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Edited Transcript of NPN.J earnings conference call or presentation 25-Nov-19 2:00pm GMT

Half Year 2019 Naspers Ltd Earnings Call

Cape Town Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Naspers Ltd earnings conference call or presentation Monday, November 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bob van Dijk

Naspers Limited - CEO & Executive Director

* Eoin Ryan

Naspers Limited - Head of IR

* John Martin Scheepbouwer

Naspers Limited - CEO of OLX Group

* Larry Illg

Naspers Limited - CEO of Online Food Delivery & Ventures

* Vasileios Sgourdos

Naspers Limited - CFO, Financial Director & Executive Director

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Conference Call Participants

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* Andrew Geoffrey Ross

Barclays Bank PLC, Research Division - Research Analyst

* Catherine T O'Neill

Citigroup Inc, Research Division - Director, VP and Analyst

* Charl Wolmarans

Avior Capital Markets (Pty) Ltd. - Research Analyst

* John Kim

UBS Investment Bank, Research Division - Research Analyst

* Lisa Yang

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Maria Leonidovna Kahn

HSBC, Research Division - Senior Analyst of TMT

* William Henry Packer

Exane BNP Paribas, Research Division - Executive Director of Media Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Prosus and Naspers Half Year Results Conference. (Operator Instructions) Please also note that this call is being recorded. I would now like to turn the conference over to Eoin Ryan. Please go ahead.

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Eoin Ryan, Naspers Limited - Head of IR [2]

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Thanks, Chris, and hello, everyone. Welcome to the first Prosus and Naspers interim earnings call. You can find our full -- our report on and accompanying documents on the Investor Relations website for both Prosus and Naspers. On the call with me today is our CEO, Bob Van Dijk; and our Chief Financial Officer, Basil Sgourdos. Bob will give a quick strategic overview, and Basil will hit the financial highlights before we open the call for Q&A. But to kick things off, I'll hand it over to Bob.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [3]

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Yes. Thanks a lot, Eoin, and thanks, everyone, for joining us. And welcome to our 2019 half year results call, which will cover what I think has been a very busy 6 months indeed. So I'll be relatively brief with my remarks today as we plan to provide an in-depth look inside our business at the Capital Markets Day next week. And I would like to also make sure that we have ample room for Q&A today.

So the last 6 months were transformational for the Group, and they reflect the work of many months of preparation. And while we're keeping our focus on operations and driving continued solid results, we've also transformed the entire structure of the company into one, which I believe will unlock substantial value over time. I'm very pleased with the progress that we've made and the ground that we've covered.

So if I can take you to Slide 4, I will walk you through the highlights. So we're very happy to report a solid first set of Prosus results. So revenue grew 20%, while trading profit and core headline earnings grew 7% and 10% despite really stepping up our investment in food delivery.

We saw strong execution across our 3 core segments. So in classifieds, we delivered excellent results, particularly from Russia, from Europe, Brazil and India. So product and tech innovation is driving stronger user engagement that enables us to monetize better. Paying listers grew 22% year-on-year. So classifieds remains profitable overall and the traditional core increases margin as Basil will cover in more detail.

In payments, transaction volumes increased 30% and reached almost $18 billion for the 6 months. India is now more than 50% of volumes and is growing really fast. And in food delivery, we've increased our investments substantially, and the early indications are very positive. So iFood, Swiggy and Delivery Hero are growing very strongly and are ahead of our expectations. In total, the number of our food orders increased 110% year-on-year, and GMV increased 81% year-on-year during the period.

So as you'll know, in September, we successfully listed Prosus on the Euronext Amsterdam. So this is a significant step forward for the Group and it provides easy access for a larger and deeper pool of international tech investors in our attractive portfolio. It also begins the process that will allow us to unlock substantial value in both Naspers and Prosus over time.

And finally, as an organization, we continue to get more fit. So we operate in an environment of continuous disruption and a lot of that is driven by new capabilities in artificial intelligence and machine learning. So during the period, we continued to invest in our capabilities in both areas across our entire group.

So if you'll join me on Slide 5, let's spend one more minute on the outcome of the Prosus listing in September, which will continue to unlock value for shareholders. So the listing created the largest listed consumer intent company in Europe comprising all our Internet interests outside South Africa. So Prosus is 74% owned by Naspers, with a free float of 26%. So as Europe's largest listed consumer Internet company by asset value, Prosus gives global Internet investors direct access to our attractive portfolio of international Internet assets as well as a unique exposure to China, to India and other high-growth markets and to the global tech sector. At the time of the listing, value unlock was approximately $16 billion due to reduction of discount to the combined net asset value of Prosus and Naspers. So we have been included in a number of new indices, and we expect to continue to be added to more, starting with the AX in December and potentially further inclusion into the stocks indices in the new year. So it's certainly been a volatile couple of months since we listed Prosus, so much of which was expected. And we recognized that the discount to the sum of our parts, while roughly down 7 percentage points since the announcement of Prosus earlier this year, has widened over the last month.

That said, it's never served the company or its investors particularly well to focus on the short term. So I'm really pleased with the value unlocked to date. And over the long term, I believe we will make significant additional progress. My team and I remain very committed to the continued reduction of the consolidated discount in Naspers and Prosus. We'll do this by 2 things: First and foremost, by building bigger and more valuable businesses across our core segments that will generate substantial and sustainable cash flow; and also by continuing to take financial and structural steps where sensible.

If you can turn to Slide 6, I am proud of the focus and execution that's exhibited by our operators during a period of significant noise and workflow. And I think this is illustrated worldwide. So operationally, our key segments are performing well. In classifieds, revenue grew 48% all in and 38%, excluding the expansion into convenient transactions. In the core business, paying listers grew 20% -- 22% year-on-year, and our convenient transactions offering is growing very rapidly with tangible synergies with the core.

Payments and Fintech continued to exhibit strong growth. The volumes processed in the payments business reached $18 billion for the half year, up 30% year-on-year on the back of over 550 million transactions. Among PayU's major markets, we have a leading position in India, which is a very large growth opportunity given the significant tailwinds of increasing e-commerce penetration and a shift from cash to alternative digital payments.

Food delivery represents a massive opportunity. As I just mentioned, order and GMV growth remains very strong as we solidify our position and to grow the market. We will take you through all our businesses in much more detail at the Capital Markets Day next week.

If we can take you to Slide 7, it shows that we continue to invest across the business. So we invested just under $400 million in M&A in the last 6 months. So to further strengthen the payments business outside India and our -- increase our footprint in growth markets, we acquired Red Dot Payments, which is Singapore's largest homegrown and trusted online payment solutions company. Also in payments, we acquired Wibmo, which both enhances our partnership with leading banks for security and mobile payments as well as improving success rates on transactions. So in classifieds, we merged our operations in the Philippines, and we contributed an aggregate amount of cash of $56 million for a 12% effective stake in Carousell. In ventures, we invested $80 million in Meesho, which is a leading social commerce online marketplace in India. In the period, we also swapped a 43% stake in MakeMyTrip for 5.6% stake in Ctrip. We've achieved an IRR of approximately 24% on the MakeMyTrip investment over its lifetime.

And more recently, in October, as you know, we announced an offer to acquire Just Eat in an all-cash deal, which is detailed on Slide 8. So we believe we've put together an attractive offer. But unfortunately, we've not been able to reach agreement with the Board of Just Eat to secure a recommended offer. So we've taken the offer to Just Eat shareholders. As you may know, Just Eat is also currently subject to an offer for an all-share takeover by Takeaway. So we believe our offer provides compelling and certain value and is a fair cash offer for a business that's been underperforming and requires substantially more investment than the market expects. So we have already spoken to many of you, and we're hopeful that the merits of the proposal will be recognized by the Just Eat shareholders and that we can engage further with Just Eat's Board to progress to a recommended offer. We released our offer document on the 11th of November and that sets out our offer terms and the first closing date for the offer. We've lowered the acceptance condition from 90% to 75% to put it at parity with Takeaway's offer. So we expect to have a great degree of visibility on the outcome of this process by the end of December. It's very important to note that throughout this process, we will, as always, remain highly disciplined as our overriding objective is to create value for our shareholders by delivering excellent returns.

So I'll now hand over to Basil for the financial update.

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Vasileios Sgourdos, Naspers Limited - CFO, Financial Director & Executive Director [4]

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Thanks, Bob. Hi, everyone, and thanks for joining us today. So as Bob mentioned, this has been a transformational 6 months for us. This is the first reporting period for the newly listed Prosus Group. The Naspers [results] reflect that of Prosus almost entirely as Naspers consolidates Prosus and then adds the Media24 and Takealot numbers. For the reason explained above, we'll be focusing on the Prosus reported numbers. Before I dive in, following the listing of Prosus, there are now new investors listening in. So I'll give you a quick reminder on how we report our numbers. First, revenue and trading profit are on an economic interest basis, meaning they include our proportional share of results of our associates and joint ventures.

Second, we report our associates, Tencent, Mail.ru and Delivery Hero and others on a 3-month lag basis. Third, free cash flow, core headline earnings are both consolidated numbers. And finally, as I work through the deck, I will focus on organic growth, organic growth rate, measured growth in local currency, excluding the impact of M&A.

So let's kick off with Slide 10. We're happy to report a strong first set of Prosus results, representing progress for the Group in line with our expectations. We saw continued strong growth from each of our core segments: classifieds, payments and fintech and food delivery. Classifieds and the payments and fintech segments have reached profitability at their core. Revenue growth continued to flow nicely to the bottom line even as these businesses invested in a number of strategic initiatives to drive future growth. Food delivery will continue to be the largest investment area for the group in the year ahead. We're very pleased with and encouraged by the business' impressive order and top line growth. Importantly, we see strong underlying unit economics as we achieved increased scale. Our share [of Tencent's] revenue and trading profit grew 18% and 16%, respectively. Quarter 2 growth was significantly stronger than quarter 1. Revenue accelerated by 5 percentage points and trading profit by 12 percentage points.

Finally, the first half was another 6 months of improved cash flow from the core profitable businesses and yet another period with a strong balance sheet. We now have approximately $9 billion in gross cash and, should we need it, more liquidity to realize our ambitions. On the right-hand side of the slide, you'll see the strong performance all around. We grew revenues 20%, trading profit increased at a slower rate of 7% entirely due to the significant step up in investment in food delivery. Meanwhile, core classifieds, payments and fintech and etail accelerated their profitability, and Tencent delivered a good performance. Free cash flow remained flat year-on-year when we exclude Prosus listing costs despite the increased investment in food delivery. Core headline earnings increased 11% year-on-year translating into $1.05 per share.

Turning to Slide 11. We see encouraging progress across the segments as they are scaling well. E-commerce revenue growth remains a strong 28% year-on-year, with meaningful contributions across the portfolio. Revenue in e-commerce for the first half totaled $1.9 billion. As was the case in full year '19, the 28% growth is a faster growth than that which we saw in Tencent. Classifieds revenue increased 38% year-on-year as the business scales its convenient transaction models, which is extending our presence in the car's [vertical] and deepening our relationship with both our users and the car dealers on our platform.

Payments and fintech continued to exhibit strong growth particularly in India. In the second quarter, revenue growth accelerated 3 percentage points compared to the first quarter, driven by a better performance in India. India revenue growth accelerated from 29% in the first quarter to 59% in the second quarter. Food delivery grew gross revenues by 107% year-over-year, 69% after netting customer acquisition costs off. This is meaningful and a very encouraging acceleration. But most encouraging is that we are seeing clear signs of improved efficiency in how the businesses are acquiring new customers, reactivating lapsed users and expanding into new cities.

If you will join me now on Slide 12, you'll see that we had some nice momentum to round out this half year. Given that we reported quarter 1 results as part of the Prosus listing in September, we can give you additional insight on the quarterly progress on the core segments. In short, we saw an acceleration in revenue growth in every line across the e-commerce portfolio in the second quarter with e-commerce revenues growing 9 percentage points faster than that of the first quarter.

So let's get into the detail of the segments, and let's start with classifieds on Slide 13. So you'll see on that slide that classifieds' revenue increased a strong 38% year-on-year to $587 million. Our business is evolving to best meet the rapidly changing consumer environment. The most important development on the financials is our increased exposure to convenient transaction models, which deepen our market presence and enhance the consumer experience in the autos vertical. Due to the different models for revenue recognition, we've also improved disclosure by now showing you revenues and costs for the core classified business and the convenient transaction models separately.

So let's start with the core. Revenue on the core classified business increased 22% driven by Russia, Europe and Brazil, with group paying listers also increasing 22% year-on-year. Avito continued its good momentum, increasing revenue 21% year-on-year, and they also saw strong growth across the largest vertical of autos with growth at 42% year-on-year. The Polish business once again reported a very strong top line growth of 27%. Brazil also grew at 25% year-on-year.

Classifieds convenient transactions revenue grew nearly fivefold compared to the previous year. Frontier Car Group, which was an associate in the previous period, is performing particularly well and driving the majority of the growth. We are optimistic about our investment in convenient transactions, which have tremendous synergies with core classifieds. You will have seen that we plan to acquire control of the Frontier Car Group, which we will then fully consolidate.

Overall, classifieds delivered a trading profit of $37 million versus $42 million in the first half of full year '19. The modest reduction in profitability was due entirely to the significant increased investment in these new convenient transaction models that are temporarily loss-making. There was also added cost in further building out global tech infrastructure as seen at the end of full year '19. We continue to invest to build our tech backbone to provide world-class cost -- customer experience by leveraging large hubs of concentrated engineering talent. Investment has increased meaningfully year-on-year. This is becoming increasingly important as classified has evolved from a marketing-led to a tech-enabled strategy.

Profits were also impacted by share-based payment expenses, driven by growth in employees and some increases in the underlying valuations on the back of fast top line growth and improved profitability. Stripping out the new cost for convenient transactions, you can see that the core classified profits improved by a strong 36% year-on-year from $37 million to $63 million with trading margins rising from 12% to 14%. We continue to expect strong growth year-over-year for the rest of the year. But remember that as in the past, the first half tends to be seasonally stronger than the second half. This is largely due to the timing of marketing spend, which is skewed to the seasonally stronger second half of the year.

Overall, we are very happy with the performance of the classified segment, which is well ahead of our plans. We believe the investment in convenient transactions, new products and our tech back bone will provide incremental benefits to grow and scale the business even further.

So folks, let's move on to payments and fintech, which is on Slide 14. You'll see that the PayU recorded another 6 months of good growth, driven by its core payments business. Revenue growth of 20% was supported by stronger growth in the core payment processing business, which grew fast at 23%, and that was partially offset by weaker results by some of the associates. The payment volumes reached a sizable $18 billion, representing growth of 30% on the back of over 550 million transactions processed.

India is still the fastest-growing market. It grew volumes 35% and it now accounts for 53% of volumes processed. As mentioned earlier, revenue growth in India was 39% for the second quarter. The online payment space is still nascent in India, and we see significant further opportunity there for PayU. It is uniquely positioned to benefit from the country's transitioning online from the traditional cash-on-delivery model, providing cashless payment together with our continued focus on innovative solutions, has enabled the business to continue strengthening its merchant offering.

As I called out on the first quarter call, the weaker performance reported by associates was driven by Luno, which was impacted by bitcoin volatility and credit tech. We have since reduced our holding in credit tech to about 12%, and we're, therefore, no longer equity accounted. The core payments business was profitable, enabling us to continue investing and integrating acquisitions such as Zooz, which helps us better serve global merchants in various markets via a single API. This does, however, have a short-term impact on profitability. With our investments in Zooz and the acquisition of Red Dot and iyzico and our drive to build a credit business in India, we expect growth in payments to pick up over time.

On Slide 15, I'd like to tell you more about the food delivery financial performance. Online food delivery revenue and order growth continue to grow rapidly, justifying our increased investment in this high-potential sector. In the period, all our online food delivery service assets continued their strong growth, resulting in GMV growth of 81%. Combined contributions from the portfolio businesses saw reported segment revenues increasing 69% to $306 million, with orders increasing 110%. Reported revenues increased 69%. However, this rate was impacted by increased investment in customer acquisition costs, which are netted off against revenue under IFRS. Gross revenues before these discounts and other incentives grew by a much faster 107% year-on-year. In order to achieve these growth rates, we have stepped up investment to grow the market and our position within it. Overall, our share of losses across the segment is $283 million, and we expect significant additional spend in the second half of the year.

We will go into this in a lot more detail at the Capital Markets Day next week, but we are incrementally more confident with the unit economics of food as well as our ability to scale it in an efficient manner. It is important to note that from a cash flow perspective, trading losses in Delivery Hero and Swiggy do not impact cash flow as losses incurred by equity accounted investments are funded by the capital already raised by these companies.

iFood continues to outperform the targets we set. Driven by expansion of its product offering and logistics business, iFood grew GMV 92%, with order growth being an impressive 122% year-on-year. iFood is investing in first-party logistics, new cities as well as building out cloud kitchens and other models that enable us to scale very quickly. On a per unit basis, iFood is realizing cost efficiencies as we scale and as we get better at optimizing. In India, Swiggy continues its impressive growth with orders up 165% year-on-year and GMV, up 134% year-on-year. This is driven by its rapid expansion into new cities and rollout of cloud kitchens and private-label food supply.

Delivery Hero continues to also execute well. For its first 6 months ended 30 June 2019, Delivery Hero's GMV grew at 60% to EUR 3.2 billion with order volumes climbing 61% to 269 million orders. Excluding the impact of Germany, sales revenues grew by an extremely strong 76% year-on-year.

On Slide 16, we unpack the increased contribution to central cash flows by our profitable Internet businesses. This is an important slide and illustrates the cash flow generating ability of the Group. On the right-hand side, we illustrate the improved e-commerce profitability particularly in our classifieds segment. The aggregate of free cash inflows generated by Internet units that are free cash flow positive increased 17% to $573 million. Tencent increased dividends, of which our share was a sizable $377 million, continues to be a significant underpin of our increased financial flexibility.

On Slide 17, we walk you through our free cash flow results. Free cash flow for the 6 months was an inflow of $14 million compared to $96 million in the prior year. The decrease was primarily due to $82 million onetime transaction costs incurred in the respect of listing of process. Excluding these costs, free cash flow was flat year-on-year and that's despite the increased investment in food delivery. The investment in food was compensated from profits in classified and in payments and then, of course, the increased dividend from Tencent.

Now moving to the balance sheet on Slide 18, you'll see that we have a strong balance sheet and the financial flexibility to continue to execute on M&A to enhance our core segment. We have significant gross cash of almost $8.6 billion and an undrawn $2.5 billion revolver and the ability to raise additional debt should we need it. We have said we plan to fund the acquisition of Just Eat principally from new debt, which, whilst we remain investment-grade, allows us to invest in other segments. As a reminder, we have 1 bond that will mature in July 2020, and we are confident we can refinance that at more attractive rates in the near term. We also have significant cash flows coming from profitable entities within the Group.

On Slide 19, we provide additional perspectives on our balance sheet. With a cash cushion of just under $9 billion and $129 billion worth of listed assets, we have the financial flexibility to fund all our growth ambitions. We will continue with the same discipline that has driven the returns so far.

So in closing. Folks, I'm very pleased with our first half year results and our position as we enter the second half of the year. All core segments made good progress against financial and strategic objectives. Our priorities for the rest of the year are driving profitability in our established e-commerce segments while accelerating investment to scale food delivery. We believe our financial progress will drive the growth of our core headline earnings into the future. And last and most importantly, we will remain disciplined in allocating our capital. With these remarks, we will now open the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Will Packer of Exane.

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [2]

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It's Will Packer for Exane BNP Paribas. A couple for me, please. Firstly, can you just talk us through the rationale of the buyout of FCG and talk about some of the potential revenue synergies that could be achieved? How have things progressed and where can they go with that asset? Secondly, India classifieds looks a very competitive market. You talked to visitor growth of 30%. Could you just update us as to how things are progressing there, please?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [3]

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Sure, Will. Martin, is here with us so you'll hear it from the main man himself.

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John Martin Scheepbouwer, Naspers Limited - CEO of OLX Group [4]

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Yes. So first, thank you for your question. So -- and I'll give you the headline now and it will be much more detailed at the Capital Markets Day next week. But essentially, FCG is in -- is quite a unique company that has build out infrastructure in many different countries to -- that will allow us to deepen our platform and build true transaction-oriented ecosystems in cars. And since making initial investment, they have outperformed on all their plans. And so we wanted to step up and accelerate. That's the long and the short of it, and we hope the deal will close imminently, and then we can invest more and build that out. And one of the places we have done that is India, and as you say, that is a very competitive market. But the overall feeling of India is still that there is an immense growth potential considering the rapid inflow of new Internet users. So we are today, the market leader, especially in cars. More than 70% of all used car trade in India happens over OLX. And now the question is, how can we adjust our product so that the hundreds of millions of new Internet users also find OLX?

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [5]

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Martin, just one quick...

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Bob van Dijk, Naspers Limited - CEO & Executive Director [6]

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Wonder if I can add maybe one point to that. I think one of the important -- basic 2 steps of synergies here. One is, if you look at the, sort of, instant cash-for-car model, by far, the biggest cost component is around lead generation. So how do you find people who are interested in selling their vehicle? Well, as Martin said before, those are exactly the customers that the Group will have -- already has, right? So that drives a tremendous amount of synergy between the 2 groups. On the other side, we typically have also the largest demand side for used vehicles as well. So when these vehicles need to be sold again, either by dealers or by others, actually, we can do that in a very efficient way. So that -- those are the 2 main sources of synergies.

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [7]

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That's very helpful. Can I just ask one quick follow-up? On food delivery, you've expressed a willingness to look at developed markets. In classifieds, you've previously invested in letgo. Should we think, looking forward, the developed market classifieds as a major potential use of capital or would that be an incorrect interpretation?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [8]

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Right. So maybe I can give you a general answer, and then Martin can maybe comment specifically on classifieds. So as a result of our process listing, nothing changes in the way we do business, right? There's no change in strategy. We've always been a growth company, right? We're focused on growth, first and foremost, whether the growth exists in a growing market or in a more mature market. And we've, over time, if you follow us for more than a few years, you've seen that we've always looked for great business models that are run by great people, and they can be in earlier-stage markets or in more developed markets. So I think when you see us make a move like investing in letgo or pursuing an acquisition like Just Eat is because we think the business opportunity is huge regardless of the stage of the market. And Martin, maybe you want to add to that.

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John Martin Scheepbouwer, Naspers Limited - CEO of OLX Group [9]

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No, I think that's it. So we saw the biggest growth opportunities, historically, outside Western Europe and North America. But then with letgo, that was -- there we capitalized on quite a unique situation in the U.S. where the market is very mature, but classifieds is underdeveloped and that's why we invested behind letgo a few years back -- starting a few years back. And you'll continue to see us look for these growth opportunities. But as Bob said, regardless whether they are in a developed or developing world. And I believe that classifieds is transforming, as per Basil's comment, for marketing led to more product, data and tech-led where you will see platforms deepen towards more transaction-based ecosystems, which might or might not provide new opportunities also in more developed markets.

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Operator [10]

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Our next question is from Catherine O'Neill from Citi.

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Catherine T O'Neill, Citigroup Inc, Research Division - Director, VP and Analyst [11]

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On food delivery. I mean, there's been some industry commentary that suggests maybe we're seeing more rationality, especially from private funding or capital. Do you have a view on global consolidation and where we are in that process and whether we could be heading towards market repair in some of the markets? Also on Just Eat, which I guess links to it, is this a more opportunistic chance that you've taken, given the derating of that sector? Or is it an asset you see as strategically valuable? And then the other question I had is on Avito or the draft law in Russia around for an ownership then it may be that, that draft law is being delayed. Could you just maybe talk about the position of Avito there and how you think about the risk? And then finally, I just wanted to get your view on potential for a buyback at Naspers and whether that's something that you would consider doing in the short term?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [12]

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Yes. Thank you for your questions. And I'll start with the first 2. And Larry, if you're on the line, maybe you can chime in. I'll speak to the SIR Bill, and then Basil can speak to buybacks. So I think if you look at the global food space, what we see is essentially that the further growth opportunity is very, very significant. And I think we're probably, like, less than 5% of the way there into what food delivery can be at scale. So we are pursuing that with our businesses. That's actually the core reason why we have increased our investment in the space in the last periods. We see a bigger opportunity that we are pursuing. So I think whether that will lead to global consolidation, I think that's hard to speculate about. But I think the opportunity is, frankly, very large everywhere in both early stage market, but also, I think, in more developed market, I think there's still a very significant upside where, in many cases, businesses are still what I would call a Generation 1 food delivery, which is just offering restaurants that have their existing delivery fleet. And actually, if you look at what Generation 2 and 3 can provide with dedicated delivery fleets and innovation in private label, cloud kitchens, et cetera, I think there's just a lot of upside from there. And I think that actually is the same answer to the Just Eat question. I think how we see that business traditionally has -- had a good development, but I think has lost growth, has lost tremendous market share, but we think with the right investments and the right partner, it can actually get back on that longer-term trend of further opportunity. Then maybe, Larry, if you're on the call, maybe you can add to these points. You're close to it.

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Larry Illg, Naspers Limited - CEO of Online Food Delivery & Ventures [13]

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No, I think you covered it well, Bob. But I think the only thing I would add, and then to scale of the discussion on consolidations, I think we've seen it's increasingly hard for the distant number 3 and number 4 players to compete. The leadership positions tend to perform quite well and that seems to be playing out. I think it's really the question in the private markets.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [14]

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Thanks, Larry. Then I'll briefly talk to the SIR Bill. So I think the responder of the bill has publicly stated that the bill is going to be withdrawn, it might be reintroduced later. I think that, that is uncertain. I think the -- our view is that e-commerce businesses, such as Avito, should not be covered by the kind of businesses that the bill is trying to address. But for the time being, that bill seems to be off the table. And maybe I can ask Basil to comment on potential buybacks.

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Vasileios Sgourdos, Naspers Limited - CFO, Financial Director & Executive Director [15]

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Catherine, it's Basil, yes. So I think Bob was very explicit in his comments when he went through his slide saying we've done this transaction, it's unlocked value, and we remain committed to taking further action to continue to unlock value and that's what we're going to do. I don't want to speculate now when and what time, but I think it's definitely something that's well on the radar. We're working hard at it. And when we're ready, we'll come back. And buybacks is definitely one of those options.

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Catherine T O'Neill, Citigroup Inc, Research Division - Director, VP and Analyst [16]

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Okay. Just one more question, actually -- I'm sorry, on food delivery. In India, there's articles about the Amazon who's entered the market, I think, around Diwali with a really low commission rate. We're also seeing signs of maybe (inaudible) exiting. Could you talk about the market in India for food delivery, whether that's becoming more rational, whether there are signs of Amazon entering at all?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [17]

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Larry, would you mind -- you're closest to that, would you mind giving your views?

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Larry Illg, Naspers Limited - CEO of Online Food Delivery & Ventures [18]

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Yes, happy to. So I think we've seen Amazon periodically pop up in several markets. And I think the reality of the space is, as Bob teed up, it's in the very early stages. So I think we'll see not just actual competitors competing harder, but there are potential entrants, and we list Amazon among that set in many markets, not just India. I think what gets us most excited is Swiggy's not just performance, but potential. It's even bigger in terms of volumes than the number 2 and number 3 players in the market. And while there will be entrants over time, we're happy with how the team executes.

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Operator [19]

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The next question is from Andrew Ross of Barclays.

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Andrew Geoffrey Ross, Barclays Bank PLC, Research Division - Research Analyst [20]

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I've just got one question, I should keep it quick. There's a slide on -- in the analyst book, I think it's #24, that goes over how you guys define interest coverage, which I think is about 6x at the moment. And maybe it's one for Basil, but I wondered how low do you think you could push that interest coverage and still maintain your investment-grade rating? Or I guess, another way of asking my question is, how much debt do you think you can support right now and still have an investment-grade rating? And obviously, that's before you did any other M&A.

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Vasileios Sgourdos, Naspers Limited - CFO, Financial Director & Executive Director [21]

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Andrew, look, I think we clearly have quite a bit of financial flexibility as demonstrated by us saying that we will fund the adjusted acquisition through debt. Is there more? Yes. But I think we have -- there's a long way to go before adding a lot more debt. We have...

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Operator [22]

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Ladies and gentlemen, please do remain online, we will be rejoined by the main speaker shortly. Just one -- please stay on the line, we will be rejoined shortly. Ladies and gentlemen, please do remain online, we will resume shortly. Ladies and gentlemen, please remain online while our main speakers we will be rejoining us shortly. Ladies and gentlemen, we have been rejoined by Bob and the rest of the party.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [23]

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Yes. I think, Andrew, we were still answering your question if I'm not mistaken. This was not our way to dodge your question by dropping off the line. So we're still here and maybe, Basil, you can -- you mind just going through it again? We don't know exactly where we missed you.

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Vasileios Sgourdos, Naspers Limited - CFO, Financial Director & Executive Director [24]

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Sure. So as I was saying, I think we have plenty of financial flexibility as demonstrated by our ability to fund the Just Eat acquisition with principally debt. Is there room beyond that? Yes. I don't want to speculate though because I think there's a long way to go before we need to do that. We have, as I mentioned, gross cash of about $8.6 billion. We have an unutilized revolver. So we're quite comfortable with our financial flexibility. And then again, I think what we do and how much more we do involves a continued constructive engagement with the rating agencies. And then we have a good relationship there.

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Operator [25]

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The next question is from Aditya Buddhavarapu of Goldman Sachs.

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Lisa Yang, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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It's actually Lisa Yang from Goldman. I have a few questions, please. Maybe the first one on payments. And you gave us the figures for India, which is about almost 40%, and (inaudible) about 30 -- 23. So just wondering if you can give us some color on the other markets. It seems like the growth is quite slow there. So just wondering why it's not growing faster or is there any seasonality between the first half and the second half. So that's the first question. The second one is on classifieds. Just wondering on Panamera, could you give us a bit of indications of where you are in terms of migrating your different assets onto the backbone and what impact or benefit have you seen, so far, from the asset that you move on to this platform? And maybe if you can, like, share what other long -- longer-term benefits that you would expect? And the third question is on food delivery. Obviously, our growth really -- very impressive at over 100%, although you had a lot of discounting happening in the first half. So just wondering, like even how the competitive landscape is evolving both at Brazil and India. How should we think about discounting into the second half in the coming years?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [27]

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Yes, thanks a lot. I will speak to payments and ask Basil to chime in and Martin, obviously, will cover Panamera, and I can give a first view on food and Larry can chime in as well. So I think on payments, I think, we've seen very strong growth in India. I think the underlying drivers there are just an e-commerce business that's growing, e-commerce environment that's growing fast. We have very strong market share and also, the country's digitizing quite quickly. And if you look at the rest of the portfolio, it's really a mixed story. There are a few places in the world where we're migrating our platforms and that leads to a certain level of slowdown. It's particularly the case in Latin America, where we've done the major tech migrations that typically lead to a setback. I would say Eastern Europe is growing well. We've there seen -- our biggest customer was Allegro, which has scaled back a little bit, but actually, other -- the other markets have grown very, very strongly. So I think it's a somewhat differentiated story with a lot of the core markets actually doing quite well.

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Vasileios Sgourdos, Naspers Limited - CFO, Financial Director & Executive Director [28]

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Yes. And Bob, what I'd add is, of course, Central, Eastern Europe are far more developed markets. So when you just look at the relative maturity, and we have very strong positions there, which then also drives improved margin and improved profitability. So a big chunk of that profit growth that you're seeing in payments is actually coming off of that part of the world. And then secondly, we did call out the investment in Red Dot, which is Southeast Asia, and iyzico, which is in Turkey, and those are going to be incrementally fast-growing opportunities. So that will continue to drive growth over the border portfolio.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [29]

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Yes. And Martin can talk about Panamera.

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John Martin Scheepbouwer, Naspers Limited - CEO of OLX Group [30]

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Sure. Yes, thank you for that question. So as some of you know, we've decided to consolidate our technology in OLX outside Europe, where historically, we've had quite fragmented software development for, let's say, creational propositions that were quite similar. So in order to reduce duplication and to the benefits of scale from pockets of excellence around the Group, we decided to consolidate our converged platforms into a single one, which is now live in Africa, in Pakistan, in Indonesia, Latin America since last week. And we see this very much as a necessary condition to continue to innovate fast and realize, sort of, to customer engagement in the future and act as a starting point for what we then call, sort of, deeper platforms facilitating transactions everywhere. So from here on, development will continue. And I see lots of long-term benefits around quality of products, customer engagement and the ability to innovate and adjust platform to local needs.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [31]

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Thanks, Martin. And maybe on food, I'll start, and Larry, maybe you can elaborate a bit more. No, I think it's, sort of, has been significant discounting in the market particularly in India. I think what we've seen that we feel really good about is that our market share's either stable or increasing. I think in India, they're clearly increasing on the back of, I think also, like increased innovation and just solid execution beyond discounting. And I think that gives me a lot of confidence is the retention curves we see when we see customer acquisition and see what percentage of customer is still around after a year. It's still probably the healthiest customer retention that I've seen in any subsector of e-commerce. So that's, I think, a key driver for our levels of confidence that we're doing marketing, but we're getting the right results for it. But maybe, Larry, you want to add?

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Larry Illg, Naspers Limited - CEO of Online Food Delivery & Ventures [32]

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Yes. And I think we are seeing some signs of rationalization of discounting around the world, including Brazil and India, but (inaudible). The role of discounting coupons are nearly the same, right? The sector is early and coupons have been executed well and discounting, they drive consumer trial. And our companies continue to show good discipline there. The cohorts, as you (inaudible) the consumer cohorts remain strong tied to that discipline, but we'll go into that more on Capital Markets Day next week.

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Operator [33]

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The next question is from Charl Wolmarans of Avior Capital Markets.

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Charl Wolmarans, Avior Capital Markets (Pty) Ltd. - Research Analyst [34]

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Guys, can you hear me well enough there?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [35]

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Yes, it's okay. You cracked up a little bit, but let's try.

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Charl Wolmarans, Avior Capital Markets (Pty) Ltd. - Research Analyst [36]

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So I just -- while we are on the subject of food delivery, I just want to get some color around 3D and the cloud kitchens. Any type of color or update there is? Obviously, it's still nascent at this stage. And then the second part is just on Swiggy, which you guys disclosed, is now in about 500 cities. What -- to where do you think that came in? And basically, would you say that most of the course it is already been adjusted by now?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [37]

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Larry, would you mind taking those questions?

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Larry Illg, Naspers Limited - CEO of Online Food Delivery & Ventures [38]

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Yes. So I guess, the first question on cloud kitchens. And I think it would be -- this is very much a local story. And in the case of India, we've been, I guess one, surprised in some ways by the lack of classic restaurants and the role that the cloud kitchens play for Swiggy is really not just introducing food delivery to the Indian consumer, but bringing a restaurant experience. And we've been surprised by the -- and impressed by the payback of these kitchens. We see a lot of further potential there. And I missed part of the second question. Is it the number of cities for Swiggy, is that correct?

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Charl Wolmarans, Avior Capital Markets (Pty) Ltd. - Research Analyst [39]

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Yes. Yes, yes. So Swiggy is I think it is over to 500 cities by now. Would you say that most of your core cities have already been penetrated and (inaudible) to how -- to what extent do you think you can go based [budget]?

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Larry Illg, Naspers Limited - CEO of Online Food Delivery & Ventures [40]

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Yes, I think the -- a very good question. The -- yes, Swiggy indeed is now in over 500 cities. And that's quite a dramatic change versus the 7 cities that they were in when we invested a couple of years ago. And I guess there's -- 2 comments on that. I think the team has gotten quite efficient in terms of how it opens up a new city and new cities are often compared to adding an additional neighborhood in Bangalore or Delhi. And what we've seen is, they've gone from 200, 300 to 500 cities. I think that the consumer behavior holds up and the 500th city tends to perform as well if not better than opening up a new neighborhood in an existing large city. So we haven't yet seen a feeling there yet. Yes, we're pleased with the progress.

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Operator [41]

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The next question is from John Kim of UBS.

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John Kim, UBS Investment Bank, Research Division - Research Analyst [42]

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A couple of questions. First on food and then on online classifieds. Within foods, you've talked about your commitment and enthusiasm for the space. When you think about the segments, what sort of IRR levels are you targeting here? And what sort of underlying assumptions are you making about the 1PL, 3PL splits on models? If we were to compare and contrast classifieds with food, food adoption moves early, but it seems like the fixed-cost investment is sizably higher. On online classifieds, can you talk just a little bit more about Panamera and convenience transactions? So on the Panamera rollout, how far along on the IT deployment are you in terms of spend or timeline? And on convenience transactions, once the margins normalize, what sort of margin range could we expect?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [43]

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Okay. I will start with the IRR question. And then, Larry, maybe you can say a little bit more about our perspective on 1P and 3P if you don't mind, and then Martin can talk to Panamera, of course. So I think if you look at IRR, so far, our investments in the food space have had an exceptionally high IRR. And Basil, you may have the number off the top of your head.

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Vasileios Sgourdos, Naspers Limited - CFO, Financial Director & Executive Director [44]

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30%.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [45]

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So had it been at 30%, which is obviously exceptional. And I think going forward, when we make investments, we aim to achieve IRRs that are in line with what we've done before and that is what we work hard to achieve. So far, I would say, exceptional, and the aim is for this to be a high return set of investments for us. And I think if I think about this long term, what we get really excited about is that it's just at the early stages today and there's a multiple in terms of market potential for later. And maybe, Larry, you can speak to the 1P, 3P question because I also didn't quite hear that. Did you?

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Larry Illg, Naspers Limited - CEO of Online Food Delivery & Ventures [46]

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Yes, I got it, I think. The -- I think the question is touching on what mix we expect between 3P and 1P long term. And this is really a market-by-market story. And even not just at the country level, but at the neighborhood level, what the right mix is. And across our portfolio, we lead with the consumer and try to figure out what approach is best going to serve consumer needs in the market. In a market like India, it actually speaks to the last set of questions. Just because there's a lack of -- not just food delivery infrastructure from existing restaurants, but restaurant infrastructure. The winner in India across the cities and in neighborhoods is going to be a 1P player. That's very different from our -- where, certainly, our starting point was in Brazil, was entirely a third-party marketplace. And we realized that consumer needs long term where increasingly going to be served by a first-party model. So the team has done a nice job of rolling that out on the back of the marketplace. And today, those volumes account for a significant and growing chunk. So it's -- really starts with the consumer lines to see what's the right model. We don't start with business model first and force it down on consumers.

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John Martin Scheepbouwer, Naspers Limited - CEO of OLX Group [47]

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All right then. It's Martin here. Let me comment on the classifieds question. So with regards to Panamera, we've pretty much reached the end of the line with regards to, let's say, the consumer side migrations with Latin America last week. Going forward, obviously, we'll continue to develop the platform, as I mentioned before, also build out our shared services function together with our European platforms in OLX to, as I said, improve the economies of scale on the technology and to reduce duplication and spend our resources more efficiently, which will allow us to build out infrastructure everywhere to get closer to the transaction, what we then call convenient transactions. With regards to margins, it's really early days. I mean, convenience transactions comes in a very different forms or flavors. It's in jobs, it's in goods, it's in cars, potentially even in real estate. And to give you an example, what we saw in cars is a price transparency, convenience, speed, safety concerns in many cases, and that's demonstrated people willing to pay for that depending on the market, gross margins in the buying cars and reselling can be, sort of, 5% to 15%. But on -- but that's I think the entry point also to sell additional services around finance, insurance and many other things so -- which will, in the long run, further bolster the margins on that line of business. So it's early days. I think we've seen lots and lots of proof points that we fulfill real customer needs. And as per books points, there's true synergies with the horizontal platforms. We are building out the infrastructure to make that possible at a global level. And yes, and the more look for the monetization opportunities.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [48]

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Okay, Chris. I think we have time for one more question, please.

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Operator [49]

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And the last question is from Masha Kahn of HSBC.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [50]

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I wanted to ask about the classifieds revenue. In my estimates, it looks like all the revenue growth came from Avito and the convenience transactions. What's happening with the rest of the portfolio? I know that (inaudible) and Brazil are growing, but why is the rest of the portfolio not growing? That's number one. Second, if you can comment about letgo versus OfferUp and their competitive position? And thirdly, can you please explain what drove financial increase in stock-based compensation in the first half?

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Bob van Dijk, Naspers Limited - CEO & Executive Director [51]

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Yes, so it was a little bit hard to hear, so we'll try to answer your questions as well as we can, but we may need a clarification. So I think, first, you asked about the source of growth, if I'm not mistaken. I think Basil can answer that and Martin can speak to letgo, OfferUp, and I think Basil can talk to stock-based compensation. And if we missed anything, just let us know.

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Vasileios Sgourdos, Naspers Limited - CFO, Financial Director & Executive Director [52]

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Yes. So let me deal with the first and the last and then -- and let Martin deal with letgo, OfferUp. So as I said in my script, Masha, in fact, we've seen growth across the portfolio, right? And Brazil is growing 25%, Poland is growing 27%, India is still very early days, and we're not pushing monetization yet, we've stopped pushing used acquisition and growth. But even there, we're seeing good growth. So it's not just Avito, and we've seen growth across the portfolio. And those -- that growth is in line with our plans. So we remain confident about the longer-term growth, which will then drive profitability and cash generation.

On the share-based compensation charge. Well, first of all, as Martin said, we're building a tech-enabled infrastructure behind Panamera that requires engineers, it requires people. So we've added more people, and they need the short, medium and the long-term retention component so it's more people. And then, of course, what you see in the business, yes, it's a business that's growing profits. It's growing top line and that drives valuation up. So there's a little bit of that coming in. And then it's a little bit more impactful in markets that were historically loss-making such as Brazil, which is now profitable. So now you have more confidence and that, of course, that's an important milestone that drives valuation.

Let me hand over to Martin to talk about letgo and OfferUp.

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John Martin Scheepbouwer, Naspers Limited - CEO of OLX Group [53]

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Yes. Yes. So letgo is in 2 markets, in the U.S. and in Turkey. And I think your question is specifically about the U.S., which is a huge market for classifieds with many, many different platforms competing for market share. letgo is one of them. There is OfferUp, there is craigslist, there is Facebook, there is several vertical offerings in every large category. So this is a very competitive market. But letgo is to take advantage of this fragmentation to develop a sizable business that captures our fair share of trade. As also show in next week, letgo's revenues are growing quickly, burn is coming down and it's about holding its ground against our competitors like OfferUp. So we see this as something that can deliver us a handsome return in the medium to long term.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [54]

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Thanks for that. So are they still the leader in the market or are they behind OfferUp now?

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John Martin Scheepbouwer, Naspers Limited - CEO of OLX Group [55]

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No, the -- I'll present some metrics next week, but basically, they're both in the same ball park, depends a bit what metric you look at it.

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Bob van Dijk, Naspers Limited - CEO & Executive Director [56]

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Great. Chris, I think we are running out of time, so I'm going to close it off, if you don't mind. So to conclude today's session, I would like to remind you that we mentioned a few times, we're preparing for, I think, what will be an exciting Capital Markets Day in Amsterdam next Tuesday, the 3rd. And we actually will go in depth in all our key operating segments, and in particular, do a deep dive into our food business. So if I look at our priorities going forward, they are around driving further scale and profitability in classifieds, in payments and in fintech and in B2C. So we will continue to invest in food delivery to enhance the products, to invest in technology and delivery capabilities, and we intend to at least maintain our growth and defend our market positions. We intend to deliver a great return in everything we do, and we will maintain our disciplined approach to capital allocation. And operationally, we will continue to build strong teams, and we are very much focused on embedding and operationalizing artificial intelligence and machine learning to enhance our products and our service offerings. And finally, we are focused on unlocking value for our shareholders, and we are sensible, we'll take further steps to address the discount. So with that, thank you very much for your time and your great questions today. And thank you very much, talk to you next time.

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Operator [57]

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Thank you very much. Ladies and gentlemen, that concludes this conference call, and you may now disconnect your lines.