Kinnevik Investment ABB (OTCPK:KINNF) Q4 2016 Earnings Conference Call February 10, 2017 4:00 AM ET
Joakim Andersson - Acting CEO and CFO
Chris Bischoff - Senior Investment Director
Elias Porse - Nordea Markets
Magnus Raman - Handelsbanken Capital Markets
Good morning and welcome to the presentation of Kinnevik’s Results for the Fourth Quarter and Full Year 2016. I’m Joakim Andersson, Acting CEO and CFO and with me today in Stockholm are Chris Bischoff, our Senior Investment Director and Torun Litzen, our Director of Corporate Communication. 2016 has been an active year at Kinnevik in which we made investments into two new companies Betterment and babylon. We recapitalized Global Fashion Group and we distributed SEK7.1 billion to our shareholders.
We were also very focused on supporting all our portfolio companies both public and private in their strategy execution. We’ll start today by taking you through presentation of the results and then we’re happy to answer any questions you may have. Now before we go more into details about the full year let’s turn to Slide 4 and the highlights of the fourth quarter.
I think it’s fair to say that the fourth quarter could be characterized by strong operational performance in our public portfolio companies as you will have seen from the results announcements the last couple of weeks. Notably our communication and entertainment assets continue to make strong progress on their strategic transformations while our E-Commerce assets are improving margins whilst maintaining healthy growth.
We invested SEK1 billion during the quarter whereof the majority in Tele2’s rights issue and we ended the year with a net asset value of SEK72.4 billion down by SEK2 billion or 3% over the quarter. However since year end our NAV is up by SEK5.7 billion or 8% on the back of the reporting. Our financial position remains strong within net debt of SEK1.4 billion which translates into leverage of 2%. The board of Kinnevik has recommended an ordinary dividend of SEK8 per share for 2016 and if approved by the AGM, this corresponds to an increase by 3% since last year and 4% dividend yield.
Turning now to Slide 5, we’d like to remind you that over 90% of our portfolio constitutes six world class companies reaching millions of customers in many markets around the world. We described these companies as our first and second generation investments at our Capital Markets Day last November with communication and entertainment as the first generation and E-Commerce and marketplace as the second. What our companies have in common is that they are all strong digital brands addressing material everyday consumer needs in large markets.
Now the value of our portfolio is driven by three components operational development, general equity market conditions and translation of foreign currencies. I want to start by talking about operation development of our most important business and then talk about the market conditions and currencies before moving on to look at the valuations for the quarter. The six companies you’re seeing here have all performed well in the fourth quarter on the next slide is an operational and financial updates on our largest assets Zalando. Zalando continue to deliver high growth in the fourth quarter breaking the €1 billion revenue barrier for the first time in a single quarter growing revenues by around 25% in the fourth quarter last year. We are very pleased to see that Zalando continues to invest in improving the customer experience through faster deliveries, platform development and in closer partnerships with the brands.
The margin for the quarter according to the preliminary numbers was stable at around 7.5%. The final numbers will be reported by Zalando on the 1st March. On the next page Slide 7, we have summarized the fourth quarter for Millicom, Tele2, Rocket Internet and MTG. I will not go through this in detail since these are all public companies that have announced their results, but I would like to highlight strong growth achieved by Tele2 and MTG in particular and a significant profitability improvement seen in all companies.
We’re also very pleased to say that Millicom has made meaningful progress in the reshaping of its business with strong growth in its mobile data and cable revenue in Latin America as well as good progress with major initiatives to improve operational efficiency. MTG continues to reallocate capital as part of its strategic transformation from a traditional broadcaster into digital entertainment company. Overall we’re very pleased with the operational performance of our public companies.
We’ll now talk about our private companies which represent our most recent third generation of digital businesses including the new investments made in 2016. At this point, I would like to hand over to Chris Bischoff to update you on their performance.
Thank you, Joakim. Overall this was a solid quarter for our private companies with both increased growth and lower cash burn and faced [ph] some macro headwinds in emerging markets. I’ll focus my comments on Page 8 of the deck and supplemental details on Pages 9 and 10. At GFG, the number of active customers grew by 20%, NMV grew by 22% and net revenue grew by 16% in the third quarter. Operating momentum was strong with improved margins across the regions. Year-on-year EBITDA margins have now improved by material 15 percentage points. The margin improvements are largely driven by improved inventory management as well as meaningful efficiency gains across fulfilment and marketing operations.
In addition to fixed cost optimization, individually as laid out on Page 9 we saw strong top line growth at Lamoda and Namshi and significant margin improvement at dafiti and Zalora and The Iconic. Moving onto Quikr, the company has shop increased engagement and revenue in recent months, while reducing marketing costs. Where price per listing grew 125% year-on-year and monetization grew 100% year-on-year. monetization growth however in the quarter was impacted by the board economic slowdown in India resulting from the governments’ move to demonetize the currency. The impact to this will continue to be felt for at least the current quarter. Quikr continues to make selective investments to expand its product range and key categories including Grabhouse, a managed rental accommodation provider.
As Joakim mentioned, we invested for the time in Betterment this year and this quarter marks our third quarter as shareholders. Now we continue to be impressed by the strong performance of the business as it grows its market leadership over the peer digital advisors in the US. As of yearend Betterment served 208,000 customers and managed $6.8 billion of assets. As of the end of January, this AUM has increased to over $7.3 billion. In early February Betterment expanded its platform to a multi-plan advice offering that now includes human advice alongside automated advice through a team of licensed financial experts. In association with offering more advice to cater to a broader range of client needs Betterment [indiscernible] it’s pricing to reflect different service offerings.
Moving onto BIMA, this is world’s leading mobile insurance provider and BIMA has 5.6 million active customers at the end of Q4 up from 4.6 million in Q3. Revenue continued to grow steadily in the quarter and three of BIMA’s markets have reached profitability on a full year or run rate basis. BIMA’s product offering continues to expand exemplified by the growth in its tele-doctor consultation service which served over 1,000 consultations per day in Bangladesh alone.
At Westwing active customers increased by 7% year-on-year, while GMV increased by 27% and net revenue grew by 23% in the third quarter. We saw significant improvement in the EBITDA margins as a result of an effort to further automate process reduce logistic cost and focus on more efficient marketing. Over half of Westwing’s revenue is now generated on mobile are result of its focus on creating easy to use and inspiring customer experience.
Our second acquisition in 2016 of a new stake in a new business was babylon. We continue to progress our strategy there of leveraging digital distribution, machine learning and clinical expertise to transform the delivery of primary health. babylon now has over 600,000 registered users and a triage product is being used by thousands of people a day. babylon continues to develop its partnership with NHS in the UK and is now powering the urgent care line 111 in a test group over 1 million people in London. Further over 100 corporates in the UK are now offering babylon as an employee benefit. Moving back to Joakim.
Thank you Chris. So as I mentioned earlier the valuation of our businesses is driven by three components operational development, general equity market conditions and translation of foreign currencies. Now that we have covered the operational performance I would like to turn over to the market and currency developments.
On Slide 12, you can see the left-hand side generally favorable performance in the key equity indexes over the quarter. On the right-hand side we have shown a selection of currencies that all point to weakening of the SEK during the fourth quarter. Obviously a context that should have a positive impact on the Kinnevik portfolio.
Turning now to look at our sectors I’ll start with E-Commerce on Slide 13. This graph shows a tough quarter for E-Commerce and in particular for the Marketplace and Classifieds models. As evidenced both by the share price performance to the left and evaluation multiples to the right. On Slide 14, looking at the telecom sector we see sideways to weak developments for the quarter. Millicom had a tough quarter both looking at the share price performance on the left and valuation multiples on the right, driven by the migration from voice and SMS to data, the challenging macroeconomic environment in Latin America and tough competition in the remaining markets. Tele2 on the other hand developed favorably in the context of both Nordic and European peers as shown on the slide.
Let’s now go on to talk about what these developments meant for the valuation of Kinnevik’s assets in the fourth quarter. On Slide 16, we’ve outlined detailed information on the valuation of our largest private companies. On a consolidated basis you can see on the bottom line that the fair value of these assets was overall stable during the fourth quarter and as a result the portfolio value remained at SEK12.3 billion. At the top we have our largest private assets Global Fashion Group and in absence of any material transactions we continue to value our shares in Global Fashion Group on the revenue multiple. As you can see there is only small adjustment of the value from last quarter.
Adding the value of the private investments to that of our public companies on Page 17. We get to a total net asset value of SEK72.4 billion at the end of the year which corresponds to decline of 3% over the last quarter. Our NAV per share consequently came down from SEK271 to SEK263 during the quarter mainly as a consequence of the share price development for Millicom. As of yesterday however, the NAV per share was SEK282 or SEK78.2 billion in total an acknowledgement of the very strong Q4 performance of our large listed companies and in particular by Millicom with a share price rebound of 25% since yearend. Overall our NAV is up by 8% so far this year.
The final slide on this section is as usual the summary of our investment activities and the overview of our financial position. During the fourth quarter we made net investments of SEK872 million including the SEK900 million participation in Tele2’s equity rights issue. The accumulated net investments for the full year amounted to SEK2.8 billion which is within our net investment guidance of SEK2 billion to SEK3 billion for the full year. Including the investments during the quarter we ended the year with the net debt position of SEK1.4 billion.
Let’s now move on to look at full year 2016 on Slide 20. As mentioned earlier, 2016 was a year with high level of activity. We invested in two new exciting companies Betterment and babylon and we deployed a total amount SEK2.7 billion into our existing companies to support their growth and path to profitability. The most noteworthy transaction in the private portfolio was the recapitalization of Global Fashion Group which in combination with their exit from India puts the company on a solid financial footing and allows them to focus on executing their strategy and improving operational efficiency.
We returned a substantial amount of cash to our shareholders in the form of ordinary dividends and through execution of share redemption program. On top of that, it was executed share buyback program and all in all our shareholder remuneration in 2016 totaled SEK7.6 billion. We further continue to drive consolidation demonstrated in particular during 2016 in Tele2 and Qliro Group and we also supported and encouraged our companies to continue invest in innovation and forming strong partnerships to create a foundation for future success.
Last but not least, we implemented governance, risk management and compliance roadmaps for most of our private companies as part of our ambition to create businesses that deliver both shareholder and social value over the longer term. Slide 21, shows our NAV development for the year as you can see like-for-like NAV adjusting for the shareholder distribution came down by 5% to 10% from SEK83.5 billion to SEK79.5 billion driven in particular by weak macroeconomic conditions which had a negative impact on Millicom.
The reported net asset value for the year was as previously stated SEK72.4 billion, but again as of yesterday our NAV is up to SEK78.2 billion or 8% since year-end. If we then move to Slide 22, you can see that we’re making some minor refinements to our return and leverage targets. Where we used to say that our aim to deliver a TSR of 13% over the cycle we have now changed to 12% to 15% over the cycle, reflecting the current interest rate environment in our portfolio composition.
The leverage target has been refined from no to low leverage to the more specific not exceeding 10% of the portfolio value. Our dividend policy is unchanged. The board has decided to recommend an ordinary cash dividend of SEK8 per share which translates into almost 4% dividend yield based on the closing share price for 2016 and 3% growth year-on-year.
Our five-year total shareholder return shown in blue on the graph was 16% as of end of year 2016. To conclude, I’d like to turn to Page 24 to talk briefly about our high level priorities for 2017 which are very much in line with what we have communicated previously. As our launched public companies are the main driver for value creation at Kinnevik, our top priority is to grow and protect their value. Each company has a clear strategic agenda and we will work had in 2017 to ensure they all deliver on their respective priorities.
Similarly our investment team remains firmly focused on driving sustainable growth in our private portfolio. Furthermore, our key priority for 2017 is to ensure we find new exciting companies, companies that will complement our existing portfolio. delivering on our targets would not be possible without top talent therefore we seek to attract, retain and reward talents in line with Kinnevik’s value creation and we aim to support a strong culture both through proactive and transparent communication with our stakeholders. In short we are in a very strong position for 2017 and continued execution is in focus.
Thank you very much and let’s now open it up for questions.
[Operator Instructions] our first question comes from the line of Elias Porse from Nordea. Please go ahead sir, your line is now open.
Could you update us on the search for new CEO and should we expect a lower level of activity until a new CEO is in place. How important is the CEO function for new investments disposals [ph] etc.? Thank you.
Thank you, Elias. We have a search process that’s been launched it was launched in December. This is process that is led by the board obviously and the board in Kinnevik will of course announce when they have made progress and when we have a new candidate, so when you see [indiscernible]. On your second question, I think this is business as usual so we have a very dedicated team and as I mentioned earlier we continue on a high activity level on the investment side, continue to look for new exciting companies that we will invest in.
Okay, thank you. And you don’t provide an investment guidance for 2017 but your revised gearing target allows for substantial investments, what kind of level should we expect this SEK2 billion to SEK3 billion reasonable level for this year as you see it now. Thank you.
Yes, as we noted we have taken out the net investment guidance and actual number. But you’re right, so we have refined and clarified our leverage targets by providing a number and what we mean with low leverage. I think you shouldn’t read it as the target to be at 10% but rather again as a clarification of the no or low leverage and we will remain below 10%. As we said we will continue to have high activity and we have a strong pipeline of new exciting investment possibilities. I think you should just expect the more or less the same activity level as last year, but we would prefer not to talk about numbers.
Great. And finally the new investment in babylon, can you tell us anything about future capital needs. Thank you.
Sure and I’ll that pass that over to Chris.
Yes so babylon remains a young company, we led the Series A financing last year and typically this sort of company is financed for 12 to 18-month period, so it will be coming up to a point which new capital is required to take it forward and obviously Kinnevik’s ambition when it invests in young companies is to continue to support them as they grow.
Our next question comes from the line of Magnus Raman from Handelsbanken. Please go ahead sir, your line is now open.
I can start off with Lorenzo Grabau last spring he stated that Kinnevik would not sell its stake in Rocket Internet coming 24 months, could you update us on your view on this holding and if that statement is still valid?
I don’t think we would like to give guidance on any specific portfolio company, so we probably prefer to talk about. I mean generally as you know we’re evaluating all the companies in portfolio and we might sell some, we might add new but we don’t comment on specific companies.
All right. Then you mentioned in the start of the presentation that all six companies performed well in Q4 here of those Global Fashion Group was one. What does that mean in terms of performance for GFG in Q4?
I think the numbers actually has been announced earlier, so this is the Q3 numbers for GFG and the Q4 numbers would be announced in March, so it’s one quarter lag in the reporting, these numbers are not new I think.
All right. Okay I see and then question to Chris Bischoff on Betterment you mentioned here that asset under management grew by 7% month-on-month in January, on an annual rate that would imply almost doubling of AUM, is that what the company target for 2017?
If you look at the historical performance of the company, it has been able to achieve a doubling of assets year-on-year over its recent history, so that may give you a guidance stability of the platform to scale. Clearly this is a negative churn business, so when you look forward the existing customer base one would expect to allocate more capital to the platform over the year and then obviously you have the addition of new investors. So I think you can read what you want from historical record, but yes clearly we’re looking to continue to scale the business and differentiate ourselves from the digital competition.
And on Quikr can you update us on the status of its path to profitability and its current cash position? Is it sufficiently funded to reach profitability or should we expect additional funding rounds in Quikr ahead?
So the cash burn as we’ve highlighted is reduced and the revenue is increased. So the requirements for funding of the business have fallen. The business is well capitalized and we do not currently expect a need for any significant further funding of the business before breakeven.
Excellent, I just have one final on Bayport. Do you define [indiscernible] as well aligned with your overall focus investment teams? Thank you.
Financial services as a sector is a core vertical for us and one way we spend a significant amount of time. Bayport is also a consumer finance business that lends to tens of thousands of customers in emerging markets in that respect. It serves a core part of the Kinnevik strategy it is as well as digital perhaps than a number of our other investments. But obviously like every business it’s moving forward on a digitization strategy.
So one could interpret that it’s not only the asset management side, but also lending side of the financial services, is a focus area for you.
I think we will look at a number of areas when we said that previously, our financial services including lending. I think we have some reservations around lending business as a whole as we do not aim to build large balance sheet businesses ourselves. We think there are other parties, at a better place to build those sort of businesses. So I think you should not expect us in the short-term at least to build large balance sheet businesses in addition to our stake in Bayport.
[Operator Instructions] we have a question registered from the line of [indiscernible] from UBS. Please go ahead sir your line is now open.
Had a question on your E-Commerce assets, we’ve seen some examples of consolidation in this area and I was wondering if when you’re seeing that potentially for your assets as well and if you would be willing partner that would be, if that were to happen as a shareholder. Thank you.
So as Joakim stated we evaluate each of our assets and opportunities for each of our assets, how we can deliver greatest shareholder value. Our base case remains to build sustainable businesses, but at times parties come to us and look to either partner in such a way build a better business who indeed they see more value than we do in the asset, we will of course look at those situations on a case-on-case basis and decide how to proceed in the best interest of shareholders.
Okay, thank you.
Our next question comes from the line of [indiscernible] from Direct. Please go ahead sir your line is open.
Sorry I was bit late to the call now, but I just saw that you have divestments of SEK99 million in the fourth quarter, what was that? Is that something you could specify? Thanks.
It’s the smaller businesses that we don’t disclose the details around.
Because we’ve chosen to not to. It’s not material for the overall methoding [ph].
[Operator Instructions] as there are no further questions. I’ll hand back the conference to the speakers.
Okay, thank you very much for listening, for your questions. As a reminder we would just like to inform you that we will report our Q1 results on the 27th April. Thank you again and have a nice day.
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