Rocket Internet SE (OTC:RCKZF) Q1 2020 Earnings Conference Call May 28, 2020 4:00 AM ET
Bettina Curtze – Senior Vice President of Finance
Conference Call Participants
Christoph Bast – Bankhaus Lampe
Nizla Naizer – Deutsche Bank
Nikolas Mauder – Kepler Cheuvreux
Andrew Ross – Barclays
Welcome to the Q1 2020 Results Call for Rocket Internet and the selected companies. As always defined our results presentation on the Investor Relations section of our corporate website, which will be the basis for our call. And please turn to Page 4 and let’s just have a look at the results of our two remaining selective companies. In April, we have reduced our stake in home24 from 11% to now 8%, our stake in Global Fashion Group remained constant that 18%. And as mentioned on the last call, we exited our stake in Jumia in Q1 2020, pre onset of the corona pandemic.
On a constant currency basis, both Global Fashion Group and home24 achieved continued top-line growth in Q1 2020 versus Q1 2019. Global Fashion Group grew by 8% and Home24 by 14%.
Global Fashion Group despite the onset of the corona pandemic in March, 2020 improved the adjusted EBITDA margin from minus 10% in Q1 2019 to minus 8% in Q1 2020. The large contributor here was the shift in revenue mix towards marketplace which accounted for 25% of NMV in Q1 2020 and was the main driver for 3 percentage points gross margin improvement.
Home24 improved the adjusted EBITDA margin by a full 13 percentage points from minus 16% in Q1 2019 to minus 3% in Q1 2020 as one-off appeared and post IPO improvements started to pay-off.
Global Fashion Group faced exchange rate headwinds in Q1, such that in the Euro denominated terms revenue grew by 4% to EUR271 million, compared to 8% growth on a constant currency basis. On March 31, 2020 Global Fashion Group withdrew its financial guidance for 2020 due to the uncertainty introduced by the corona pandemic. The weekly order intake year-on-year growth bottomed out at the end of March, but then this negative trend reversed and in April weekly order intake was up to 40% ahead of last year. However, substantial uncertainty prevails the full negative impact of the COVID-19 pandemic that can’t be quantified as of today. The company for example reduced the inventory by EUR19 million in Q2.
Home24 had a good first quarter with revenue reaching EUR103 million, a 10% increase over last year in euro terms, 14% on a constant currency basis. One time effect and measures related to contain the COVID-19 pandemic impacted Q1 to supply chain restrictions closure of retail stores in Europe and Brazil and for the volatility in customer demand at the beginning of the lockdown period.
Similarly to Global Fashion Group, order intake has accelerated and led to an 88% increase of gross order volume in Europe and 39% Brazil for the month of April. Despite the high degree of uncertainty, Home24 has confirmed its financial outlook for fiscal year 2020. As mentioned in earlier calls, Rocket has launched 20 new business models since 2018. We generally want to give these companies some time to develop, but to give you an idea of what we are working on, let me introduce you to Tinvio today.
Tinvio is a digital B2B procurement and communications platform that tremendously simplifies the communication ordering process for merchants and suppliers. The app comes with features such as real time communication with suppliers. This sense of ordering system where one can order with just a few clicks. Digitization of the order book for real time controlling and reporting in a fully digitized invoicing and center order tracking.
Tinvio has already won more than 1000 partners in Asia. The company is currently active in Singapore, Australia, Hong Kong, Indonesia, South Korea, Taiwan, Thailand and Vietnam. With investment also from Sequoia and Partech in the most recent financing round to Tinvio further developed its product offering and is looking to conquer the still very under penetrated market. Tinvio aims to make ordering for businesses as intuitive and simple as we by now are used to for many consumer applications but with an eye on what businesses require in terms of monitoring and reporting.
Looking at our private companies in aggregate. COVID 19 has introduced a lot of uncertainty and a variation of participations as well as operating performance has been very negatively impacted. We expect this to endure on the short and medium term. The total internally ascribed fair value of the participation of the private companies has declined to EUR1.0 billion as of end of March 31, relative to an investment costs of EUR400 million.
Now let us have a look at the consolidated results of Rocket Internet SE. We had already pre-announced and expect that the loss of EUR162 million on March 11 that now has been concerned in the final Q1 trading statement. This loss is primarily as a result of the decline and variations of companies accounted for under the equity methods as well as those accounted for at fair value.
On the IFRS balance sheet, you can see a reduction in cash but also a corresponding increase in other current financial assets of circa EUR300 million and the equity section one can see a reduction of the subscribed capital to EUR137.3 million, which reflects the cancellation of most treasury shares posted December share buyback.
In the last month, adjusted net cash declined by circa EUR200 million to EUR1.9 billion, however public stocks increased circa EUR600 million from circa EUR400 million at the end of March and also loans granted and asset from our balance sheet increased to circa EUR700 million. The recent COVID-19 outbreak and related posts year and market conditions may have a significant intake on the loan portfolio granted, but events of the companies control and the likelihood that they may occur and the effect or the estimate of the impact of the loan granted portfolio cannot really be predicted at this point.
On the last slide in our deck, the financial calendar, please note that we have decided to push back the Capital Market Day to November 24 as we hope to have more clarity on the COVID-19 impact for many of our companies at that point and are looking forward to discussing with you then.
Operator, can you please open it up for questions?
And the first question is from Christoph Bast of Bankhaus Lampe. Your line is now open. Please go ahead.
Hi, good morning, Bettina and two questions from my side please. Firstly could you explain a bit more in detail your cash outflow from investing I think EUR400 million if I understood EUR175 million reinvestments and EUR194 million relate to some banking finance. So some more details here would be helpful.
The second question is just may I ask what the reason behind the two slides on Tinvio is? I mean, what exactly are you trying to show us? I think in the past Rocket has already presented us several new businesses and we have never heard anything again about this. So is there any reason why this should be different this time? That’s it already thank you.
Thanks for the question. The way I usually look at the cash is really what we have on Page 16 is just showing you the net cash balance. So the last time we reported figure there was on April 31, was a EUR2.1 billion net cash balance now we’re at EUR1.9 billion. And when you see most of this corresponds to the increase in public stock and also the loan portfolio granted. So we have a decline in cash, but then the sort of corresponding increase in public stocks mostly on the liquid side as well as a little bit on the loans grant portfolio.
So that means the banking finance relates to the loans granted that’s, correct.
Yes, and so basically like yes, I mean, we just look at– I mean when you look at net cash basis we have sort of netted out any sort of banking activity going on from the Rocket side.
And then on the portfolio companies, it was really just to give you a flavor of the set of companies that we’re working on. So there was no deeper intention behind this, but I just wanted to provide you with one example of a company this is sort of currently active and has gained some good traction in Southeast Asia. So we will, as we said before, as a company became really significant in size, sort of uplifted to our selected company, but also as mentioned in the past, we currently don’t have the company in the portfolio where we foresee this in the very short term, and these companies, obviously as they have just recently been launched are still fairly far away, but it was just to give you one example of a company that’s part of the portfolio that we have launched. And the intention was not to give our quarterly updates on these companies, but to really just show you the types of business models that we’re working on.
Okay, thank you.
And the next question we received is from Nizla Naizer of Deutsche Bank. Your line is now open madam. Please go ahead.
Great thanks. Hi, Bettina. I have a couple of questions. The first is on the increase in your liquid stock. Could you give us some color as to where you invested if you currently been at least the sectors in which you thought it was interesting in April particularly, to invest in as much as EUR200 million in. And based on the United — your stake in United Internet is within that bucket. So how much of United do you currently own some color there would be great?
And then you mentioned, the EUR700 million loans granted, there could be some risk on the back of COVID-19. Could you tell us how much of this could be at risk based on the analysis that you yourself have done. And you have probably better visibility on the run-rate of your own investments, which how much of this is probably at risk from what you can see right now.
And then lastly, on the private investments. One of the companies that invested always talk about is Traveloka within that bucket, and we know it’s travel exposed and this has been one of the hardest hit sectors. Could you give us some color as to what the valuation that is now, anything that’s been publicly disclosed? And so any, additional funding that this company might have that you might also want to participate in. So, some color that would be great. Thank you.
Thanks Nizla for that. So, the first question was with regards to the liquid stocks and sort of where we invest in the sectors. So some of it is like in the past from predominantly large public tech stocks that we also mentioned earlier. And then we also just for cash management purposes took a position in certain dividend paying large caps. The Internet stake the last stake that we notified was just about 3% voting rights of threshold. So, we in the fall had 5% right and there was the share buyback program where we tendered certain number of shares into United Internet buyback program but then also increased the stake again to above 3%. It’s just what we’re currently holding. And then certainly you have asked about granted at risk portfolio. I mean overall, the portfolio is fairly well-diversified. One of the largest conditions which was also in the news was a loan granted to Revolut. But for the most part, it’s really a number of loan granted to a variety of companies. So we can not always say its going to sort of, currently we have it on the books for like the EUR700 million, which we think is the fair value. But then depending on how long the COVID crisis continues, I mean that might also impact the loan portfolio based on the operating performance of those companies and the liquidity position now.
And then lastly, you had asked about Traveloka and unfortunately I need to disappoint that we can’t really comment on valuation and also funding need for the company, that’s a total sector overall has clearly been negatively impacted on a global basis.
[Operator Instructions] And the next question is from Nikolas Mauder of Kepler Cheuvreux. Your line is now open. Please go ahead.
Good morning, Bettina. A few questions from my side. First one on the loans granted, where you were apparently invested on a net basis and other EUR100 million, despite like putting this big rhetoric, the disclaimer that a lot of uncertainty. So, can we assume that, on the additional investments you had a lot of conviction. Second one, have you seen, given that valuations have come off a bit also in your private portfolio and an increase in sort of pitching activity or have you seen more companies or have you been rather focused on picking up existing companies of yours? Have you done anything like it already that would be my second question. And the third one is, I read that you had received an authorization for a share buyback program at the AGM. Can you share your thoughts on using this instrument going forward or whether that was fake news that I read?
Okay. So, let’s start for the question. So, let’s start with the loans. Yes, so look every time we sort of grant loans, we obviously do a risk analysis, risk reward and we try to price the loans accordingly. So any new loans granted, obviously it would have taken into account the sort of COVID situation since and would have price that in. The private portfolio investments, I mean we do investments in smaller ones also on a continuous basis, weekly basis. We’re backing some of our portfolio companies that have been impacted by COVID-19 and also continue to look for opportunities.
But some companies that would have maybe raised capital now, sort of maybe also are pushing them a little bit further. Other folks sort of taking up funding now while they are still in a position, that they can get a remittance, they attract the financing. So it’s really a mix of things. I would say overall investment activities, maybe a little bit slower than that just to be same time last year. But we are actively working with our existing portfolio companies and also looking for new opportunities.
And on the share buyback, I mean we never sort of preannounced anything, but its [AGM contract] sort of standard I would say request that the AGM, that one gets an authorization up to 10% per share buyback program and I thing that’s just a good corporate measure to have in place. So the fund has the authorization if one decides to do something in that direction.
[Operator Instructions] The next question we received from [Indiscernible]. Your line is now open. Please go ahead.
Thank you, Bettina. Just a quick question on Westwing. Is your stake still 8% the next one on Tele Columbus, is that still 10%? And if you could give us an indication of what your stake in Tinvio is?
So Westwing we currently hold just above 25%. That’s also what they had filed in the voting rights notification. And Tele Columbus we had filed for exactly a 10%. That’s correct. In Tinvio we have another list disclosed its not a public information post the last financing round when new investment came in.
The next question is from Andrew Ross of Barclays. Your line is now open. Please go ahead.
Good morning Bettina. I just got two more. Could you give us more color as to what you’ve actually written down or had so far post COVID, I think that the statement refers to B2B food assets. Is it just faster or is there more that you’ve written down already? And my second question on maybe just more broadly on what you’re saying for private valuations in general across your portfolio, you got a sense of a, they’re behind rebased or is it taking a bit of time for expectations to come down would be fascinated by what you’re saying more broadly across the valuation cycle. Thanks.
Thanks, Andrew for that. So basically also when you look at the quarterly statement that we published, the IFRS statement, you will see that there is I think two or three main impacts on sort of the lower variations of the portfolio company. Some of it is the public share prices of Global Fashion Group and Home 24. So Global Fashion Group now year-end 2019, relative to quarter end 2020 had declined by 54% and the Home 24 share price was down 44%. And so those are accounted for as I said earlier, that’s going straight to the income statement exactly. And then we had them written down B2B food group, Traveloka and also some of the funds valuation — portfolio valuation there on the private side as part of the equity accounting of the associates.
And for the valuations. I mean, we do this exercise on a quarterly basis, while those up company by company where we assigned fair values to the companies but obviously, there’s a lot of uncertainty around that in the private context, especially if a company hasn’t had a financing around post-COVID-19 outbreak. So we feel like we have taken into account, but we know at this point in time. Now, not to say that there might not be more in the future or also that might not be also some upside in the future to some of the valuations. It’s just our best estimate as of that point in time. But it really depends a lot I would say on how long the economic impacts of continuous threats. Because a lot of companies have seen very sharp declines in revenue during this period of time. Companies have taken measures to reduce costs. But nevertheless,
this cash burned during that period of time and the longer period continues. Obviously, I think it would have negative impact on the company.
Thanks. Maybe just a couple of follow ups. On the first piece, so you mentioned I think that Traveloka have been harder for writedowns in the associates line. So can I proceed from that but you have done a complete far evaluation exercise on the Traveloka post-COVID. And have a write down must be relatively small given the kind of aggregate associated under what we see. And that’s what we shouldn’t expect anything further or if I misinterpreted that.
No, I mean, it’s just sort of, yes. I mean look, there could be more in the future we just don’t know yet. Like, it really depends how long, but we do look at each company. So like all the March valuations we looked at the companies in April right as a sort of book the valuation has been for what the sort of knew at that point in time has been incorporated those numbers.
Cool. And then just a follow up on second question on part of valuations. What are you seeing in terms of potential new investments. Because, clearly you guys have a lot of cash potentially. There’s less competition from other VCs going around right now. So are you finding that there are more attractive opportunities opening up new investments or is it too soon tell?
I think it’s a bit too soon to tell. Obviously private markets you get a share price quote every day. Like if you can either decide whether you buy or sell at that point in time or at that price for a private company valuations. We always see there is a little bit of a lag time also. When sort of bad news sort of impact the markets overall. I think there’s still quite some cash also some capital available in the venture capital spend like a little fund have raised money, and also corporates. So I think it’s a bit too early to tell if there will be any target that you want to call it such.
Great, very helpful. Thanks very much.
[Operator Instructions] And we see further question is from [Indiscernible]
Good morning, Bettina. Just a small question. So, I know that usually during Q1 you give the liquidity position at the end of May. This time you gave it at the end of March. So, backward looking that during the full year release, you gave it at the end of April. So maybe can you give share indication of what was the cash movements that’s happened maybe for full year was there any big news that you made since then? Thank you.
Yes, thanks for the question. Like — look normally we try to give the cash balance and the fair value of the portfolio companies ever I guess the most recent month and shortly before we report results, like in a couple of weeks. This just last quarter we moved to the day prior to the announcement just because of COVID-19. Obviously, people are interested in what we’re doing on, especially for the public portfolio. So we had to chose very close cut-off date, here we chose the last day of the prior month from when we reported just to give you an sort up-to-date cash balance. So I think – I don’t want to give any sort of further update of the cash balance or the portfolio today. We will do that again when we report next, the half year number.
As we received no further questions, I hand it back to Ms. Curtze.
Well, thank you everybody for taking the time this morning and wishing you all a good weekend and speak latest in September. Thank you very much. Bye.