming years. Firstly, we will aim to invest 2/3 of our capital in follow-on investments in the proven and high-performing companies in our portfolio to reach 15% to 25% ownership levels. We are looking for influence rather than -- or outcomes rather than control of our companies.Secondly, we will aim to invest 1/3 of our capital in new businesses to ensure we keep infusing our system. We will be looking to add 2 to 4 new companies per year from 2020 to 2023, spread evenly across our sectors. 80% of the first-round capital will be invested in the international growth opportunities just -- such as, for example, a VillageMD. And 20% of the first-round capital will be invested in more early-stage opportunities in our Nordic home market such as, for example, a Pleo. Thirdly, with our targets to maintain a portfolio of around 30 companies, we're aiming to exit just as many companies as we're looking to add. This means that we will reallocate capital more dynamically and exit a number of businesses at attractive terms as our relatively young portfolio matures.Let's now shift focus to talk about the performance of our operating companies during the quarter, now starting on Page 8.Zalando had its strongest ever second quarter in terms of active customer growth, which drove gross merchandise value growth of 24% and revenue growth of 20%. The company also raised its full year profitability outlook, with adjusted EBIT expected to come in at the upper half of the initial EUR 175 million to EUR 225 million range. Tele2 reported third quarter revenue and end-user service revenue in line with the same period last year, but the underlining (sic) [ underlying ] EBITDA grew by 5%. And the company realized an additional SEK 150 million of synergies from the Com Hem integration, raising its year-end run rate target to SEK 750 million.Turning now to Millicom's financial performance and some more details on Kinnevik's distribution on Page 9. Millicom reported largely flat organic service revenue growth in the quarter and added a record of 99,000 subscribers to its fixed footprint. Following its acquisition of Panama's largest mobile operator, Cable Onda, Millicom firmly strengthens its position as the leading telecommunications operator in the country. Due to a weaker-than-expected macro backdrop and intensifying competition, Millicom revised its outlook for the full year organic Latin American service revenue growth from 3% to 5% to slightly above 2% while keeping the guidance on the operating free cash flow of mid- to high single digits.The distribution of our shareholding in Millicom to our shareholders marks the end of an era. Millicom was founded by Kinnevik almost 30 years ago. And since its listing on Nasdaq Stockholm in 2004, it has yielded significant dividends and returns to Kinnevik and its shareholders. The transaction represent a dividend in kind corresponding to around SEK 60 per share. It also allows our shareholders the options to directly partake in Millicom's future value creation and dividend yield. The distribution is subject to shareholder approval by the Extraordinary General Meeting which will be held on the 7th of November. And you will find the notice and details on how to register on the Kinnevik website.Now moving to Page 10. During our third quarter, we also invested further capital into 2 of our high-growth health care companies, Livongo and Babylon.Livongo raised a total of $400 million in its IPO in July. And in connection with that, Kinnevik invested $88 million, increasing our ownership stake to 14%. Our continued support in the company is a testament to its strong development since our first investment in March 2017. And just recently, Livongo was awarded its largest contract in the company's history, adding some $50 million to $60 million revenues over the coming 2 years. Babylon closed the largest ever funding round in digital health globally with a first close of $400 million. Kinnevik participated with $50 million, taking our ownership stake to 16%. And the capital will be used by the company to further support the growth and innovation strategy.These are 2 clear examples of us executing on our strategy to allocate capital in the companies we believe are tomorrow's winners.Now on Page 11 we have an overview of our new, exciting investment in VillageMD, a leading U.S.-based provider of primary care and a pioneer in the delivery of value-based care.During the last decade, U.S. health care has to a large extent bypassed primary care as many patients have gone directly to higher-cost specialists and emergency care. This has led to spiraling costs and lower efficiency. By putting primary care doctors back in charge, patients receive more frequent and preventive care, which reduces unexpected trips to the emergency room and avoidable surgeries. This both reduces costs and improves health outcomes. VillageMD is the platform that provides primary care physicians with the technology, the operational support, care management and care coordination staff they need to deliver a first-rate patient experience. The company also delivers financial backing and contracting expertise in order for the physicians to establish value-based contract with insurers. Since its foundation in 2013, the company has grown to serve more than 2,500 physicians, cares for approximately 500,000 lives and oversees over $3 billion in total medical spend. The company fits very well into our investment thesis, as it leverages technology to enable the delivery of better care to more people at lower costs. We also believe the company is highly complementary to our existing portfolio giving it takes on the risk of a patient's entire health care expense.Now let us turn to Page 12 for an overview of the performance of our growth companies. These companies are seeing continued strong momentum, with focus firmly set on growth, strategic partnerships and product innovation. In addition to Livongo and Babylon, which we have already touched on, I would like to highlight a few other companies on this page.Global Fashion Group grew its net merchandise value by 23% and revenues by 17%. Notably, share of marketplace increased from 14% to 19% of net merchandise value, which showcases GFG's strong position as a strategic partner of choice for fashion and lifestyle brands in its markets. Betterment continues its growth trajectory with a 21% increase in its customer base and 28% growth in assets under management. And during the quarter, the company also introduced a cash management platform called Betterment Everyday. Finally, MatHem has appointed a new CEO, Johan Lagercrantz, who will assume his position in a little over a month's time.I would now like to hand over to Joakim for an update on our financial position.

[Joakim Andersson, Chief Financial Officer]

Thank you, Georgi.Page 14 is another page you will recognize from our Capital Markets Day. As Georgi mentioned, as a consequence of our distribution of Millicom and pivot towards growth, we will cease to pay ordinary dividends and instead generate shareholder returns primarily through capital appreciation. This should, however, not be seen as a move to stop paying dividend altogether. We will seek to return excess capital generated by our investments in the form of extra dividends. A reasonable assumption is that we will stay within a range of plus, minus 10% net cash/net debt-to-portfolio value. Finally, I would like to clarify that our change in dividend policy does not affect the already communicated dividend to be paid in November of SEK 4 per share.On Page 15, we present the key contributors to this quarter's NAV development. In the third quarter, our NAV increased by 3% to SEK 92 billion and NAV per share increased to SEK 334. The main drivers for the uplift were continued strong share price performance by both Zalando and Tele2 as well as an upward revision in the fair value of Babylon. Rather weak share price provision in GFG and Millicom weighed on our overall performance. As per yesterday, our NAV was flat compared to quarter end, with Zalando down 1% and Livongo up 20%.The value of our unlisted portfolio increased by SEK 2.7 billion to SEK 13.7 billion in total. This increase was driven by the investments in VillageMD and Babylon as well as the upward revision of Babylon's fair value.Please turn to Page 16 for an overview of our balance sheet. As we can see on this page, investments amounted to SEK 2.1 billion and divestments to SEK 5.9 billion, resulting in net divestments and a strengthening of our balance sheet of SEK 3.8 billion in the quarter. Tele2's extraordinary dividend, drawing from the proceeds from the transactions in Kazakhstan and the Netherlands, strengthened our financial position by another SEK 1.1 billion, and all together and combined with the portfolio value uplift, it reduced our leverage over the quarter from 6% to 0.9%.With these remarks, I would like to hand back to Georgi to go through our priorities on Page 18.

[Georgi Ganev, Chief Executive Officer]

Thank you, Joakim.To sum it up. We have 3 clear priorities going forward. We will continue to evolve the portfolio towards a higher proportion of growth companies in our target sectors and markets. Doubling down in Babylon and Livongo and adding VillageMD to our group of companies are excellent examples of this. We will strengthen our portfolio balance across sectors, stages and time to liquidity. This means constantly moving capital within the portfolio but at the same time holding onto our companies for as long as the risk-return opportunity is there. We will reallocate capital more dynamically going forward and exit a number of businesses at attractive terms as our relatively young portfolio matures. In contrast to providing a regular annual cash dividend, we aim to deliver cash returns when we release capital in successful exits.And as said at our Capital Markets Day, as a team, we're excited about the next chapter for Kinnevik, and we are convinced that we have the portfolio and the pipeline to execute.Finally, we have announced the appointment of a new CFO at Kinnevik, Erika Söderberg Johnson. Erika is today CFO of Biotage, a global life science company listed in Stockholm. And she will join Kinnevik in the spring of 2020. I also want to take this opportunity to personally thank Joakim Andersson, who has been the CFO of Kinnevik since 2015 and also doubled as Kinnevik's Interim CEO in 2017. Joakim has been instrumental to me during my first years as CEO. I would like to thank him for his great work for Kinnevik and our companies for the past 18 years.I wish you all the best, Joakim, on your new endeavors outside Kinnevik.We are now ready to answer your questions. Operator, please open up for Q&A.

[Operator]

We have our first question from Ulrichim Gunell.

[Joachim Gunell, Junior Analyst]

Yes. Well, I'm sure, well, that was me, Joachim Gunell from DNB. Can you hear me?

[Georgi Ganev, Chief Executive Officer]

Yes, we can hear you, Joachim.

[Joachim Gunell, Junior Analyst]

Yes. Perfect. So in terms of year-to-date capital allocation between new investments and follow-on investments. They have been rather equally divided [ in the analyst ] portfolio. So as you mentioned, Georgi, you aim to allocate some 2/3 into follow-on investments and to your new winners. Should we perhaps expect new founding -- financing rounds in the quarters to come here given your strong financial position?

[Georgi Ganev, Chief Executive Officer]

I mean I think what we're saying with that statement is, first of all, the kind of strategy of Kinnevik to start with relatively small tickets in an early stage of a company's cycle. And as we are getting more convinced and see the traction of a company and we kind of justify the thesis or underline the thesis, then we will do our follow-on investments. And then secondly, if we look at the period that we have now going forward, we have invested, as you know, in many new companies. And therefore, we don't see that we will add that many new companies in the portfolio but rather follow the ones in that kind of vintage, if you may say, and that leaves the statement of 2/3 going into existing portfolio.

[Joachim Gunell, Junior Analyst]

That's clear. And also, if I'm not mistaken, there was a financing round in Deposit Solutions in September, which rallied the fintech company up some, I think it was, EUR 1 billion. And it doesn't seem addressed in your Q3 fair value, so how should we think there?

[Georgi Ganev, Chief Executive Officer]

That specific round was basically linked to a certain gates and milestone for that valuation to trigger. And therefore, we have done our analysis on our side and we would like to be on the conservative side. And when those milestones are met, we will bring up the valuation, but there were some disclosed, some announcements from other investors that did a different -- that had a different view on those milestones.

[Joachim Gunell, Junior Analyst]

Okay. And also on the same topic, there seems to be some discrepancy regarding the valuation of Quikr that you have versus some independent report filed by -- I think it was to the Indian Ministry Of Corporate Affairs. So any comments there? And also your updated view on Quikr's position in your portfolio given that it has been there for quite some years now and given your new, perhaps, focused geographies.

[Georgi Ganev, Chief Executive Officer]

Yes. First of all, if we'll go start with the valuation question. I mean I don't want to go into details there, but we have our methodology, right, and that is something we are strict to. So if we see something like this, we can't basically just simply change our valuation methodologies. We are sticking to our framework. The second question, whether Quikr fits in our portfolio. As said also at the Capital Markets Day, I mean, of course, we have many times said that the new focus will be more on mature markets, Europe with a special focus for younger companies in the Nordics and U.S. But since we have now also pruned our portfolio, we have a few companies that we have been with for a while that we also see a strong traction in. Quikr is one examples where we have seen this verticalization strategy being quite efficient in the local market. And therefore, we are -- we have no intention to change our ownership there in the short term.

[Joachim Gunell, Junior Analyst]

That's clear. And just finally for you, Joakim, on the second dividend tranche from Millicom, the record date set for 6th of November, I believe. So that's before the -- your EGM. That does means that you as Kinnevik will be entitled to that dividend, right?

[Joakim Andersson, Chief Financial Officer]

Correct.

[Operator]

[Operator Instructions] We now have our next question from Liamar Esteves from Carnegie.

[Lena Osterberg]

This is Lena Osterberg from Carnegie. So my question is regarding your pruning strategy. Lately, you've been mainly buying and investing in new companies. You have 26 companies, if I count correctly, now. And you set the limit to 30. And the exits you've made have been partial. So how should we view your pruning strategy? Could you explain it a little bit more in detail? How will a company fit to be pruned? I mean what are the criteria when you decide to exit?

[Georgi Ganev, Chief Executive Officer]

Lena, it's a very relevant question. I think we've been for a couple of years in a pruning phase of, if I may say, cleaning out the tail, the long tail. And what we say now, that including the earlier-stage company, we wouldn't like to have a portfolio with more than 30 companies because that will kind of make it more difficult for us to be the active and close owners that we want to be. We biannually review our companies thoroughly based on the companies' performance. Of course, we look at the performance every month, but twice a year, we do a deep dive in each company. Has anything changed to the thesis we had when we did the investment? That's the first question. Secondly, how is the company performing? And if it's not performing according to the expectations, and that's for me could be better than expectations or actually worse, we need to understand why. Could it be the team that is better and -- or worse than expected or something else that has changed? And thirdly, how does this fit with our strategy? And if we can't have good answer on these 3 questions with a company, we will continue to dig until we have realized that this company will fit in the portfolio. So as an example, if nothing has changed in the thesis, the performance, as an example, is worse than the original plan, but we know that we will fix this by replacing part of the team or if using more capital or whatever that is and it still fits in our strategy, we are the long-term investors that would most probably keep that company for another round of reviews. But if something has fundamentally changed in the thesis, so the markets have developed in a different way or there are new, large competitor on the landscape that makes this company, put this company in a very different position, we might basically scrutinize that investment thesis and go for divestments. This is what I call the more dynamic capital allocation. And of course, then we add a layer of the expected returns, which means that even though we have kind of a successful journey in one of those companies and fits squarely with our strategy but we still see that there are more attractive returns in some other companies, we might still exit that company while that company is growing in a positive way, let's say, and reallocate that capital into another company with better returns expectations. So that's the systematic approach that -- I mean personally I've taken that a lot from how I have been working in an operational company as CEO before. And I think that since we are a mix of a financial investor and an operational investor, being very entrepreneurial part of building companies, I think that methodology can be applied in a very successful way.

[Lena Osterberg]

Okay. Can I also have, maybe have a follow-up question on your investment in Babylon?

[Georgi Ganev, Chief Executive Officer]

Yes.

[Lena Osterberg]

Because you didn't take your pro rata share in the last funding round, so your ownership was decreased from 20% to 16%. Could you explain how you're thinking around here? Because you have a strategy to have, say, 20%, 25% ownership in a company. And could you also maybe share, what was the last valuation in terms of revenue multiple in the last funding round?

[Georgi Ganev, Chief Executive Officer]

I will start with the one why we participated below our pro rata. And I said during this call we invested SEK 1.8 billion during the quarter in the health care sectors. We really doubled down there. We followed Livongo, a company that we have been following since 2016 or actually a year before that we see has a very proven business model and very strong team. And we wanted to be part of that and accreting our ownership from a lower level to a slightly higher. We also want to expand our health care portfolio into primary care, into a stable business model such as VillageMD where we deployed $75 million. So with a somewhat constrain on capital that we had before the sell-down in Zalando, we basically looked at the entire portfolio within health care. We took decision that we could still invest USD 50 million in Babylon, have a decent ownership in relation to the other companies and be part of these expansions. So I think that is -- that was more important to us, to let more and new companies in to a relatively new health care portfolio than to just have a few companies with a large stake. It's about portfolio differentiation, you might say. When it comes to the valuation question, I will hand over to you, Joakim.

[Joakim Andersson, Chief Financial Officer]

Yes. And the valuation we've done this quarter is based on a multiples approach, as you've seen in the report, but obviously we also looked at the valuation in this funding round as an indication for where it should be. So that's the methodology behind it.

[Lena Osterberg]

Could you maybe share how -- what the multiple was?

[Joakim Andersson, Chief Financial Officer]

No, I would pass on that actually.

[Operator]

We have our next question from Bernard Levektiva.

[Derek Laliberte, Research Analyst]

Yes. It's Derek Laliberte from ABG. I had a question on the Millicom distribution and your selection of distribution method involving a share redemption plan, just wondering if you could give some details around why you selected this specific method and its potential advantages or, if there are any, disadvantages.

[Joakim Andersson, Chief Financial Officer]

Yes, sure. It's Joakim here. So I mean, obviously, we evaluated different alternatives for distributing those shares, and we found that this structure by splitting and have a mandatory redemption is more tax efficient for many of our shareholders. And it is a somewhat more, well, complex structure, you might argue, but the benefits of -- from the tax side is overweighing that complexity. So that's why we took that decision.

[Operator]

[Operator Instructions]

[Georgi Ganev, Chief Executive Officer]

Thank you very much for listening and for your questions. And as a reminder, the EGM to vote on the proposed distribution of Millicom shares will be head -- held on 7th of November. And we will report our results for the full year of 2019 on the 6th of February 2020.Have a nice day. Thank you.