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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and thank you for standing by. Welcome to the VEF First Quarter 2024 Earnings Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, David Nangle, CEO. Please go ahead, sir.
Yes. Good morning and good afternoon, everybody, and welcome again to our quarterly results conference call this time for the first quarter of '24. Am I'm Dave Nangle, the CEO of VEF. And with me, as always, will be my colleague and CIO, Alexis Koumoudo who is with us from Rio today at a conference in Brazil. And what we'll do over the next 20 minutes plus minus, as per usual, give you a brief rundown of the updates of our story over the last quarter, recent past, I'm looking forward to the rest of the year, and then as always, open up to Q&A at the end. The materials themselves are on our webcast or will be on our website also during the day. But getting straight into it. Just from a key events of the quarter, and this is on Slide 2, just kind of the salient points that we think about when we think about VEF this point in the cycle. And from a NAV point of view, we had up 1% in the quarter from a dollar point of view, but 9% year-on-year. And probably more importantly is the trend that we're now up 17% from Q4 lows. So we do like the evolution of the trend and the number of driving factors within that, whether it be micro level at a company level, but also the various aspects of market strength and multiples FX and then most importantly, company performance. And but below that 1% move was some strong moves in both directions, which Alex will get into, the Creditas stand at a 14% plus quarter-on-quarter and TransferGo off the back of a funding round of 36%. The other moves on the downside are more methodology evolution, but I will let Alexis double click on them as I'm sure you have some questions. Creditas itself in the quarter had a very strong confident quarter. They delivered their results for last year. It's all about profitability last year. This year is all about profitable growth. We like the evolution of a company from breakneck speed growth through to profitability and now controlled growth and profitable at the same time. Management also back off the back of these strong trends on forums, at events, once again, speaking about its IPO attentions, which is obviously key for an investment company like us at VEF. TransferGo on their funding round was the key event of the quarter -- specific, it's always good to have companies having funding rounds. But this is the second one that we've had in the last 6 months. It feeds into this trend that we've been telling investors that everything that we see through the prism of VEF is getting better. We're not buying in the table, saying it's a bull market like it was in 2020 or 2021, because incrementally every aspect of what we do and what we to seems to be getting better. And that, again, in Q1 with TransferGo raising $10 million in an up-ground, similar to what Gringo did $20 million plus in Q4 of last year. And we'll talk about that in the evolution of the portfolio as more rounds come through and that trend starts to take hold as we go through this year. The portfolio is everything for us and for you, our investors. We have a strong portfolio. It will create value over time, and that will be reflected in the share price. And where we are is we're very happy after a couple of tough years in, I guess, global macro and [ never mind ] market, never mind VC and private. Where it started this year, we've been in a bunch of Board meetings on the ground, meeting our companies, sitting with them, and it's very much about talking about front foot growth strategy with these companies as opposed to 12, 18 months ago when you're talking defense, costs, balance sheets margin optimization, et cetera. We're looking at portfolio revenue growth next 12 months of approximately 30%, but stronger at an average weighted gross profit level of 65% year-on-year for the next 12 months. So this is kind of key for us in terms of the portfolio growth and that feeds through to NAV and then gradually feeds through the share prices we're seeing. And then finally, is macro. We don't like overly to talk about macro, but I guess, a lot of headlines globally with the U.S. But in our world, our markets do tend and continue to be ahead of the curve, Brazil on to 6 rate cuts since its second half '23 peak, and a positive for the macro, fintech, Creditas within that and some of our other names also. But also Mexico had its first base rate cost in Q1. So the trend from a macro rates into financial services and fintech has also been a friend of vet through Q1. Moving on to Slide #3. There are some key numbers. Our NAV is just shy of $450 million at the quarter and touch SEK 4.8 billion from a SEK per share, which is obviously a key indicator given our share prices in SEK. It was up to SEK 4.58. Obviously, the SEK was weak over the quarter. So the moderate move in the U.S. dollar of our NAV and NAV per share was more -- stronger from a SEK point of view, up 7% quarter-on-quarter, hence, the move to SEK 4.58 per share NAV from 4.26. Looking at our Slide 4 on our NAV from a dollar point of view, I would say it's touching $450 million. long evolution of our NAV through cycle and obviously the spike in 2021 with market forces and the pullback as we got our NAV back down to rightsizing in line with public market multiples and performance. But what's key for me and someone who's managing this portfolio with the team and seeing this NAV evolve an output of what's happening in our portfolio. There's been a gradual uptick from that December 2022 low. I would say, 17% up from that low and kind of restarting that gradual trend that we saw back in 2015, it was a gradual upward to the right as opposed to the dramatic spike that we had in that window and the dramatic pullback. So a much more -- I would much more rather manage and communicate a gradual upward trend as we're seeing over the last 3 to 5 quarters. And finally, just from a market point of view, Slide #5 before move onto Alexis. It's been a strong start to the year for markets. We are market dependent in many ways, our companies allow them are valued against the market. And then also looking to exit them into the market, market multiples. And we are still are obviously a listed entity and have a market share price. The markets have been strong year-to-date, both in terms of NASDAQ and S&P, you'll see as market participants up 10%. And the fintech indexes, which we follow, obviously, have been up similar. Obviously, the various names within there have moved to different degrees, new banks are not strong, whereas other names have been down strong like Paytm in India. So it's hard to put -- these are just average numbers and a lot of those multiples do feed through to different names in our portfolio. But overall, markets have been a tailwind for everything we do year-to-date and also through 2023. And at this point, I'll move on to the valuation section of our portfolio NAV and Alexis I'll bring you in, if that's okay.
Great. Thanks, Dave. Hi, everyone. Yes, so on Slide 6, I'll start by just highlighting some of the key moves in the quarter. And as that Dave highlighted, the valuation of Creditas moved up 14% quarter-on-quarter. This was largely driven by both company performance and also the performance of the listed comps that we use in the mark-to-market valuation process for Creditas. The other large up move was TransferGo. Again, Dave spoke about this, that TransferGo raise the $10 million round in the quarter, which saw the mark going up 36% quarter-on-quarter. On the negative side, the largest one to highlight is Konfio. The valuation for Konfio was marked down 21% quarter-on-quarter. This reflected pretty much an equal part, the weaker comps in the quarter and then also the impact of the valuation evolution, the methodology evolution, which we'll cover on the next slide. And then more broadly speaking, the evolution of the valuation methodology had an impact in the quarter across some of the other names, and we'll cover that in a little bit more depth later in the presentation. But moving to Slide 7. On this slide, we summarize the rationale and impact of the valuation evolution, the methodology evolution that we're using in the quarter for the mark-to-market value businesses. In a nutshell, what we're doing is that with a large portion of our portfolio now either profitable or approaching breakeven, our valuation methodology has evolved to incorporate the additional data points that will drive the valuation of these businesses going forward. So as we've communicated, a big portion of our NAV now has reached the place of maturity and sustainable growth. That is the large companies are still growing into very large opportunities that are very focused on uneconomics. They're approaching or have reached steady-state gross margins and they're balancing the growth of the business with profits ultimately solving for breakeven so that they're in control of their destiny. For these businesses that have reached sustainable growth and this level of maturity, we become -- we've begun moving the valuation methodology to incorporate multiples further down the income statement, in particular, gross profit. As such, our valuation methodology improves with more relevant data points to value the businesses. This approach is aligned with market feedback about valuation from other growth stage investors that are likely to participate in next pricing, the equity in these companies. And it's something that we've done naturally for Creditas and TransferGo over the course of 2023. And now in this quarter, we've done it for Konfio, Juspay, Solfacil and Nibo. At this point, over 90% of our mark-to-market valued portfolio is valued using this methodology. And overall, we feel this results in a more robust valuation that reflects more relevant data points available to us to value these businesses. The transition did prove a headwind to NAV evolution in the quarter as some of the companies are still approaching steady-state gross margins. But as long as our companies continue to make progress on gross margins, this gap will close in the coming quarters. Our goal in the valuation process working alongside our auditors is always provide a true and fair value of the portfolio to the market with the highest probability of portfolio events to occur at or above our NAV. So moving on to Page 8. Slide 8, we show a summary of the portfolio. Of the 14 portfolio companies 10 are mark-to-market, representing 87% of our NAV and 4 based on latest transactions representing 13% of NAV. You can see the breakdown of this on this page. The large portfolio company where there was a change in methodology was TransferGo because of the funding round that happened in the quarter. And you'll also see on this slide that we show that of the large portfolio companies that are on mark-to-market valuation methodology, all of them incorporate revenue and gross profit multiples. On Slide 9, just running through some of the key NAV and portfolio performance metrics for the quarter. As many of you remember, in 2022, our portfolio moved to mark-to-market quickly to reflect this new environment that we were entering. What's notable in this quarter, as Dave has mentioned, is that as the environment improves and companies begin to raise rounds again, we're starting to see the portfolio shift back towards latest transaction, which is a welcome shift. The latest transaction valued portfolio increased from 7% of the portfolio to 13% this quarter from the previous quarter. And importantly, in aggregate, this shift is happening above our NAV mark driven by the bigger, more important companies in our portfolio. In terms of growth, the portfolio continues to execute well, expecting 30% or so next 12-month top line growth on a sustainable basis. And 95% of our portfolio are now at or can reach breakeven with existing cash position. And an additional data point related to this is a bigger portion of our portfolio now is actually at breakeven, specifically given Creditas announcement of reaching breakeven at the end of last quarter. And the remaining 5% who are not able to reach breakeven given existing cash, have 18 months of runway.On Slide 10, just running through the NAV bridge, showing what the biggest contributors are to the change in NAV quarter-on-quarter. The main positive forces driving the NAV growth in the quarter is the portfolio performance as our companies continue to execute well. The other positive impact is from the TransferGo transaction, which drove the $10 million new transaction bucket within the latest transaction valuations on this slide. On the negative front, the largest headwind came from the change in multiple buckets, which incorporates the valuation methodology, evolution down the income statement mentioned before. If we isolate the impact of the valuation methodology evolution accounted for $25 million of the $24 million headwind in the [ NAV's ] bucket. FX is generally a small headwind from the depreciation of the real and the change in corporate cash reflects our OpEx which is partly offset by the portion of our unhedged bond and the translation impact of the SEK depreciation in the quarter.Overall, this was a positive quarter with portfolio growing at a healthy rate contributing to shareholder value growth whilst refining our valuation process for a maturing portfolio improved the headwind. We see this as a fine-tuning of our portfolio multiples with incremental data. Dave back to you.
Super. Thanks, Alexis. From my side, to wrap up with a few slides before we open up to questions. First and foremost, to Creditas -- still our biggest and most important asset. And what you've seen over with the charts on Slide 11 is a company which deliberately and focused its mind to reduce growth to reduce the balance sheet side of the story to really focus on the income side of the story. And what you saw, as I said over the last few quarters as a company raising its pricing, raising its margin, getting costs down, asset quality starting to turn in line with the cycle. And all of that has led to the gradual trend that you see in gross profit back to steady state margins of 45% and net income going from the size burn numbers back in 2021 to what was operationally breakeven in December of last year. You roll that into the start of 2024 Creditas, and it simply had a strong start to the year. And we're starting to see that growth coming through, and you'll see it in the coming quarters. And I'd like to see 2024 as the return of growth year for companies like Creditas, Konfio, and a couple of others that are in that more cyclical balance sheets-heavy business as opposed to some of our clear structural growth stories like Gringo and Juspay, which have been growing at a 50% plus/minus clip through the last couple of years. But the Konfio, the Creditas they're trying to put the foot back down on growth at balance sheet level to marry what is now a very efficient and fit-for-purpose income statement. And that also then feeds through to the confidence our founder and company level to be out there, again, talking to investors at forums, Sergio himself, he will see us on Bloomberg, giving you an update on the story and talking about IPO intentions again. So we're back at that point in the cycle for what is, as I say, our most important asset. And then to repeat this point on Slide 13 around TransferGo's $10 million funding round. In itself, it was obviously important because we like our companies being a well-funded, but be raising more incremental capital from quality investors at higher valuations, either to the last funding round, but more importantly to our NAV mark because there's a lot of scrutiny and focus on NAV marks for companies like ours in the market. So when our companies do raise capital at or above, it's a welcome sign and what of many we're seeing at the moment. But I think the read across is as important for the broader ecosystem. It is the second company win our top 5 companies to raise capital in the last 6 months and to do so at a higher level of valuation versus last versus our NAV mark and also allows the company to market more and share some information that we maybe haven't been able to share before, like they did deliver 50% revenue growth last year and have best-in-class margins in that part of the subsegment of fintech with 80% gross margin. So -- and they are also a profitable company, plus/minus depending on the month year-to-date. So nice read across 13% of our portfolio is now based on a transaction valuation. We like that evolution as much as we like the valuation side of what we do on the market model and how deep we get in it, the evolution back towards a transaction base is a natural evolution of where we're at in the market cycle. On the share price and what we're doing on the IR/PR front, what we've seen this is Slide 14 is a share price which has lagged an been hanging around SEK 1.70, SEK 1.80 a share for the last at cost, 6 months. Of late, in line with everything we're seeing from macro market and into prism of our portfolio and performance. The share price is starting to react, which is generally what it tends to do and then it can gap up quite quickly as we've seen in the past. So over SEK 2 a share at this point but still a long cry away from our NAV of SEK 4.58 at the end of the quarter, still a good 50% plus distance to that. So on Slide 15, these are the things that we continue to communicate to you that we're doing to try and close that gap because our goal as stewards of this company and your capital is to drive that NAV per share up and to the right and close that gap and discount from share price to NAV to as close to possible if not a premium as we saw in the last cycle. And what we're seeing, I guess the key points from this for me is just coverage. And we're big fans of the investment banking community that works with us in our Swedish investment bank, many of which are on this call, but we added Jefferies to that list. That's our first global bulge bracket bank covering our stock and also a bit more global reach from our stock out there. Also, the transparency continues. You see with Creditas in their quarterly results, you see a TransferGo and the PR they put in around on some of the information around their capital raise. But also a lot of our companies are getting out there, again, Konfio and Creditas were in the U.S. at our Goldman Sachs conference in February. They'll be at a BofA conference in May in New York again. So our best assets are out there talking their story, which effectively taking our story to the broader investment community, and that's only a good thing for VEF. And as Alexis communicated, the growth is coming through, again, more reasonable than last cycle, but it's profitable growth, it's more mature growth and we're looking at 30% portfolio weighted revenue growth over the next 12 months. I guess the final point is probably the most important one on the balance sheet. This is a key year for us in terms of exits and getting cash in this year into next year. It's something we're focusing on very much. And I guess what I can say to the tune about at the moment but we're more confident today than we were 3 months ago and then even more confident 6 months ago, the work streams that we have ongoing within our portfolio to get cash in at the right valuation, mind you, are going in the right direction. Our confidence is higher than it has been in the recent past that we'll do something this year. Second on slide to Slide 16. Just from a capital position point of view, we ended the quarter with $17.9 million of cash capital on balance sheet. We expect to end the year just north of $11 million comfortable for this year, comfortable to next year. We are not overly investing. We have invested 1 year-to-date. But very much aware of our capital position, where of our net debt. Hence, we rolled the bond out to 2026 at the back end of last year. That was the first move in balance sheet management. That gives us the comfort zone to operate and then working on the exit on the other side and working on the share price. And as I say, the work streams are moving in a positive direction, which gives us that broader comfort zone to work within. And then just to wrap up, what I would say, and this hasn't really changed much from last quarter, I didn't really need to. The NAV tailwinds are in place, and that's key. And NAV goes in the right direction and the share price generally follows as well as in closing that discount to NAV. But we're adding value on a quarter-by-quarter basis through the prism of our portfolio on true NAV. And we're seeing the growth and the expected growth coming through. And if anything, from an analyst point of view, we're starting to up some of the forecast in our portfolio, a bit like -- the Street is upping forecast in some public companies as they got behind in the down drag of the last cycle. We are optimistic about our portfolio, how could we not be having lived in the up cycle through to '21, but also haven't seen them in the last couple of years being very resilient in the face of a lot of headwinds. So Creditas and Konfio cyclical, but still structural companies, a lot of grow potential back on the front foot with growth, structural classic growth stories like -- Juspay, Gringo, putting the foot down in growth and names like TransferGo raising more capital for growth. So it does feel good at that top and 90% plus NAV part of the portfolio. The geographic point of view, I've talked to this before, but we do like the aspect of being long Brazil cyclical growth into a falling rate environment. India is still the strongest structural growth story on the planet, and we're along there with Juspay plus others. And then Mexico increasingly is becoming a very real U.S. near-shoring story, which is good for the economy, good for macro and that generally feeds through to the SME for us, that's Konfio can only be a tailwind for what they're doing. The portfolio itself, we use our maturity a lot in this quarter, but I hate you for you to think that our companies are mature like a state entity or like utilities, they're mature in terms of they're reaching steady-state gross margins or the region breakeven at some point, but the growth is still there to go. And we're only starting to put that foot down in growth again in some of our bigger names, which is exciting. And then the venture industry is improving. That comes through in what we're seeing, most importantly, for our companies getting funded, Gringo and TransferGo. And then on the other side, the exit market, which is really starting to open up dormant 12, 18 months ago, and you're starting to see those wheels turn again, and that gives us confidence that we can do what we need to do on the last point, which is really around balance sheet strengthening and exits and also working that discount to NAV, and we're starting to see the share price catch a bit, which is quite nice at this point in the cycle. I will stop there, operator, I'm happy to open up to questions from the audience.
Thank you, sir. [Operator Instructions] We are now going to proceed with our first question -- and the questions come from the line of Linus Sigurdson from DNB.
I'd like to start with a broader question here, and you alluded to this. But I mean, clearly, the industry is improving, markets are getting better. Are there any sort of external factors missing for exits to take off? Or is this more a question of time and work, if you will?
Look, I think it's time, patience. When you talk about exit markets, you're talking for us, it's M&A, IPO and then it's into the secondary sale market. I think in the IPO market, we are everyone lies in the U.S., but my feedback from being there last week talking to the heads of ECM for U.S. is the U.S. market is open for business on the IPO front. And then once that normal market of when that starts to trickle down into other markets as risk appetite improves, obviously, Europe is behind the U.S. and then some emerging markets behind that, too. So a bit of patience, a bit of time, more deals being done, especially in the Big Boy markets. But then you've got anomalies like India, which is a hot IPO market, and we're long 3 assets in India. So the IPO market is something that gives us confidence, at least to the direction of travel in it and obviously, watch this space. And then M&A has been constant, but I guess this is getting a bit more active now, a bit more confidence across buyers and opportunities and open to some sellers to get out there and sell their businesses. So I think it's a bit of time, a bit of patience, but what's important and what I keep on communicating is that quarter-on-quarter, everything we see is just getting incrementally that bit better and that continues into Q2.
Great. That's very helpful. And then secondly, I wanted to ask on if you could perhaps help us break down sort of the drivers between -- I think you said 65% gross profit growth year-over-year, if there's anything in particular coming through in that number?
Alex, do you want to grab that? And is there anything you want to double click on where the outliers line of 65% or we just want to keep it as a generic number.
Yes. I mean, I think, broadly speaking, so this evolution and valuation methodology that we've done. We were kind of doing it as companies are approaching steady-state margins. So there's still a bit of like gross margin expansion that's happening at the portfolio companies, and that's driving that higher rate of growth for gross profit. I'd say it's pretty broadly across all of these large portfolio companies. And it's not particularly focused on one name. I'd say it's pretty consistently high across all these names.
[Operator Instructions] And the questions come from the line of Ermin Keric from Carnegie.
So maybe just if we would start on this evaluation or evolution rather of the valuation methodology, should we expect to see the same kind of negative effect when you start adding up further down the P&L, like if we start to see it on EBIT or anything like that? Or was this more of a onetime when we go from sales to gross profit?
Alexis do you want to grab it?
Yes, sure. Yes, I think this change that we've made, I think, reflects how we feel the portfolio is evolving and the companies are still very, very focused on growth. And as Dave mentioned, they were still growing into very large opportunities. So they're really optimizing gross profit and the balancing that with solving for breakeven and achieving revenue growth. We haven't -- I feel like we're still quite a long way away from any of [Technical Difficulty] portfolio absolute profits because they've reached a size whereby they don't feel that there's a lot of growth left. So I can't see us moving further down the income statement on the horizon. It obviously depends how quickly our portfolio grow into their opportunities. But right now, we're still quite a long way away from really, really maturing and optimizing absolute EBIT or net income.
And maybe, Ermin, just to add a point to that. I wouldn't -- I know it's what we've communicated in this quarter. Obviously, the move down the income statement has led to a pullback in a couple of names in terms of valuation. But I wouldn't naturally associate a move down the income statement to a negative move in valuation, it could actually be the opposite. And if anything, maybe we move the touch early arguably, discussing with our auditors -- but then the flip side of that is that you get the benefit of the 65% expected gross profit growth coming through over the next 12 months versus the 30% expected revenue growth. So it kind of swings around about some timing how you do these things.
Got it. And would it be right to think that when the companies where you're still seeing expanding GP margins, when they reach what do you think is more of a steady-state, this shift from looking at sales multiple to GP multiples would be quite neutral. Another way of saying is that you don't see your holdings having lower GP margins over time than the peer that you're looking at?
Yes, exactly. And the more accurate the peer set, the more close like the gross margin for our portfolio companies that maturity will be to them, the listed companies. But yes, given that our companies are tech-first, fintech, typically, they'll have like very similar gross margins, if not the potential to have slightly higher gross margins than some of their peers.
Great. That's very helpful. Then the second topic I wanted to touch upon was a little bit continuation of the exit topic. I mean it's quite clear that you really like the portfolio you have, but you're looking to increase liquidity a little bit. Could you give us some sense for -- are you feeling like you're missing out on any opportunities currently in the market? And given the NAV discount you have, is it even an alternative to look at new investments before you would resume buybacks?
Look, I'll start, Alexis, and feel free to layer in. And it's a busy ongoing conversation at [ FEPP ], but we sit down with some of our bigger investors with our Board. So something we're very cognizant of. I think first and foremost, we're happy with our portfolio. And you don't want to sell your best assets. So there's obviously a tension there in what we have, a month liquid or fairly liquid within that prism of a private portfolio. Hence, we've got a number of work streams, and we look to act appropriately with the right asset at the right time and the right market price as opposed to having to force anything, which is what we've really worked hard over the last couple of years to do, hence the rollover of the bond. Then you kind of flip that down to if you had an extra dollar in the house today, what would you do with it, well, you probably pay down your debt first and foremost, but then you also look at your equity as 2 ways of adding value, reducing leverage. And it's very hard to look at a thing beyond them, at least initially. But then pulling that back, it doesn't stop us on the day-to-day pipeline work because that's the bread and butter, what we do and finding the next think of Easyco, Creditas, Juspay is what investors want us to do. And that's ongoing, Alexis is in Brazil this week, and I was in Mexico a few weeks back, the last were in India. So it continues the pipeline build out. And maybe 12 months ago, I would have said that we weren't missing out in the market because the markets were -- they're very dry -- best-in-class companies were under the covers. Some of the worst ones were raised, we didn't want to touch them, but there wasn't a lot of activity out there and not the kind that we like. I guess, year-to-date, we are starting to see some activity, and we're starting to see maybe the first company or 2 that if we had additional capital, we may lean in to go deeper and potentially invest I think we would invest. But we're actually getting back to that point in the cycle by no means is a busy [indiscernible] means that we're seeing 50 quality companies, and we're missing a great opportunity, but we do feel it is coming and hence, the work that we're doing to get our shop and our balance sheet in order, so that we and our shareholders can take part in this next part of the cycle.
We have no further questions at this time. I will hand back to you for closing remarks.
Excellent. Thank you, operator. And thank you, everybody, as always, for dialing in, for listening in and for following our story. As always, we're here to answer any follow-up questions that you have. Myself, Alexis, [indiscernible] on the IR front. But thank you for your support. Thank you for following us. We hope to continue to deliver incremental positive news as we go throughout this year. And in the meantime, you guys have a great day. Thank you.
This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.