Investment AB Kinnevik's (KINNF) CEO Lorenzo Grabau on Q2 2014 Results - Earnings Call Transcript

| About: Kinnevik Investment (KINNF)

Investment AB Kinnevik (OTCPK:KINNF) Q2 2014 Earning Conference Call July 18, 2014 4:00 AM ET


Lorenzo Grabau – Chief Executive Officer

Mikael Larsson – Chief Financial Officer

Torun Litzén – Director-Corporate Communications


Elias Porse – Nordea Markets

Magnus Råman – Handelsbanken Capital Markets

Adonis Catic – ABG Sundal Collier

Bile Daar – Danske Bank

Markus Iwar – Goldman Sachs

Lorenzo Grabau

Thank you and good morning to you all. This is Lorenzo Grabau here at Skeppsbron 18, together with Mikael Larsson, our CFO and Torun Litzén, our Head of Investor Relation. And I’m delighted to welcome you to this call. As you know Kinnevik strategy going forward which will be presented in further details at our Capital Markets Day on September 18, is to focus on building a number of leading digital consumer brands for key partnerships around the world. And our objective is really to build few big strong companies where Kinnevik can own a large share and play a leadership role in the governance of the company.

Today, I’d like to share with you five key messages which in my opinion encapsulates a excellent quarter and a very strong interim report. And they are as follows: Number one; we performed very well from a financial point of view with NAV growth of 4% to SEK 68.5 billion. Despite, the fact that we paid SEK 82 billion in dividends to our shareholders and we were rewarded by a share price increase of approximately 19% to close up to SEK 285 on June 30.

Even more importantly and this is my second message our company grew and our profits improved. On a see-through basis which what we call proportionate share of invested companies, Kinnevik grew 10% with E-commerce and Marketplaces growing 38%.

Going deeper and starting with the Lamoda which is a larger company that has not reported independently, and we will be doing so during the month of August. Lamoda reached revenues which at this stage are preliminary because we only July 18, all between €1.20 billion and €1.60 billion for the first six months, and recorded an operating profits during the second quarter, which means that for the first six months the operated results are expected to be around break-even.

Moving on to the emerging market fashion companies, we were very pleased to see and this is still early days and we are reporting only some KPIs today, an excellent performance across the board and really a further exceptional growth rate coming across which gives us strong comfort that our increase in the share capitals of those companies is backed by an excellent performance.

In addition, we decided together with the efforts to transform Rocket into a German stock corporation and I will spend some more time describing the rationale for that transformation and the opportunities that it creates for us.

And so in conclusion, we end the quarter and the first six months of the year with a very strong cash position of over $1 billion of the parent company. We have a revised guidance of new investment that is lower as we wish to focus on our core company and we have been admitted as you have noted to the stock exchange top 30 companies as of July 1, and I want to congratulate the team for the amazing work that they have done over the last five years for delivering what is in my opinion a absolutely outstanding set of results and that have been recognized also for the inclusion on the larger index.

So these are the five messages I wanted to give you today, which I will summarize on Page 2. And the presentation today will include three section: an investment review which I will take you through just now; a financial summary, which will be led by Michael; and then a Q&A section that will be moderated by Torun.

Now, let’s turn to the investment reviews. If you move to Page 4, we thought it might be useful because a number of you have asked me, how I think about Kinnevik. If we started by giving you a little bit of the framework for how we think about our company, which as you can see on Page 4 are structured in four columns or four pillars, if you think about this as a solid foundation for our business. And they are effectively communication, E-commerce & Marketplaces, Entertainment, and Financial Services and our B2B businesses.

But a different way to think about them is to think about them really in three separate groups. The first one, the large cash flow generating Communication & Entertainment business which account for about 55% of our business, and following the recent performance the fast growing and on path to profitability companies, which accounts for about 42% of our NAV.

Finally, we have a number of companies which are smaller, but are just as important which are the companies that we call in transformation because of business model of the industries in which they operate still require. So that’s how we think about our businesses. We think about them by industry and we think about them in terms of the nature and the phase of development they are.

Taking the first classification and thinking about what has driven our growth in NAV over the last quarter and fast moving to Page 5, you can see that they are the two main drivers of our NAV growth was a upside in the unlisted investments mainly in E-commerce & Marketplaces, which we will describe in further detail in a moment, and of course the reduction that comes from the dividends that we have paid to our shareholders.

Moving on to Page 6, and giving you a little bit more perspective on the two fundamental drivers, our communication business essentially delivers an improvement on the operational performance, as I’m sure you will have noted for the results that were published over the last two days. But that was offset by a change in the implied multiple that affected our factors and of course the significant dividends that total Millicom and Tele2 and MTG paid to us.

In the E-commerce & Marketplaces, the performance was driven by a combination of performance improvement in terms of growth and profitability, combined with an increase in the multiple that Mikael, will describe later on. And of course, we do not distribute dividends nor did we invest in a significant way.

As I said a moment ago most of you will have had the opportunity to hear already from Jørgen, Mats and Hans-Holger in particular, so I don’t need to repeat whatever they have told you about 50% of our NAV. What I think is important though is to draw on Page 7, what we think is really the strategic alignment that exist between Kinnevik and Millicom, Tele2 and MTG in particular.

And that’s strategic alignment really revolves around three axes; the first one, is that we are all focused on the same long-term objective, which is to build leading digital consumer plans. And whether it is Millicom ground breaking in the mobile financial services sector by launching interoperability in Tanzania, whether it is launching educational platform, whether it is strengthening their corporation with faithful. Or whether it is MTG having another various types and brands trade to its portfolio of existing powerful entertainment brands. The theme is always the same, we are about owning and building long-term the success of leading digital consumer brands in as many markets as we possibly can.

The second thing that we are all about and this applies back to Kinnevik which as you know is an investment company and for example, Millicom which is more of an operating company is thinking only very thoughtfully about how we can be more effective in the countries in which we want to operate, and a good example of that is the expansion of the African Internet holding which as you may have seen now into MTN and the transaction closed two weeks ago. That gives support which is much more substantial than the one that Millicom could do on its own, because for example, as you know Millicom is not in Nigeria, which is a very promising country.

And then lastly, a third very important aspect of our strategy is about pursuing consolidation. And as you know last year, we pursued consolidation in Russia by receiving cash for the sale of Tele2 and we announced a very important landmark potential merger in Colombia between Millicom and UNE.

In the last quarter it was three important transactions that took place and starting from the bottom, MTG decided to dispose and close the sale of its B2B business here in Sweden. Millicom sold its Mauritius mobile interest that wasn’t under the Tigo brand and that was a 50:50 joint venture.

And finally Tele2 as you saw completed by now the sale to be completed in a few months of its Norwegian business to Telia Sonera, and this shows in my opinion both the combination of long-term strategy for organic growth, flexibility in building partnership and readiness to capture opportunity that come in the M&A market.

Turning to page eight, I would like to give you some greater detail on an area which I think many of you are interested in which is our private companies and in particular our private E-commerce & Marketplaces businesses which are summarized on page eight. We think about these assets in five main areas, although I also want to stress that there are other companies that are not on this page which are also very exciting for us including CDON and its multi capillary presence with (indiscernible) and so forth and a number of our general merchandise businesses like Lazada, Linio and Konga in Nigeria.

But turning to the five main areas that we want to focus on. We have Zalando, which I am going to talk about in just a second and then three other companies that are essentially related to and in connection and partnership with EFX, which are the emerging markets fashion companies the Home & Living business and Rocket Internet itself, as well as two very important marketplace businesses that we have been building for a while in Russia and more recently in India.

So starting with Zalando on page nine, as I said at the beginning of this call it is important to say that Zalando on July 18 doesn’t still has its final numbers. It’s a relatively young company operating €2 billion run rate across 15 or 14 countries and as such they are still in the process of finalizing their numbers which will then be submitted by auditors, will have to be approved by the supervisory board and so we are few weeks away.

Having said that Mikael, Torun and of course myself said that it was very important that we gave you today on the days of our results a very clear feedback on two, which in my opinion are the most important points that have been out of the focus for our investors and the media over the last several months. First, how to think about tracking Zalando and its performance and second, whether this company is on track to profitability.

In slide nine and 10, provide you I hope a clear message on two topics. The first one when you think about tracking Zalando from the archive, it’s critical that you appreciate that our company has captured and it’s been fully enabled by the mobile world. As you can see, we have been very effective in building the businesses in terms of its multi-platform presence and the mobile traffic share in Q2 was over 40%.

The second very important point, which is where is Zalando in terms of its performance, where as you recall in about a couple of months ago, Zalando itself announced its Q1 report. We are very pleased to provide you some preliminary guidance on where Zalando is likely to come out for the first six months of the year, which as you can see suggests a very healthy growth rate in a range of 26% to 31% year-on-year, which is very much what we believe to be an attractive growth rate for the company.

And second and very importantly, the demonstrated ability to make money, which is to deliver profitability in the second quarter, which as you can see combined with the performance of the first quarter suggest for the first six months of the year Zalando was around break-even. As I said this is the first of five important areas that are really the pillars of our E-commerce & Marketplaces strategy.

The second main area turning to page 11 is the emerging markets fashion companies, which as you may recall we discussed briefly a few weeks ago when we entered into a transaction with Rocket that gave us approximately an addition of 5% in the company. We have decided in the spirit of improved transparency and disclosure to provide you even more details around this company, which you would have seen in our report and in this presentation. And of course, as these companies mature and become larger we will continue to improve on their disclosure.

We just ask you to bear with us because for competitive reasons we are keen to keep them a little bit more under the hood for a little while longer. But of course, we are keen to provide you as much as we can details on their performance.

And what we have done here is to present you on page 11 and 12, both the summary or further detail information on their operating profitability. And so as an example we were keen to share with you that Lamoda, its gross profit margin last year was approximately 40% which we believe to be a very healthy way, but more importantly to give you an update of where this companies are for the first six months of the year which we have summarized on page 12. And we are very pleased to see that across the board the five emerging markets fashion companies that continue to deliver on our expectation.

Now, you have to recognize that these companies are very different in terms of where they spend in their path. Many of them are going to launched in the last two and a half years and as result they are still been fine-tuned in terms of the amount of market expense, the amount of visitors that we are looking to acquire and how we transform those into active customers. And so while if we were looking at a company with five or 10 years of experience and track record, we could be talking about detail MD&As around each and everyone of these numbers, you must appreciate that these are very young companies and as such they do not have the predictability and the KPI developments that you should expect from a larger company.

Having said that we are very pleased to see that for example Lamoda continue to develop very strongly during the first six months, both in terms of gross merchandise value which as you can see grew 124% as well as in total order, and you may note as an example that the GMD growth was higher than the total order which means that not only we are growing, but we are increasing our basket size.

Jabong, if we turn now to India which is a company that does not have a B2C business, but it operates into B2B and that’s why you are seeing a lot of these customers reporting had a phenomenal growth in unique visitors which underpins the strength of the brand proposition as the fashion destination in India. And again this is a very young company and as such you have probably shaped that becoming a destination as the Indian E-commerce market development is an absolute priority for us.

If you take a look at Zalora for example, now this is a business that is a mix between a more mature business like Australia and our faster growing business in Southeast Asia. And in that particular case the focus over the first six months has been a really to drive active customers which as you can see grew 53% as opposed to acquire more unique visitors. And so, but I like you to take away from this slide is that we are working towards giving you greater transparency, but you must appreciate these are very young companies and as such the KPIs are the result of a particular strategy which is being adjusted and tracked accordingly.

The third area I would like to just spend a minute on is another very exciting set of investments that we are been developing mainly in Europe that have very attractive growth potential in Latin America and in Central Eastern Europe, which our investments in Home24 and Westwing. These are two very different models, the first one is a plastic inventory businesses, the other one is more of a promoters and engaging sales oriented company which is Westwing. And the key messages here is that the growth rate are very attractive, obviously Home historically a more mature business, Westwing growing faster and as I want to stress was very high level of gross profit margin.

Turning now to the fourth area, which is Rocket Internet, a number of people have asked me, how we think about the Rocket Internet partnership that was started five years ago. And to provide a little bit more guidance in terms of what Rocket Internet has actually done in terms of performance.

So on slide 14, what we try to summarize is half a dozen key numbers that hopefully give you some further light on that subject. The first and most important thing which all investors will appreciate is we have a net negative investment in Rocket, meaning we have taken out more than what we have invested. So from our point of view, the fact that we still own a very, very valuable asset and we haven’t paid for it is obviously a great recipe for future returns.

The second thing is that, if we look at the way Rocket has actually invested its own capital some of which was our own, some of which was our capital that they received and put themselves when they started. Across about over 50 or 60 investments they have invested approximately €100 million and have created a very substantial performance as you can see in terms of the total value that they have created, and they have done so by the incredibly effective in terms of deploying capital from third party, some of the capital coming from us, some from other third parties. And as you know, Rocket Internet has now built a very strong and committed shareholder base.

In terms of returns, if you look at the SEK 100 million of their own capital and assume the latest funding rounds of the transactions that have taken place in the company they still own an interest in that is over 20 times.

In addition, those companies are very well capitalized and as a result we feel very confident that the business can continue to invest to perform because of the substantial reserves they have.

Another very important topic which goes with the first one is that as all investors know the secret of making good returns is to finding good investments, but also to never money to loose very little money. And we are pleased to say that based on our assessments of the analysis of the investments that we have made, we have loss less or written off, loss or written off than 3% of the total amount invested, and so to us this has been a very successful relationship where we have been fortunate to identify Rocket Internet early on and to build a very strong partnership to create some exceptional companies including some of the ones we just described.

So, Rocket Internet is being transformed to an AG and we believe this is a very important step just like Zalando and form itself into an AG and then SE some months ago, because it establishes even stronger base for further developments. Developments which includes launching new businesses and as you can see on Page 15 we summarize just a few of the latest announcements, and also a strong foundation to attract more investors not only the individual company level like Westwing, HelloFresh and Linio, but also potentially longer term attracting more capital at the Rocket level.

And as you know we are very supportive of these initiatives because they create greater capabilities and flexibility for each of the companies Rocket Internet and their invested companies, they creates more flexibility for Kinnevik as we look to build our businesses.

With that I’d like to turn it over to Mikael, who will take you through the summary of our financial performance and then we will turn it over to Torun to take Q&A.

Mikael Larsson

Okay, and with that turn to Slide 17, we have revenues and EBIT for the companies that Kinnevik has invested in and this numbers are presented on a see-through proportionate basis as Lorenzo mentioned earlier. And that would say that Kinnevik share of each companies revenue and EBIT have been summarized in this numbers. As you can see on the left hand side of the page, we continue to see a good growth reaching 10% for the entire portfolio in the first half of this year; those numbers are compared with the same period last year. And in particular, we saw a strong growth in the E-commerce & Marketplace component, which reached 38% year-on-year.

On the right hand of the page you can see the EBIT development where the most significant change is in the E-commerce & Marketplace component with a 9 percentage point improvement in EBIT margin. The slight decline was in communication & media at SEK 6 million by continued investments into new services and to capture growth opportunities in this component.

And if we then turn to Page 18, we have a summary of the market sales multiples within the online sector and as you can see in the table this continue to decrease during the second quarter. And in the table we showed a decrease for our largest component where we have based evaluation on sales multiples.

Strong sales growth in all our components and the positive development in other areas in particular in Zalando, which turned into profit in the Q2. These two factors have compensated for the decline in market multiples. So, positive development in our components have resulted in the discount we applied to the sales multiples versus vis-à-vis their listed peers. Such discounts have been lowered for some of the components in the valuations end of June. There are also often lower in the discount we still find those evaluations in our books are conservative.

Please turn to Page 19, you will find some more details around our valuation of emerging markets fashion companies Lamoda, Dafiti, Jabong, Zalora and Namshi, they are all owned by the shareholdings company Bigfoot I and Bigfoot II.

And as we announced in May, Kinnevik got in the quarter received part of Rocket shares in digital shareholding components as dividend in hand. And thereby we have increased the shareholding to 32% in Bigfoot I and 34% in Bigfoot II. The transactions in May were carried out at the valuation implied by the latest funding rounds to external within each underlying portfolio company.

As major transaction chart, total cash transaction it was significant in size and it was carried at arms length between Rocket and its shareholders. Kinnevik in accordance with break through implied the value from the transaction when determining the values in our books end of June. And it has resulted in a positive change in fair value in the accounts of SEK 3.15 billion plus the effect it has on the valuation of the remaining shares are still held by Rocket. As per June the transaction value resulted in an implied sales multiple of 3.4x for Bigfoot 1 and 5.9x for Bigfoot II.

And if you turn on to Page 20, we come to the valuation we outperformed for Rocket Internet. Consistent with previous quarters we outperformed some of the cost valuation of the underlying assets held by Rocket. But what is new from this quarter is that we present the valuation on the standalone basis, and the slow for the details on the significant debt we have between implied value for the latest financing rounds in the operating components under fair value we have in the accounts.

And as we’ve explained in the interim report this gap which was Kinnevik shareholding in Rocket amounted to SEK 3 billion end of June. That is explained by the liquidation preference structure that are in place on the operation company.

If you look at the individual asset in the table the gap is more significant for Home24, Westwing, Big Commerce and the more recently launched components included on other aspects. On Bigfoot I and Bigfoot II have been valued in-line with the transaction value for May there is no gap in relating to this company.

In total, including Kinnevik’s direct ownership in Home24, Westwing, Big Commerce as well as Avito. The gap between prior values in our books and the view and for the latest funding rounds in each company such gaps amounted to SEK 5.5 billion end of June.

On Page 21, we have a summary of the unlisted online portfolio end of June. And as you can see in the bottom of the table Kinnevik has invested SEK 12.2 billion in the unlisted portfolio. And the prior value in the books at the end of the second quarter was SEK 25.7 billion of which Zalando represent around 50%. The valuation of Zalando were kept at constant level in Q2 €3.9 billion for the entire company.

The change in fair value of €338 million which you can in the table which was booked in Q2 is due to positive exchange rate effects when translating the investments from euro to Swedish krona.

As you also can see it on the table the main focus of change in prior value in the second quarter was driven the revaluation of the Bigfoot I and Bigfoot II company at a recently stock exchange and it will also affected the current value. For Avito, the strong sales development fully compensated for the lower multiple we implied in the valuation and the result of the unchanged fair value in their account.

If you then turn to Page 22, you will have we can see the changes in the parent company, cash position for the first half of the year and the main thing received SEK 1.4 billion in dividends from Millicom, Tele2 and MTG. We paid SEK 1.9 billion to the generic shareholders.

Cash flow for investments was close to SEK 800 million and that includes SEK 200 million of investments contracted in the last year has now paid out in this year. And this tend to all in all with something in closing net cash position of SEK 1.1 billion in the parent company end of June.

And with the revised guidance for new investments of SEK 1 billion to SEK 1.5 billion for the full year, all new investments maybe financed of the existing cash balance without knowing on the parent company’s unutilized credit facilities amounting to SEK 5.9 billion end of June.

And that is all I have to say. I will then hand over to Torun.

Torun Litzén

Thank you, Mikael. And before we go to Q&A I just want to take this opportunity to invite you to our Capital Markets Day in Stockholm on the 18 of September, where we will focus the presentations around our private digital investments. And you can find a registration form at our website, and we will provide a full program mid-August. But please register and we hope to see you there.

And with these words, Operator, we can go over to Q&A.

Question-and-Answer Session


(Operator instructions) And as we speak we have questions coming in, the first one is from Mr. Elias Porse from Nordea. Your question please.

Elias Porse – Nordea Markets

Thank you, good morning everyone. So my first question, the gross margins in the emerging market the fashion firms are on 40% and lower, should we expect it to converge per se and their markets become more mature. Would it be possible to reach European levels around 50% in the long run? Philander said it had a 52% gross margin last year and also there is turn level seem to be lower your due and also expect these to convert to European levels as the markets mature?

Lorenzo Grabau

Thank you for your question, which obviously I would love to have the answer too. I think as I state at the beginning, the emerging markets fashion companies are very young companies and the beauty of the companies we are building is that they are pioneer. And what I mean by that is that we are not looking to replicate another successful company against which we can benchmark our performance and say here the British company that is making 49% EBITDA margin, because their share of private label is XYZ.

And we are trying to build a copycat of that in the UK. No, we are groundbreaking, we are building businesses in markets that have never seen what we bring. And as a result, it’s very difficult to anticipate today what it’s that the company will have as a steady state, revenue growth, gross profit. And that why when we comment on this company, we talk about managing on a quarter-by-quarter basis, the KPI sometimes even on a monthly basis to make sure that they perform on the basis of a trajectory. And so I am afraid that I cannot answer your question, because I don’t think anybody can answer the question of what will be the long-term sustainable margin. What we care about is that these businesses are on the right trajectory, but they are led by very capable managers that are constantly adjusting their approach and are looking to deliver good long-term returns.

Elias Porse – Nordea Markets

Okay, thank you. And on Zalando, given that the Q2 was strong in terms of profitability, what sort of drivers for not reaching break-even for the full year. Have you been under spending on marketing and this – where there is a slight slowdown in growth, and could you give us some more flavor on the regional EBIT margins and also what opportunities do you see in Eastern Europe for Zalando?

Lorenzo Grabau

Thank you, for your question. I think as I stated at the beginning our objective is not to replace Zalando release of results that more to give guidance to where the company is coming out, and as I said the results are not finalizing, so it won’t really be appropriate for us at this stage. But rest assured that as soon as we have a fixed date for the release of the Zalando results, we would inform you and make sure you have an opportunity to ask questions as in the past.

Elias Porse – Nordea Markets

Okay, moving to Rocket venture, the B2B lenders (indiscernible) are joining forces in Germany in the Deutsche credit plus. Can you tell us anything about the development theorem if more portfolio companies could make similar moves?

Lorenzo Grabau

So, I would say that, the Rocket Internet in Westwing companies are very focused on recognizing that depending on the market segment in which they operate and in the countries in which they operate, they either need to be full force ahead organic growth or need to adjust their force to ensure that they improve their presence either regionally or locally.

And so, for example, you may have seen I think in which we have disclosed even in our presentation that in Russia the Foodpanda business shows to make an acquisition which is a very unusual thing to do for Rocket. And so what we should expect going forward is that in every one of our businesses we are working with Rockets to make sure that they capture the right opportunity, which for the most part has been an opportunity of organic growth, but you will see increasingly is an opportunity where we combine organic growth with strategic transaction.

Elias Porse – Nordea Markets

Okay. Thank you.


Okay, and there is a next question coming in from Mr. Magnus Råman from Handelsbanken. Your question please.

Magnus Råman – Handelsbanken Capital Markets

Thank you and good morning. If we come back to the Zalando results and specifically the comments on probability here in Q2. We are then expecting a full trading update from Zalando that released in the end of August, should we expect an updated guidance for the full year EBIT margin at that point, or should we view this repeated comments from Q1 as the definitive guidance?

Mikael Larsson

I think as I said, you should not take the two pages we have included on Zalando as a release of results and management team of Zalando will be working towards the middle, towards the end of August in producing their release and we understand that it will be important for investors to have the most updated information at that time and I can assure you that as a supervisory board member I will make that point on your behalf during our supervisory board meeting.

Magnus Råman – Handelsbanken Capital Markets

All right, thank you. And you have previously stated that the profitability in Zalando should be – should probably be required ahead of the potential IPO I mean reaching profitability. And do you view that as it done – been sort of now that we’ve see in Q2 reaching positive EBIT numbers?

Lorenzo Grabau

As I talked about I do not recall ever having made the statement that a company needs to profitable to go public, so if that was a case I rectify. There are many different type of companies that can go public for many different types of exchanges and I do not believe that in all industry it is required to be profitable to go public.

So having put that aside I think our view remains the same which is that we track hold of our companies on their path from investment path to break-even to profitability. And any decisions that is made regarding raising of further private capital or indeed public capital is always done on a case by case basis by taking into account, and about the key factors which include of course the trajectory of the business is on, but are not alone driver of the decision making and so I think this is the case for Zalando as well.

Magnus Råman – Handelsbanken Capital Markets

Excellent, and just a final – more overview question when it comes to the online portfolio, you’ve been talking about concentrating this portfolio, could you give us some more flavor on what ways you would see that happening?

Lorenzo Grabau

Sure, so today Kinnevik has 47 companies in which it is invested and they range in total size from SEK 60 million to SEK 60 billion. And as you can imagine our objective is to be a very active and lead shareholder across all of the companies in which we invest. We are 40, we are very strong and experienced team, but we want to continue to be a strong and experienced team of a small size. And as a result we recognized that we can deploy our expertise and we’ll engage with these companies that we have invested in which now include companies in the far corners of the world in a way that requires us to focus on fewer companies. And so that one driver of this decision is to reduce the number of companies we have invested in.

The second one is to take the capital that we might release from some of the companies that we may not own in three to five year and invest them in the company where we see that we can do a better job of driving growth and profitability. And lastly we do have some great companies in our portfolio and we get offers often and in some cases those offers are very attractive and they may actually deliver more share to the value than if we were to own the companies forever. And so I think you should expect that over the next five year we will be working to reduce the number of companies in which we invested and to increase the size of the one we retain and positively in some cases to increase the share that we have of those larger companies.

Magnus Råman – Handelsbanken Capital Markets

Sure, but would that imply that you also see sort of a concentration in the Rocket Internet portfolio companies?

Lorenzo Grabau

I think I don’t remember if the number is 22 or 23, but I think we are invested in over 20 Rocket companies, and that is a very large number of companies. And as I said we – these – in most cases company that have huge potential both on a standalone basis and in some cases even as merger partners to other companies, and I don’t think that we can have the bandwidth to pursue and be a lead shareholder across 20 plus Rocket companies, and so again you should expect that over the next five years we may concentrate our resources of your company.

Magnus Råman – Handelsbanken Capital Markets

Excellent. Just one final question, make a loss on, if you could just specify a little bit why the total ownership in Dafiti and Lamoda for example is coming down a few percentage points following this transaction Bigfoot I and Bigfoot II transactions?

Mikael Larsson

It’s – I mean as evident during the quarter these companies are more to raise capital on the local level and that may affect them their total numbers. I can run into – I’m not sure if you compare to direct shareholder in Q1 with the direct in Q2.

Magnus Råman – Handelsbanken Capital Markets

The total, but that’s fine. Thank you so much.

Mikael Larsson

Yes, thank you.


And we have the next question coming from Mr. Adonis Catic from ABG. Your question please.

Adonis Catic – ABG Sundal Collier

Yes, good morning. I think that all of my questions have been answered, thank you.

Lorenzo Grabau



Okay, then we can continue with the next question which comes from Mr. Bile Daar from Danske Bank. Your question please.

Bile Daar – Danske Bank

Thank you and I was just wondering about you were talking about potential excess over the coming three to five years, but in terms of your communication on online investments, should we consider to be an absolute amount or net amount?

Mikael Larsson

Yes, are you talking about the revised guidance for this year?

Bile Daar – Danske Bank

Yes exactly.

Mikael Larsson

Yeah, SEK 1 billion to SEK 1.5 billion is the total number for the full year and of course you have to deduct the amount we have already invested.

Bile Daar – Danske Bank

Okay, thank you. And then, I know that you’ve already had a couple of questions on Zalando, but just want to understand that your comments on the profitability in Q2 is that irrespective where in the revenue range you would end up?

Mikael Larsson

That is correct. Yes.

Lorenzo Grabau


Bile Daar – Danske Bank

Thank you. And then finally and you’ve done a couple of organizational changes and is there any sort of knowledge gap that you’ve identified in terms of potential new sectors we’ve talked lot of about financial services. Is there any you need to step up going forward?

Mikael Larsson

I’ve been very fortunate to, I can use the word inherit, but to find a fantastic team of Kinnevik that has been able to accomplish really a transformation of this company over the last five years to seven years, by really working incredibly hard and being multi skilled and multi sector in terms of their approach. And I think that’s how we expect to continue working a small team with expertise across different sectors whether it is E-commerce, Marketplaces, Financial Services and really the owners and thought leaders around those sectors.

So, clearly we have a large number of companies that are becoming larger and larger and as such with prior even more governance, and so I suspected over the next two or three years the team is likely to increase as opposed to remain at the current head count. But I would not expect a major transformation I would expect just the natural matching of the pass the trends by competent Kinnevik resources.

Bile Daar – Danske Bank

Okay, thank you.


We have a last question coming in from Mr. Markus Iwar from Goldman Sachs. Your question please.

Markus Iwar – Goldman Sachs

Good morning and thank you for taking my questions. So they are – I guess they are a little bit related to previous questions. One is regarding the partnerships you were talking about that there is one way to gain advantage within the Rocket III et cetera?. How is that if you look at the other part of the business in telecom, in the online classifieds? Is this something that from a machinery point of view you really, really support such development if opportunities arise?

And my second question is related to your thoughts about reducing the number of companies you’re investing in. And now it’s, as you said, there is over 40 of them, is 20 more towards number, is 30, is it 10, just kind of or you comfortable to give some kind of direction, kind of more quantitative numbers there, and but more importantly what I’m wondering as you look to maybe increase your influence in these companies, looking at your portfolio today often your stake is between 20% and 40%. Is this something that you could potentially go above 50% and start consolidating assets from a P&L perspective? Thank you.

Lorenzo Grabau

Thank you, Markus. I was worried that you were not going to ask any questions, and so I am glad you came online. And with respect to partnership and I think based on the business experience I had over the last 25 years, I have noticed many different ways of going about building businesses. But I have noticed one that has made me increasingly uncomfortable, which is a principle that as a – maybe in the (indiscernible) world, I’m not so sure, whereby people need to own 100% of a business to feel comfortable in leading the business and running it for value creation.

And I’m looking delighted that from my work experience with Kinnevik and being at Kinnevik and now being part of Rocket that they have taken a completely diametrically opposed approach to build business building recognizing that if you want to build businesses across 50, 60, 70, 80 countries around the world you need to be local, you need to hire local people, you need to think locally and in many cases, you need to have local partner.

And that is what Kinnevik has been all about since the very beginning. It was a partnership between different families where every single company that has been build has talked about establishing smart partnership whether it is Millicom building its business in Guatemala or whether it is now Lazada building its business in partnership with Tesco in Southeast Asia. That’s very tough partnership, that mindset, that openness, that recognition that more smart brains that have local expertise can create more value for shareholders as you build businesses across the world.

To me is a key success factor of Kinnevik and a very big success factor of Rocket, and I firmly believe that we should continue to operate on that basis, and I hope that we will have the support from new markets and all of the other research analyst and in the investment community in looking through this principle of consolidation and thinking about what is the best way to create long-term shareholder value, is it to privilege accounting consolidation or is it to privilege the best way to build local businesses. I firmly believe it’s the latter, and I believe that long-term people will ascribe a premium to the Kinnevik and Rocket way of doing business as opposed to our priority on accounting consolidation.

The second question was effected to the reduction of company. We are not ever going to think about any company as a company that should be sold. We will always think about companies in terms of the potential that they have and our ability to add value to those companies, and so this plan that we might develop over the next five years of reducing the number of companies is something we will do by thinking through every single possible option because for us whilst our focus is on driving digital consumer brand not all of our company’s are in that business.

Having said that we believe we can make significant returns also for companies that are not in that particular area, and we will make sure that we provide the right support, the right amount of capital, the right strategic input, the use of our relationship, to ensure we maximize the value of every single one of our company. And we may take as I’ve said many, many years because to the extend that we believe that we can deliver the right return which is on a risk-adjusted basis the relevant measure for that particular investments, we will continue driving, but if someone has pays us the higher price or we can make more money by pursuing another transaction of course we will pursue another option.

Lastly, as it relates to the stakes 20 to 40 versus 50 right now, we do not believe that to be an imperative for us. Our imperative as I said at the beginning is to build very strong businesses in partnership and never make accounting consolidation a priority because if we are to do business the way I just described, we will make sure that we maximize the opportunity for the business as opposed to maximizing the simplicity of our accounts. It may happen, but it will happen more as a natural implication of strategic and commercial decisions as opposed to a top down decision I want my accounts to look in a different way.

Markus Iwar – Goldman Sachs

That’s very clear. Thank you very much.


We have another last question coming in from Mr. Magnus Råman from Handelsbanken. Your line is open now.

Magnus Råman – Handelsbanken Capital Markets

Yes, all right. Thank you for that reasoning I think that maybe even as it my follow-up a bit here, but if you could just maybe I know that you cannot comment maybe on the specific names in the portfolio, but apart from Zalando and Rocket Internet, do you see today any other sort of IPO candidates?

Lorenzo Grabau

So I think I have been very clear on this topic, which is I would hope that over time all of our company become a IPO candidate and many of them go public because as I said before in this industry being public, being a standalone company is a big sign of effect, it means you are large, you are growing, you are on track to profitability or profitable that the public investors want to own your stock that you have further growth potential that you can explore, that you have use of capital, that you are willing to report and engage with investors in a key entrance pathway that we are willing to accept a distributed governance and the list goes on. To me those are all signs of success and why would I sit here and say that I don’t want all of our companies to be successful even the smaller ones.

Now the reality maybe that the natural course of business development results in fewer than all 47 being public or so, but from our point of view as I said there is no predetermined objective that we have to keep a certain type of companies private that in our opinion would not be a smart thing to do.

Magnus Råman – Handelsbanken Capital Markets

That’s it. That’s very clear. So all of this time we said that normally in venture capital you would expect two out of 10 investments to be successful than Rocket might have sort of – this industrialized profit to becoming eight out of 10 ventures becoming successful, would you agree on that?

Lorenzo Grabau

So I think – thank you for the question because it’s a really important point in my opinion. Rocket is really not in the venture capital business, the venture capital business is typically a business where you actually start something completely new which is really never been done, hopeful there are no track record and you hope that it works. Most of what Rocket does is to actually tailor and execute concept that are tried and tested, that are large, that are profitable and that demonstrates an ability to return shareholder value. And as a result you could call it execution capital as opposed to venture capital, meaning there is a risk in the execution, but the basis business principle is in place and so it is a really a different type of capital that what I’ll describe as Silicon Valley venture.

Magnus Råman – Handelsbanken Capital Markets

Thank you for very good answers.


And there is a follow-up question from Mr. Markus Iwar from Goldman Sachs. Your line is open now.

Markus Iwar – Goldman Sachs

Yes, thank you and just one quick question on the Rocket Internet, it doesn’t seem like they are kind of stop anytime soon to launch new execution ventures or so to speak and as they do that and you – would you still be looking to do direct investment, I guess this opportunity in the price is right, you probably would. But how do you describe that with over time reducing the number of holdings if that is a priority or how do you prioritize that so to speak. Thank you.

Lorenzo Grabau

It’s a very good question and as you can imagine, all our opportunities spend a lot of time around it because you just – you have half of the question, the other half is how do you think about all of the rest of the world of the founders and great managers of Avito, of the Quikr, of Bayport, (indiscernible) are building other businesses outside. Right, so have to pull – first of all your question in its totality, which is how you’re thinking about investments generally, and then within Rocket how are you thinking about the new businesses. And I think the way we approach this is to say first and foremost what is that they were trying to do.

And as I said earlier, we are trying to build big digital consumer brand that have international potential. And so wherever they come from, whether they come from our existing companies, they come from Rocket, they come from other existing partners or new partners we would always evaluate them on a standalone basis, because as I think I’ve said in one of the meetings I’ve had there with the media in the last two months, we are paranoid about missing the next big opportunity.

And so the next big opportunity could come from the right, from the left, from the top, from the bottom and that’s why a critical part of our effort is to constantly engage with people that we can bring that inside for that extra knowledge, so that we don’t reduce the risk of missing the next opportunity. So we will of course continue to engage very deeply with all of our in a way that maybe even more structured than in the past to ensure that we understand what great ideas are been developed by them and whether they fit if you wish our strategic objective.

The second thing I would say, as Rocket becomes increasingly a standalone company with its own capital base that is superior to the one that they may have had in the past. Then to a certain extent, we are already owning say 20 plus percent of any business that they do. And so, if you wish, the need to invest directly into the company was also linked to the fact that given the model that were being built where very capital intensive E-commerce businesses. The dilution that we would have suffered by just investing at the Rocket levels are not in the investing companies would have been such that we will have owned very little of that. And so we powered up our position by investing directly.

To the extent that the Rocket models develops more into capitalize a more marketplace businesses. And Rocket has more capital available than you could say we start by having already 20%, 25% exposure to those businesses, and so the need to invest more is reduced.

Markus Iwar – Goldman Sachs

Thank you.


There are no further questions for the moment. (Operator instructions) There are no further questions at this time. Please go ahead, speaker.

Lorenzo Grabau

Good. Well, thank you very much for your good questions which obviously help us stay on the edge and continuously revisit our folks. So we are very grateful for your contributions and we look forward to seeing as many of you if possible on September 18 on our Capital Markets Day. Have a great summer for the people who haven’t taken their holidays yet.

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