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Edited Transcript of VEMFsdb.ST earnings conference call or presentation 13-Nov-19 2:00pm GMT

Q3 2019 Vostok Emerging Finance Ltd Earnings Call

HAMILTON Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Vostok Emerging Finance Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Francis Nangle

Vostok Emerging Finance Ltd. - CEO, MD & Director

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Conference Call Participants

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* Gustav Österberg

Pareto Securities, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Vostok Emerging Finance Q3 2019. Today I'm pleased to present David Nangle, Managing Director. (Operator Instructions) David, please begin.

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [2]

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Thank you and good morning, good afternoon, everybody. And welcome to our Q3 9-month results conference call. And thank you very much for participating. I'll go straight into the slide deck, which is online and also on our website on Slide #2, just to run through some of the 2019 highlights for the business. It's been an exceptional year for Vostok Emerging Finance. Mainly when we look at exits, it's been a real theme for us through the year with the finalization of our exit from Tinkoff Bank in Russia and also our announced exit from iyzico payments company out of Turkey. Both exits returned approximately 60% plus/minus IRRs, 6x cash-on-cash return for Tinkoff and over 3x for iyzico, albeit the iyzico transaction is still subject to regulatory approval and is set to conclude in the near term. And we've also had big landmark investment rounds in our larger portfolio -- largest portfolio company, Creditas at $231 million Series D funding rounds, which is a phenomenal cap war chest for it to win in the consumer-secured lending space in Brazil, which it's always -- already out in the front. We also made a new investment over the quarter and our first new investment this year, albeit we deployed a lot of capital in portfolio, and this is into Xerpa and Xerpay, a subsidiary. We will talk about that further on in the presentation. We lead a Series B $13 million investment by us into the company, and it's the leading salary-on-demand HR platform in Brazil, very excited about that investment.

And then also on Brazil, we'll touch on this again. We always talk about Brazil because it is our favorite Fintech market globally for all the right reasons. We also have now a reform story coming through from politics into macro, which has a nice tailwind to what is an exceptional structural long-term growth story, and we'll talk about that too.

And we'll finally talk about the performance after companies like ours. NAV per share up 24% almost this year, year-to-date for 9 months, and share price up 57% (sic) [57.1%], 2 facts we're clearly very proud of and something we focus on a lot.

Moving on to the next slide, Slide 3, and in the quarter itself, give some numbers. The NAV -- our NAV increased 4.3% quarter-on-quarter to nearly touching $250 million. Our NAV per share in SEK where we're listed is at SEK 0.378 and up approximately 10% quarter-on-quarter. And this is a reminder, we started back in 2015 with a NAV of approximately $90 million and at around SEK 1 per share, and we've delivered an IRR from a NAV point of view and from a share price point of view of plus/minus 30% per year and to date. Cash position at a low ebb in this quarter at $11.7 million at the end of Q3, albeit this is pre the receipt of our fund flows from the exit in iyzico, which is an additional $34 million.

Moving swiftly on to Slide #8, which gives us a summary of our portfolio and commentary on that. And from the pie on the right-hand side, you will see that 2 names are now dominating our portfolio in Creditas and Konfio becoming clear portfolio champions and the real compounding assets and the nature of Creditas on the secured lending space across many products in Brazil and growing in Konfio on the SME lending space into a broader SME digital bank in the Mexican market. And we've already talked about the exits and the yields that they delivered.

Pipeline is something that is probably at its healthiest point in a long time, and it kind of comes in waves where you do the work on the ground, moving around, working with local VCs on a lot of opportunities and then they come in batches. So Xerpa was most recent investments and the other we've done this year, and we do feel the pipeline is looking at a very healthy point right now. And capital levels, I have already spoken about.

Moving on to Slide #9. Same as last quarter, we are heavy Brazil. We are heavy LatAm with an EM Fintech mandate. But we pinpointed Brazil as a market we like best. And on that, I'll speak about that.

Right now, just again focus, if you look at Slide #11. The reason that we do favor Brazil, I'll say it again and again, it's a scale population of 200 million people, one of many scale markets in the world. We do like scale. It's online. It's one of most online digitally savvy smartphone penetrated into the penetration markets globally. The banking sector is an oligopoly, and the revenue [pool] there is phenomenally high and astronomically high. And that's what our -- the business we're backing are eating into, and it gives you a great unit economic revenue stream to play into as a participant. Regulatory wise, the central bank is very supportive of Fintech and very supportive of the companies that we back. You don't always get that across markets. Where sometimes you get regulatory skepticism, you back the banks. And then the people and the ecosystem is something we love to play in and with great founders, great VCs. And the same thing happened with our recent investment in Xerpa, similar set of VCs that we've worked at in many other investments. Just makes it easier if you're partnering with people you're comfortable with and experience on the ground and where you've [won] with before. And exits. Entering investments is one thing; exiting is everything. And we've seen that with Tinkoff and now iyzico, but Brazil is a very healthy exit market, and we have seen it through a number of M&A and IPOs of Fintech companies and payments and beyond. And we like that for our companies that we're in when we can see a path to exit, and you don't always get that in all emerging markets.

Moving forward to Slide #13, just around our share, our share price. It's been a very healthy year, albeit markets are generally healthy, we accept that. And we focus on our NAV per share, driving NAV per share as hard as possible through exits and through mark-to-market and effectively investing in the right companies at the right valuations. And our share price has tended to track that albeit at a discount. And we have taken it upon ourselves over the last 12 to 18 months to market the story harder, get the story out there to a wider audience. And we do think it's starting to get some traction as we see in the share price movements of late.

From a portfolio point of view, I think it's only right that I speak about Xerpa. That's the new name in the portfolio and the one that deserves focus this quarter. And this is on Slide #25. Xerpa is a HR software and salary-on-demand company in Brazil. And similar to many models that we back, these are models that have existed and succeeded elsewhere in the world, and this is a play on the wage stream model in the U.K. Effectively, the ideology is the individual is and has earned their salary over the course of a month and they only get paid at the end of the month. And to make ends meet, they generally have to go to overdrafts, payday loans, loan sharks at astronomical rates when they need money ahead of payday. And in Brazil, those rates can be anywhere from 200% to 300%. It's a phenomenal revenue and profitable for the Brazilian banks. Xerpa and Xerpay subsidiary effectively plugs into companies into their HR and the payroll systems and effectively offers to people -- pay people in advance. They're getting access to 30% to 50% of their actual salary earned for a nominal fee. That nominal fee ends up at our interest rate about 30% and for the individuals much lower than what they've been charged by the banks, and with gearing, it ends up being a much higher return for Xerpa. Early days, not the story, but it's a phenomenal product. It's a phenomenal employee benefit. The employers are very happy to bring it on board because it makes the financial well-being of their employees much healthier than otherwise would be. And from a risk point of view, you're effectively doing secured lending where you're paid back directly from the payroll at the end of the month. So we'd like the scale opportunity in it. We like to unit economics of it. We'd like the risk of it and the growth profile and the team behind it. So it's a very classic Vostok Emerging Finance investment, and once again, it's in the Brazilian market, where we have 5 other investments today. And just to wrap up before I open up to questions, and I'll move to the last slide on the deck, outlook and guidance for 2019 and beyond. Not much of this is changed, but it's good to reiterate. And over the last 4 years, we have built a very exciting and diversified Fintech portfolio. We are in a lot of different subsegment of Fintech. We have a lot of experience now under our belt of different stages and sizes of entering, of exiting. And we would argue we got some of the best Fintech assets in the countries where we exist, and we can defend that. And from an exit point of view, entering is good, but exiting is everything. And having 2 almost completed exits with real returns is a great show for our investors who gave us their faith and capital to take care of 4 years ago. And also, we're getting portfolio champions like Creditas and now Konfio coming through a benchmark round, which is putting them in the big league in financial services in the spaces where the play and gives them a little bit of capital to win.

From a geographic focus. EMEA, we've always been strong, only the opportunities aren't as deep. LatAm we're strong and the opportunities are definitely deeper, at least today. We continue to look at frontiers like Pakistan, like Egypt to deploy more capital when the time is right. And India is a market where we spent a lot of time of late. But we've been in and out of the market for the last 4 years looking for the right partners, right opportunities, and -- but we do think we're getting a lot closer to finding the right one in that market after all the work. So we're never in a rush to deploy capital in a bad way, but we feel India is getting close to that point where we're comfortable, we have the markets, the partners, the opportunities to deploy capital.

NAV, on the up. As I said earlier, we're [all] a better NAV per share and closing that discount. It's all about shareholder value. And our cash levels are at a decent point, $11.7 million at the end of the quarter. Iyzico inflows obviously puts us in a good position to continue to deploy capital and for our mandate, but clearly, we've got one eye on capital levels as we go. And generally speaking, we're well positioned. I think we're still one of the only houses focusing on EM Fintech with a broad EM Fintech lens from experience across many markets and many deals and entering and exiting, and it puts us in a very strong position to continue to deploy capital in a value-added way.

I will stop there, operator, and happily open up to any questions from participants.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Gustav Österberg from Pareto Securities.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [2]

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First question is on the focus. Obviously, you're very focused on Brazil, as you mentioned. But then my follow-on question would be that given your investment in Konfio and also Xerpa, are you moving -- are you seeing better opportunities within the SME space? Or are you saying that it's just a coincidence? Or can you give us an update also on the sectors that you are looking to find good opportunities in currently?

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [3]

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Yes. That's very good, Gustav. Thanks for the question. Look, Brazil is just something that makes a lot of sense with as a market for all the reasons that I highlight again and again. So within that top-down framework, we want to invest. We just have been lucky enough to find the right investments arguably at the right prices and want to do more and Xerpa is an example of that. It is though -- Brazil is in the sun. People are looking at it both structurally Fintech and a new economy. It is very exciting, and it makes a lot of sense. But also macro-wise and reform story-wise, Brazil is starting to be one of the only interesting markets globally on -- from a reform point of view and recovery and growth. So I can see why and how Brazil might get a little bit too hot for its own good, but that's not our problem because we have assets in there today, and we're happy to see that happen and happy to deploy capital elsewhere if that does happen and the benefit of having a multi-market mandate. From a company -- or sorry, from a segment point of view, I look at Brazil and what are we in. There's a lot of consumer in there, but then, Nibo is very much SME. And we love the SME space, what they're doing in the accounting SaaS [into] payments and, hopefully, the credits and in due course. You can look at Creditas, and Creditas is lending broadly to consumers secured against assets, but some of that is to small business owners, and that creeps in there as well. And Xerpa is lending to the consumer at the end of the day but is doing it through businesses and businesses in the medium-space category as opposed to the large or very small category. Konfio, obviously, in Mexico is the small business space, small business lender today. And that was a deliberate decision to play the small business area in Mexico, where we found the consumer being very a hot, (inaudible) and difficult market to play, and the SME is a big, deep and relatively less competitive market. So a lot of it comes down to market-by-market dynamics and then within that market-by-market opportunities. But on average, I'd say the consumer is the hotter space, the SME is the less -- is more underlooked space. If we can find more SME opportunities that fit, we'll happily grab them up.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [4]

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Okay. Perfect. So it's partly competition, but we are also reading something that it's an evolving process where you can currently find -- you first fulfill the basic needs and then it evolves further and further and further and then you enter into these SME businesses where you also have the exposure to the consumer? Or is it just by accident that you -- it has been investments in Xerpa and Konfio?

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [5]

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Look, like [I hope] looking for accidents, but then -- and it doesn't -- I'm joking. It doesn't evolve as smoothly as that. But there's a lot of crossover from the consumer and the very small -- and the small business. And again, if we go to a market and -- whether it's ridesharing or the banks themselves or social media or e-commerce, and they're all attacking the consumer and the consumer has multiple apps coming out from multiple financial options and payments in Fintech via the incumbent players, never mind the new Fintech players, we may just choose not to play that. And it might be the small business space natural opportunity for us. So it's really market-by-market and stage-by-stage. I don't think it's a simple evolution of play the consumer then play the small business and then play something else. Each of them are slightly different.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [6]

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All right. Got that. And then the second question is on -- and this is obviously broad, David, but if you can focus on key markets, for instance, Brazil, then are you seeing any pressure or -- upward or downward in terms of valuation levels? And you briefly touched on the inflow of capital. Are you seeing like -- if you compare to a year ago, are you seeing any larger changes for today?

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [7]

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Yes. Markets, because it's a big world and there's different markets going through different political macro, et cetera, cycles. Brazil is definitely on the more positive front on most of those. And with that, we are getting -- yes, a growth in capital focus on Brazil. Would I say Brazil is out of control? No, I wouldn't say that at all. I think different segments of the investment curve are getting very busy. The earlier stage you'll see it, and Series A is definitely busy. And at the top end, at the later stage, Series D and beyond, it definitely got a lot of focus on it. But still is the mid kind of Series B, C is, I think, normal or medium in terms of where it was last year versus today. So we're definitely seeing more focus for all the right reasons. But then you got somewhere like Turkey or Russia and make -- almost the interest is falling off the cliff in terms of investors to those markets for many macro-political concerns. And there are markets where we've made our most realized money. I'm very happy to put more money into those markets if we find the right asset in windows like this where they're out of favor. So yes, I would say Brazil, and next go then is a subset of Brazil and LatAm is getting more focused this year than last year.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [8]

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Okay. So -- and in terms of read across or potential read across through your pipeline than, I'm taking it that you're looking more in towards the existing markets and perhaps India as well as your next -- where you're looking more intensively for new assets?

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [9]

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Yes. Like where we've been of late. We spent -- we took some 2 trips to Mexico. So we've got a lot going on there in terms of interactions and early stage on radar deal flow. And Brazil's just naturally by having 6 assets there, you're back and forth to that country for roadshows, board meetings, talk in the local VCs. So that interaction just breeds more pipeline. But actually where we got the later-stage pipeline today is probably Russia, 1 asset, and Colombia as another asset. Not that either will convert, so they're 2 that you've got kind of the top end of pipeline as we've looked at those markets. India is one where we are a lot more comfortable than we've ever been. We've gone through ways of questioning is India for us after doing the work, doing the work. And we want to get everything when we get an investment from the market-scale opportunity to team to partners, traction, the price. You never get everything, but we want everything, and we like to look for that. And we think we might be able to get there in India at last. And generally, it's been the valuation that put us off because a lot of funds [won't] pay the wrong price for arguably the right asset, but we haven't been willing to go there, but we might have got there.

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Operator [10]

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(Operator Instructions) And as there are no further questions, I'll hand it back to you David.

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [11]

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Excellent. Thank you, operator. And thank you, everybody, for dialing in and for your interest as always in our company. And this is a short but hopefully efficient call, but as always, feel free to get in touch with myself or Henrik for any follow-on questions you have on our story or results or anything else related to Vostok Emerging Finance. Thank you.

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Operator [12]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.