Vef AB (publ)

STO:VEFAB

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the VEF 4Q 2024 Earnings Conference 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, Mr. David Nangle, CEO. Please go ahead.

[David Nangle, executive]

Many thanks, Frazia, and welcome all once again to our results -- quarterly results conference call this time for the fourth quarter of '24. And going straight into the deck, it was a more eventful quarter than usual and the highlights of key events in the quarter. First and foremost, it was around our NAV and our Q4 NAV, weakness was driven by mainly Brazil macro and market aspects feeding into our valuation process, and we'll get into that in a bit deeper detail obviously in the presentation, but we ended the quarter and the year at a NAV of $353 million, down 26% quarter-on-quarter in dollar terms and down nearly 20% quarter-on-quarter in SEK.

From a portfolio point of view, looking at the underlying companies, once again, still delivering the quarterly message is the same as last quarter, majority breakeven, which is where we want them to be and growth is back in focus, and we saw those trends coming through in our key names in the portfolio through 2024, and that continued into Q4, and we expect 35% to 40% top line gross profit growth as we look into next year. So it's a much -- it's a nice risk-reward balanced portfolio at this stage.

On a micro level, Creditas always gets focused given the size and shape in our portfolio. And the Q3 results would have been reported to you, investors back in November, they're the latest set of public figures we have, but trends are continuing into Q4 from what we saw throughout the year. But in Q4, they delivered 17% quarter-on-quarter origination growth, nearly 50% year-on-year. And that origination growth is obviously driving everything else from a balance sheet into an income statement as we are profitable growth and reaccelerating that growth into 2025. I guess what's new is basically delivering on promises around exits.

We've been talking a lot about this for a long time. It was a key focus goal for us, promise to the market. And now we've done 2 exits back to back with BlackBuck, the IPO in India. And more recently, this week, we announced the exit of Gringo in a 100% cash deal. So we'll get into both of them. And that leads on to the last point, which is what these exits allow us to do.

These exits obviously delivered at NAV plus/minus. And with capital in, we just start to have a lot more flexibility and ability to put that capital to work. And what comes front and center to mind is obviously our balance sheet strengthening that by delevering and our own equity trades at a deep discount and the opportunity to [indiscernible].

And from a numbers point of view, Slide 3, as I said, headline $353 million at year-end of NAV from a SEK per share basis on the NAV per share, SEK 3.73, that's down from SEK 4.26 at the end of last year, mainly because of the Q4 moves, first 3 quarters of the year, quite directionally positive. We had that macro Brazil overlay in Q4, which we'll get into. And then from a graphical point of view on Slide 4, you see the step down in Q4 from what we had in September through to the $353 million in December.

And finally, just to layer the left, which is going to get into a lot more of the detail on our NAV in Q4 and the key components of that. What basically happened in Q4 and the basis for that is the stark divergence in how markets performed in the U.S. versus the rest of the world and our core markets within that of Latin America, obviously, quite robust from key markets, NASDAQ, S&P and even fintech markets globally, which are heavily weighted towards developed markets, all having a very healthy Q4.

ARC and Finex index up 12% and 24%, respectively. You pull that into a LatAm context and the fintech companies of which we benchmark valuations against mathematically. And there was pullback in a lot of key LatAm fintech names. You add that to currency and you get the math feeding into the valuation process that we try and be true and fair to. But that's a basis where Alexis is going to talk to. So Alexis, do you want to jump in at this point and get some more detail on that front, please?

[Alexis Koumoudos, executive]

Yes. Thanks, Dave. Hi, everyone. I'm going to start talking you through some of the individual portfolio position moves and the forces driving them. This quarter, as Dave mentioned, LatAm comps and a weak Brazilian real paired with a strong dollar had a large impact on our NAV evolution. And you'll see that as well later in the NAV bridge. But diving into the individual names. So Creditas saw a 44% decline quarter-on-quarter.

As Dave mentioned, that was dominated by macro factors. The peers multiples that saw a 30% contraction, specifically LatAm fintech peers in terms of their multiples and the real depreciated 12% in the quarter. These 2 factors account for almost all of this move, this 44% move. Another name worth mentioning is TransferGo, where the valuation saw a 32% decline, reflecting the move to mark-to-model from the latest transaction. Peer multiples for TransferGo contracted since the latest transaction in TransferGo that was priced at the end of 2023 and weaker FX over the period also contributed to this move.

Another name worth diving into is Gringo, where we saw an 11% decline quarter-on-quarter in the mark as we applied the calibration methodology to reflect the FX impact on the ongoing transaction, which was fixed at a Brazilian real price. Since the end of the fourth quarter, Gringo has entered into a definitive agreement to be acquired by Sem Parar, as Dave mentioned, and it's subject to customary closing, including antitrust approval, but VEF will receive net proceeds of $15.2 million reflected there in that fourth quarter number.

More details on this transaction will follow later in the presentation. On the positive front, the Juspay mark increased 6.5%. This is despite a 6% decline in comps and 2% depreciation in rupee versus the dollar, all more than offset by the company performance and growth of around 20% quarter-on-quarter.

And Nibo saw a small increase of 2.6% quarter-on-quarter, reflecting stable comps in the SaaS space, including LatAm SaaS comps and a 12% decline in the currency, offset by company growth of around 16% quarter-on-quarter. Those were the key names that I wanted to highlight in that slide. Dave, moving on to Slide 7. So just to highlight what the key moving parts are in terms of valuation methodology changes are in the quarter. As we mentioned, TransferGo moved to mark model as we move towards the end of the 12-month window since the last transaction, and we reflect our new fair value there in this quarter. Gringo moved to calibration methodology to reflect the FX move on the transaction, which occurred post the closing of the quarter. BlackBuck is now a public company and valued as such.

And so the net impact of these changes is that the public or latest transaction marks account for 26% of the portfolio. down slightly from 27% in the previous quarter and 74% of the portfolio, the remaining 74% are valued on a mark-to-model basis with over 90% of those incorporating multiples further down the income statement as we've implemented earlier in 2024.

We continue to expect the shift of -- the shift from the mark-to-model to public and latest transaction. I guess the obvious catalyst being that Gringo is going to move the cash on the closing of the transaction and further fundraisers would drive that shift as well.

Moving on to Slide 8. Given the sharp move in Creditas' mark-to-model this quarter, we wanted to illustrate some of the components of the pronounced move, which were largely macro in nature. So in the fourth quarter, the market focused a lot on Brazil's fiscal situation and the weak balance sheet and lack of fiscal discipline, but also the dollar strengthened in the quarter. As a result, there are 2 big factors that impacted the move in Creditas. Here, we show a basket of LatAm fintech share price moves in the quarter.

As you can see, they moved 20% to 30%. These are not the actual multiples. These are not the actual comps of Creditas, but indicative of a basket of names similar to the comps that we use at Creditas. And as I mentioned earlier in the call, the multiples of comps were actually down 30% quarter-on-quarter.

In addition, on the chart at the bottom of this page, you can see that the Brazilian real depreciated 12% in the quarter, which was more than it depreciated in the preceding 3 quarters. And so as Dave mentioned, these 2 factors feed into our valuation methodology. So despite Creditas' ongoing underlying solid performance and delivering on their promise of accelerating growth from a profitable base, these 2 factors feed through to the 44% quarter-on-quarter contraction in our market.

On Slide 9, we -- I'm going to run through the bridge for the NAV evolution over the quarter as we do. As you can see, it was the change in multiples for comps and FX which dominated the move, accounting for over $100 million of the quarter-on-quarter NAV move. Portfolio performance within the mark-to-model holdings remains resilient, but we did also make some adjustments to the business plans for the next 12 months given the shift in rate environment and wanting to remain conservative on our outlooks.

And then the only other thing I would highlight on this fourth quarter bridge is we -- this reflects $2 million that came in from BlackBuck in the latest transaction, and that offset our OpEx and coupon payments in the corporate cash bucket. So that's why those buckets look very flat quarter-on-quarter.

Going on to Slide 10 and just running through the 2024 NAV evolution and bridge. We decided in this quarter, it would be nice to have a look back and sum up all of the quarterly NAV bridges over the course of 2024 to really reflect on what drove the change in our NAV year-on-year. As you can see, portfolio performance represented $77 million of positive NAV growth, which equates to about 17% in the year, but this was offset by about $150 million of pullback from comp multiples in the year and also FX, predominantly Brazilian real and the Mexican peso.

So we continue to believe in the strong portfolio performance being able to drive shareholder value looking forward, but the 2024 headwinds from comps and FX of $150 million were particularly strong.

Going on to Slide 11. We just wanted to reiterate with this slide that we continue to feel confident in the portfolio's ability to drive shareholder value. Now over 90% of the portfolio is breakeven and growing self-sustainably, not dependent on fresh capital to grow and control of its destiny. The portfolio's next 12-month revenue and gross profit growth will be 35% and 40%, respectively, on our forecast today.

And that's reflected in Creditas' public disclosures of accelerating growth and targeting 25% to 30% profitable growth in 2025. The portfolio companies are well capitalized and high-quality targets attracting fresh capital. Examples of this being TransferGo, [indiscernible] and now Gringo being acquired. And we expect to see more of the portfolio attract fresh capital in size fundraises. Handing back to Dave quick just to run through an update on Creditas.

[David Nangle, executive]

Just moving from that valuation section to more of the micro level portfolio. We respect we understand the macro that we're exposed to very much the portfolio, we look at on a micro basis to ask yourselves. Are we in the right companies at this time. And all the way throughout 2024 and into Q4, our key companies have been performing and performing better from a strong base, raising capital, getting to profitability as Alexis said, and also now reigniting growth because we are a growth investor.

We want our company growing profitable growth. Creditas is front and center in that they do report numbers every quarter. And we are getting back to that growth phase. On the bottom right-hand chart obviously shows that origination growth picking up quarter-on-quarter, getting closer to that BRL 1 billion mark that we're doing at the peak of the last cycle. We're trending towards that as they've grown 17% quarter-on-quarter for 2 quarters in a row.

That's feeding through to the portfolio. which will touch BRL 6 billion by year-end, and obviously also naturally feeds through to the revenues and all being done on a profitable basis. Sergio has been very clear with its outlook for 2025 that has not changed. And so on a micro level, irrespective of what we're saying, we're not be [indiscernible] what we're seeing on the macro and the valuation side.

But on a micro level, we still feel very comfortable and confident in the portfolio we're exposed to. And obviously, Creditas is a big part of that. Outside of Creditas, which is not focused on here, Confio is seeing very similar trends in Mexico on the SME credit side, actually growing a little bit faster and a little bit ahead of Creditas, as I've mentioned before, and also cash flow positive. And then Juspay, the payments company, we've talked about many times, obviously growing at a much healthier clip, north of 50% year-on-year, both in terms of volumes and in terms of top line and once again profitable. Alexis, I'm going to pass back to you to touch on some of our exits and our capital position before I wrap up.

[Alexis Koumoudos, executive]

Great. Thanks, Dave. Yes, as we've mentioned a couple of times before in the past, 2024 was -- we focused a lot on exits. And it's a slow process in private markets, but we're starting to see this pay off with both BlackBuck and Gringo exits. These will bring in $17.2 million of cash and another $5.2 million in the form of a listed asset, so $22.4 million in total.

And there are still other efforts in the pipes on this front as we focus on strengthening our balance sheet and everything that brings with that. So on Slide 13, just to dive a little bit into the IPO of BlackBuck in November, BlackBuck successfully IPO-ed on the National Stock Exchange of India. It marked their first exit in the cycle, and we sold 40% of our stake, realizing $2 million, which was consistent with our strategic objective of realizing some exits and strengthening our balance sheet.

Since the IPO, BlackBuck share price has performed well, growing 72% for year-end and 57% until Monday this week with a market cap growing from about $580 million at IPO to $900 million today. The 60% position, which we retain accounts for $5.2 million as of the end of the year, and it's subject to a 6-month lockup, which will be expiring in May 2025, at which point we may consider further liquidity, weighing up our relative view on BlackBuck growth from that point versus strengthening our balance sheet, the level of our share price relative to NAV and other opportunities for capital and shareholder value creation.

And as a reminder, BlackBuck is the largest digital platform for truck operators in India with 1 in 3 truckers using the app daily, and we continue to be excited shareholders there the core products being payments, telematics, Deloittes Marketplace and vehicle financing for which we believe there's a very large opportunity still.

Moving on to Slide 14, which is the Gringo sale that we announced at the beginning of this week. So as we press released on Monday, Gringo entered a definitive agreement to be acquired by Sem Parar. Gringo built a category-defining business serving over 20 million registered drivers in Brazil and really pioneered the business model, building one of the largest of its kind globally. But we back founded and support exiting when high-caliber teams feel it's the right time to take an offer, and this was that moment. 100% -- it was 100% all-cash offer from Sem Parar to acquire Gringo and all existing investors will fully exit their Gringo position. Sem Parar are a leading tolling and vehicle services provider with a strong position in Brazil. And the net proceeds from the transaction to VEF will be $15.2 million, which is 11% below last quarter's mark, largely because of the real depreciation over the course of negotiating the transaction, which was a fixed Brazilian real sale price.

The net proceeds are equivalent to our initial invested amount in this instance. It's not desired financial outcome from exiting a great business, but it's very aligned with our objective of strengthening the balance sheet by selectively trimming our -- or exiting positions at or around our NAV mark, thus opening opportunities for further shareholder value creation given the large discount to NAV that we trade at today.

So we welcome the transaction and what it enables us to do. The transaction is subject to customary closing conditions, including approval from the Brazilian antitrust authority, and it's expected to close with funds flowing in the coming months. With that, I'll hand back to Dave.

[David Nangle, executive]

Cool from sort of last 2 slides, just where this puts us in terms of capital position, big focus on exits that capital coming in gets us from a year-end position of $12.8 million to a pro forma liquidity position of $33 million, assuming the cash inflow from the Gringo proceeds plus the BlackBuck public stake today. As of year-end, our bond bond was about $36 million, $5.8 million translated into U.S. dollars.

And so we're getting on paper close to that net debt neutral position. Exits were key for us this year. We're very happy to have delivered on 2. We're very clear that we're not finished in this regard. We're focused on delivering more. It's been selective. It's been opportunistic. It's been the right deals and always looking to do them at or around NAV to prove incrementally to the market that our NAV is true and fair and real and then obviously build a cash position to allow us to do the things that we want to do best with that capital.

And even though we haven't yet got a formal capital allocation policy out there in the market, our logic and our communication is clear around what we will do with excess or extra capital coming in, strengthens the balance sheet and 2 things which are front and center in our radar are our bonds, our debt to pay down, delever the balance sheet from this debt that we will no longer need. And the other aspect, obviously, is around share buybacks and the simple, most obvious logical value creation we can do at this point in time, given where our share price is, especially today, is to look at our shares in terms of buybacks.

Then incrementally, you start getting back to investing, which is the path that we're on. It's a stage process where you go from companies recovering, cash coming into companies, exiting companies, cash coming in, delever, buy back your shares, building pipeline and investing in great companies again, step-by-step, patient process.

You can see it happening and playing out in everything we're doing. It just takes time. We say it, we action it, execute it. And over time, it is becoming a reality, which we're quite happy about. Then just to finish and summarize before we open up to questions. We are -- bigger picture, we're not belittling the move in our NAV this quarter. We understand the nature of that, but we always want to be true and fair to the market around our NAV and the moving forces which impact that NAV, which are macro and micro in nature.

And we also want to be real time with that and never want to be legacy or stale NAV, hence, the quarterly move and hence, the inputs which explained behind that. We're trying to come out with a positive message because it's clear to us on a micro level, it is all about the portfolio. That's a portfolio that's quality in nature and proven to be so, profitable, growing and getting back to increasing growth and raising fresh capital.

Alexis mentioned a number of companies last year and now this year that are raising fresh capital, once again, reaffirming our NAV mark, but also strengthening these companies and giving us selective opportunities to do secondary transactions. The exit is big. And you can talk about exits, but exits are hard and to realize them at decent prices to reflect our NAV to get the cash in. We're now starting to do that.

We're building a track record and a trend beyond just words with the market. And then what we can do with that capital is very clear, should be very clear to the market in terms of how the positive impact of delevering, buying back our shares and moving back to pipeline investing it back on the front spot. So it's a stage step-by-step patient process for which we're getting there. Operator, I'll stop there, and we will open the floor to questions, please.

[Operator]

[Operator Instructions] Our first question -- the questions come from the line of Ermin Keric from Carnegie.

[Ermin Keric, analyst]

So maybe if we start with -- on the operational impact, it sounds like you're not too worried about what you've seen from macro so far. But could you still talk a little bit more about the risks here that you see?

I mean also previously, we did see Creditas see some margin compression when rates moved up and I suppose we've done that we seen that again now? Do you see that risk again? And then if you could talk a little bit about year-to-date what you've seen in terms of, if you would do kind of a mark-to-market, I suppose the Brazilian real has -- it looks like it's troughed a little bit and how you see kind of the peer benchmarks as well.

[David Nangle, executive]

Look, I think from a market point of view, we're looking at India, Mexico, most notably Brazil, Brazil, we've had the macro implications be it currency and peer valuation speed into our companies. And then the question is around the fundamentals of those companies that operate in a market like Brazil, which is going through -- let's call it yet another wobble.

This happens every 18 months maybe. We lived through something like this in Brazil. It's par for the course not me being [indiscernible], but it comes with territory and yet, we still see companies being built through cycle that are used to it. What we've seen so far or Creditas is no change to plan for 2025, and we've been back and forth with the company. And trends have been good within the company, obviously, vigilance on all the moving parts that are going on.

And what we saw last time in the last cycle where the margins did collapse is the gross margins to 12% from that kind of stay 45%. But when interest rates move from 2% to 14% quite quickly. So not so much to move in itself, but it was the pace of the move and the size of the move, which made the extrapolation of the margin pressure so quickly and then it help come back in.

But that will be a painful period for the company and well documented. This has been an interest rate period where it's gone from base rates 14% down to about 11%, and they're now back at 12.5% and rising -- so it's been moving gradually both ways in a range and the repricing, like most of the book, we'll turn the book at basically price fixed versus floating, so it's constantly being replaced to reflect this.

So nothing like what happened last time. What we may see on the way upward rates is some short-term margin compression, but minor. And then as rates peak can come back down, it will go the other way. But do it early to say in the cycle, but that would be the extent to where we see this. Obviously, we'll be vigilant with Brazil because it's emerging markets. So things are where they are going to get worse before they get better.

Clearly, we need to be vigilant of that kind of affect macro, credit growth, credit quality. We've seen cycles like this in all of our markets before but we're not seeing anything like that yet. And what I think to your second point, it's an interesting one, even though we do quarterly not marks, we can do daily, monthly, weekly, and we start this morning talking about enough at this point in time, and the real is up 4% year-to-date.

New Bank [indiscernible] Europe, I think it's 4% to 8% year-to-date. So does that mean our Creditas position is 10% higher today and will be something different at month end. So it's -- what I think in the market is we understand the volatility inherent in our NAV, especially when we're valuing some of our companies and the biggest one on a mark-to-model basis versus last round.

It's a lot easier in these companies are raising capital on a regular basis. It sets them up for a period of [indiscernible] valuation mark. But we like to be true and fair, and we like it to be dynamic and we like in real-time unreal, but obviously changes quarter-to-quarter. But year-to-date, the trends which feed into that, let's say, creditor-specific valuation are net positive.

[Ermin Keric, analyst]

That's very helpful. Just maybe one follow-up on it. So I think in Q3 when you gave your outlook for how you think the portfolio will grow and gross profit growth, that was 40% and 60% of revenue and gross profit. And now it's 35% and 40%. So where have you done those revisions? Or obviously just one more quarter, so a little bit more mature? Or is it a different weighting of the portfolio now than Q3? Just to understand.

[David Nangle, executive]

No, supervision and it's a bit of both. But Alex, do you want to turn to that.

[Alexis Koumoudos, executive]

Yes. Yes, sure. Thanks for the question, many. As our portfolio companies mature. Like a lot of our large portfolio companies now are at more mature gross margin profile. So you can see in the public disclosure from Creditas there at like 40% to 44% gross margins. And once that level of gross margin has reached like a credit business, the gross profit is more likely to grow in line with revenues.

And even at a company like Juspay, we said that they've reached like 90% gross margins. And so because the larger portfolio companies, their gross margins have reached kind of a more mature state, the 2 numbers will converge.

[Operator]

[Operator Instructions] We have no further questions at this time. I'll now hand back to you for closing remarks. .

[David Nangle, executive]

Yes. Thank you very much, operator. Thank you, everybody, for dialing in. I do actually believe that some people had difficulty dialing in today's call. So we'll make sure recording is sent out to everybody who wants to listen to it and after the fact and we'll be available for calls and questions as we always are.

But thank you for your support and for following us through what's been an eventful quarter and we look forward to better NAV marks in 2025 and building on the exits and looking what to do with those capital as we move through '25. So thank you very much for your time today and look forward to seeing you next quarter.

[Operator]

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.