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Edited Transcript of VEMFsdb.ST earnings conference call or presentation 12-Feb-20 1:00pm GMT

Q4 2019 Vostok Emerging Finance Ltd Earnings Call

HAMILTON Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Vostok Emerging Finance Ltd earnings conference call or presentation Wednesday, February 12, 2020 at 1:00:00pm 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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* Herman Wartoft

Pareto Securities, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Vostok Emerging Finance Q4 2019 Call. Today, I'm pleased to present David Nangle, the Managing Director. (Operator Instructions)

Speaker, please begin.

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

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Yes. Thank you very much, operator. Good morning, good afternoon, everybody. This is Dave Nangle, CEO of Vostok Emerging Finance, and welcome, as always, to our quarterly results conference call, this one for the full year and Q4 results. And slides are available as always on our website and also via our webcast, which I see many of you have logged into. And what I'll do is normal, open 10 to 15 minutes just running through the highlights of: a, the year; b, the quarter; and then c, some outlook for 2020 as we're already into the year and up and running. And then I'm very happy as always to answer any of your questions post my remarks and then thereafter, at any time that you see fit.

So going into Slide #2 in the deck, 2019 highlights. So we had an exceptional 2019. We're very realistic, very humble about it, but it was a year when the firm effectively grew up where a lot of the work we've done for the last 4 to 5 years since inception really came to fruition. And what are the highlights of that year and mainly during exits, 2 portfolio exits: Tinkoff Bank, we've finished our exit in that story, Russia's leading digital bank and one of the best fintech assets globally; and then iyzico, Turkey's leading online payments company. And both exits were substantial returns for us, Tinkoff was 6.1x cash-on-cash return and iyzico, 3.2x cash-on-cash return. And on average, both were about 60% IRR exits.

We always told investors about the thesis of investing in fintech and emerging markets, the value grade creation space. We always -- we're very proud of the portfolio we had built and continue to build. But I guess it's only when you actually make a realistic exit and those mark-to-market valuations become realistic, exit valuations or above. And in the case of iyzico, that the market starts to take notes that it's actually working. So very proud of both of those exits. Sorry to see them gone because they're both great assets, but that's the nature of the business.

Also, 2 of our companies had landmark investment rounds. These are Creditas and Konfio during the year, Creditas during the some of the year and Konfio during the latter part of the year. Creditas rate over $200 million, and Konfio approximately $100 million. So size funding rounds for 2 of our biggest portfolio companies, which really puts them in a very strong position to win in their respective spaces. And both these assets are now lighthouse investments for our portfolio.

And Xerpa -- we did one new investment in 2019 that was Xerpa in the payroll and demand space, which is a very in-focused fintech space globally and lot of models being rolled out across many countries. Xerpa was the one being rolled out in Brazil, and it's a model that we like. We like the payroll on demand, plugging into HR and payroll solutions. It's a great model, very high return, very ethical as well. It's a great service to both the company and the individual. But one new deal last year, following on from one new deal the year before. So the barrier to entry to the portfolio is heightening, and we put a lot more money into current portfolio companies. So it was a very heavy investment here, but only one new assets kind of got above the barrier to get into the portfolio.

And another big heart of 2019 was Brazil. For us, it has been a highlight of many years' work, having spent a lot of time analyzing, traveling, working, focusing on fintech across emerging markets. The team effectively ended up focusing on Brazil. It became our top on many metrics as the place where we want to put our fintech investment dollar. So back in 2016, '17, during what was effectively a recession in Brazil, we looked beyond that. We looked at the structural growth potential in fintech in Brazil, and we bet hard. We continue to bet hard '16, '17, and that is starting to come through to fruition now that I guess, the world is waking up to what Brazil is in terms of financial services and fintech disruption and the opportunity set. And our portfolio is biased that way and well placed for that trend to continue.

And also value creation last year. It's a long-term game, what we do, focusing on NAV per share very much year-on-year, month-on-month. But last year, we had a big year in NAV per share of 24%, or NAV, 24%. And on the share price, I guess, because of all the other aspects of 2019, our story got in focus and a lot of market focus on the story because of the trends that we delivered and the share price reacted to that. So everything we do is long term in nature, multiyear focused. Last year was the year when a lot of things went right for us and hence, a lot of positive set-through to the share price off the back of that performance.

Moving on to the next slide, Slide #3, more short term in the last quarter and some of the highlights. We're broadly at a flattish NAV on a dollar term, still around $250 million. And to remind, we started back in 2015 with still $100 million and haven't raised capital since, so that's organic value creation over the period. And in local currency terms, the portfolio or NAV was off nearly 5% with the SEK moving against the dollar in that period, strengthening for a change versus a broader weakening trend before that.

We had a cash position of $40.1 million and at the end of Q4, and effectively, that was because of the cash in from the iyzico exit, so well cash positioned as well as well portfolio positioned, and at the end of 2019.

And I'm jumping across the income statement and balance sheet slide and straight on to the business overview, Slide #8. And this is just portfolio commentary. And I could you a pie representation of where the portfolio is today. I always say, it inevitably in companies like ours, investment companies, one or maybe two of the portfolio names start to stand out in terms of size or proportion of your NAV. And initially, with Vostok Emerging Finance that was Tinkoff, and it was a large portion of our NAV, over 50%. And we have no problem with concentration once concentration is performing, and that was followed by iyzico in Turkey. In their absence now following the exits, Creditas has taken over that mantle, and Konfio in Mexico. These are 2 best size companies, only they are our best companies, but in terms of the size and shape and the importance for our NAV, and that's no disrespect after companies in our portfolio. And these are companies that are very much well set in terms of the capital strength, both debt and equity. The focus markets of Brazil and Mexico, their focused spaces of secured consumer lending and on SME Lending and broader SME digital bank, to have strong firepower, strong management teams, focused strategy and are set to compound from here, all based around clearly execution of the management team on a very clear strategy that both companies have. So we're very proud of both assets, and they're very in-focused assets for us at this stage.

We mentioned the cash position. We mentioned the exit. And from a pipeline point of view, I'll mention that in the concluding remarks, but it's as healthy as it ever been. But that said, we looked at nearly 300 companies last year to filter through to get one new asset into portfolio. So that's the nature. There is a large pipeline. There is a large opportunity set. And -- but we're very selective of markets into the portfolio at this stage.

And just moving on to Slide #10. It's just a geographic representation of where our portfolio is at now in -- at the end of 2019. And I said before, Brazil is, from a country point of view, a large part of our portfolio, at 57% as of year-end and Mexico, near 20%. So we're 77% in Latin America at this stage. And this is very much by design, not by default. We focused our investment dollar there and it's coming through to fruition, and we're very happy with where we're focusing our investment dollar today.

Moving forward to corporate governance section, so a few points on that. This is Slide #12. So since inception, NAV and NAV per share has been a big focus at the firm. We wanted very much to get that right, get the company right, get the portfolio right, and then work the market and go around and educate investors and do more and more and deeper and broader investor relations, which is obviously positive from the corporate governance and a share price point of view. But very much what was in focus for us, first and foremost, was having the company, having the mandates, having the underbelly to talk about. So over the last 4 to 5 years, we've had a gradual uptick consistently in our NAV. Our share price has been following that. We've gone from a NAV and a market cap of $100 million to today, a now of nearly $250 million and a market cap of broadly $220 million. And we worked hard to bring the discount down. We know we don't control market forces, but we know we can work harder with them. And that discount to NAV has come down to approximately 10%, plus or minus.

And this Slide #13 is just -- from the Investor Relations point of view, we've worked very hard with the investment community and investment banks and brokers across many communities to get our message across to the investors about what we are doing in our portfolio, and how good it is and where it's going. And we've been working obviously with the Swedish investment community where we are listed, but also the broader global investment bank community. And more recently, there's been a lot of focus on the Latin American community where our portfolio is biased. And little bit of focus there on our portfolio and because of the success that Brazil and Brazil fintech is having, the exits you're seeing there on the IPO and the M&A front, and how biased our portfolio currently is to that success story.

And just to finish up before we open up to questions, is outlook for 2020. This is the last slide. So what would I say to you, the investor? I think at this stage, we're very comfortable to say we have arrived as a story, I think, 2019 was a year where we grew up and the year where we made our mark in terms of real exits on some of the portfolio names that are like Creditas, Konfio, to name two, but there are many and start to stand out in nature as real portfolio winners. So we're very excited about the current portfolio and what we've achieved in the past and what will come in the near and mid-future. And the exits are important. The investment rounds are important and not because they give your value -- your company's evaluation mark, but because it give your companies firepower to win in their respective spaces. And it is a part of the defendable note, having the capital to win.

And Brazil, I repeat it again and again, but there is no fintech market like Brazil in terms of the size and scale, in terms of the revenue economics, in terms of the [VC] and partners we have in that market, in terms of support of regulatory environment and ability to exit. There is many aspects that tone up to make Brazil a very attractive fintech market for our investable dollar. That said, there is obviously a valuation consideration and with attractive markets comes higher valuations, so we need to be careful on that front. But Brazil is very much in focus. I would say from a focused market in size, we would put 3 names out there: Brazil, Mexico, India is where we're spending most of our time. On the frontier's front, Egypt has been a market we spent a lot more time of late. And I've got a nascent fintech market coming through, it just following hot on the heels of other new economy and ecosystems, which we've rolled through. And we can see opportunities for us to deploy capital there in the not-too-distant future. Now it has been on the up, and capital deployment continues. We are sitting on $40 million of investable capital, and we always have 3 pillars to look at that new pipeline, current portfolio companies and potentially buybacks, all looking at a 30% IRR hurdle. And we're very happy to put our dollar in any of those 3. Or potentially the best thing we can do with our money is not invest today and sit on our strategic capital after tomorrow.

And final point, just we're as well positioned as we ever were. I think we're 5 years in track record, wind in our sales, very much focused on what we do. We're -- continue to be humble, continue to learn, but we're clearly in a stronger position that has ever been to continue to create value for us and you, the shareholder.

I will stop there, operator, and I'm happy to hand it out now to anybody with any questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Herman Wartoft of Pareto Securities.

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Herman Wartoft, Pareto Securities, Research Division - Research Analyst [2]

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Herman from Pareto here. Couple of questions from our side. So first off, I see that you made a positive revaluation of the Guiabolso Holding. I hope I'm pronouncing that right. And you mentioned it's primarily due to external factors such as increases in the peer group multiples and also FX. And I'm wondering a little bit to how this business is doing at its core? Like -- and how is that story developing, would you say?

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

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Thank you, Herman, very fair question. This -- Guiabolso has been one of our single high profile mistake. Let's put it that way in terms of you going to market as it down from what was $30 million to approximately $10 million. You've done something wrong in terms of investing, and we have owned that mistake in terms of what it was and what it is. And -- but also, we have worked very hard with this company since the situation went wrong. And a quick recap, we invested back in 2017. It was a personal financial management app, the leading one in Brazil, and it was working with partners to lend the consumers who were coming to their application. But it starts to build its own loan book on the slightest part of the marketplace and effectively it got underwriting wrong and had a hole in its loan book. We could close that business or that part of the business and clean up the loan book and cut down that division. We eventually sold it off.

So effectively, we've had 2 years of cleanup, recovery, restating the business. And I'm very happy to say, I was in Brazil last week, and now that we're in early 2020, trends have started like last year was all the stability, the year before cleanup. 2019 actually looks quite positive in terms of recovery and growth, and we're already seeing those metrics come true, whether it's monthly average users we've moved from one product on the hub, which is loans to -- for credit cards and offering there good investments. Just added insurance products. There are more partners coming in from the financial services side, more customers coming in. And actually, the -- as well as the hub metrics, the revenue metrics have picked up as well in January. So that didn't drive the uptick in valuation in Q4, which is more multiples and FX-driven. But from a business point of view, having sat on the Board and being with these investments through that window, and it's a hard window, and it was very satisfying to be sitting there with them in January and just walking through the metrics and where -- how the team feels and where the business is at. So it feels like that the company would have brighter future without getting ahead of ourselves.

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Herman Wartoft, Pareto Securities, Research Division - Research Analyst [4]

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All right, great. And then secondly, I mean, like 2019 was, at least in Sweden, the Western markets, a year of multiple expansions in a lot of ways with pretty poor like underlying earnings growth. So I'm thinking -- I'm just wondering how are you -- if that is something that you see in your underlying holdings as well that multiples have come up during 2019, both in your exits, but also in your investments?

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

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Yes. Look, we welcome higher multiples in our exits, that's for sure. But it really is market dependent and company dependent. And we have a broad range of geographies that we can shop and invest in, and we can also turn away from. So if we're investing in Russia or Turkey or Pakistan, so in certain markets right now, there isn't lots of demand. There isn't high multiples, and you can be the buyer of choice. There's some markets -- Brazil has got a little bit hotter. And emerging markets hasn't got as hot as developed markets, but certainly in a bizarre old twist actually Mexico is more in focus, and multiples have gone a little bit higher than they should have gone from a [VC] point of view than say, Brazil, which we would argue is a much more interesting market. But what we have is we have the ability to just not invest, turn away. India has gone cold and in the broader investment community at the back end of last year, start of this year. So after 5 years of looking at India, it's a good time for us to be shopping in India. But we have a nice ability to move around, and I'd like to think we're always fundamental at the end of the day because we're former analysts, we do the numbers. We're looking for numbers to work as well as the businesses to work, and we don't get caught up in the hype. So yes, it's happening in our world. There is a lot more capital than it's ever been in VC land and private equity land versus the public side. But in our worlds, fintech emerging markets in pockets, but not across the board.

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Herman Wartoft, Pareto Securities, Research Division - Research Analyst [6]

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All right. Yes, and then I'm also -- I'm seeing that you're out -- that you're looking into making maybe 1 or 2 investments, in 2020. So I'm wondering if you have something like an ideal number of holdings that you're working with? Or that you've seen historically that 12 to 13 holdings is a good target, so to speak? Or is it -- or if it's very much dependent on the situation?

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

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Look, it's partly -- I'd say, with the current -- it's probably turned on the team size and shape and ability to work with those assets. I say from the team shape and size now we are 6 people, soon to be 7, and we've been building team as we've been building size and shape. We could comfortably do 15% to 20% in the portfolio, given the broader team base and the broader analysts looking at different geographies and working on different assets. I would -- we're quite happy to not make an investment this year if the right investment doesn't come up. We're quite happy to work with our current portfolio and bet hard at where it is working. But that said, we have -- I'd say, Brazil, we were there last week. We have different stages of our funnel and pipeline, but we've got nothing top-of-funnel in Brazil, but a lot below that level. And in Mexico, we got 2 names of which we're very close to be tracking. And we don't just find a company and invest. Generally, it's a 2- to 3-year romance where we track and work with the company before we actually invest. We only pass them around before we actually go in. You got 2 in Mexico and upfront. And India, for the first time, we've got a couple which are towards back top end of the funnel, which is getting interesting for us because valuations have come to a point where everything else is adding up. Yes, I would -- if I was going to predict, I would say, 1 to maybe 2 new investments from the size point of view. And then potentially 1 or 2 smaller option that in smaller frontier markets where you're backing the small -- very strong founder, our team in a space that can grow over time.

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Herman Wartoft, Pareto Securities, Research Division - Research Analyst [8]

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All right, Dave. And then just a final question here. I'm looking at the share count, and I see that increased by 8.3 million shares in this quarter. And I'm assuming that's related to the incentive programs. I'm just wondering, how do you see the buyback going forward? And is that something that you could increase? If, maybe, the discount would widen a little bit, et cetera?

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

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Yes. Look, the buyback program is -- we see buybacks as we see new investments, obviously, putting dollars into current portfolio companies. We're looking for the best return for our dollar possible. So if the market decides to put our share price down 10%, 20%, 30%, and we've got a significant discount to our NAV. And we -- generally, we know from a buyback point of view, we generally look at our NAV forward 1 or 2 years. And looking to get a 30% IRR and the dollar we put in today. So it's not as simple as putting a simple discount on the share price today. But yes, we will continue to buy for our LTIP program because it makes sense to buy our shares at a discount to the share price for that program rather than issuing new shares at that par. And more generally speaking, we'll be opportunistic in our buybacks around where the share price and discount lies, for sure.

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Operator [10]

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(Operator Instructions) And there are no further questions at this time. Please go ahead.

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

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Super. And thank you very much, operator. And thank you very much, everybody, for dialing in to this call. I would say, very happy to have any individual calls or answer your questions, either to myself and Henrik Stenlund. And if you want to get in touch directly. And also, we're doing more marketing as we go. So I'm sure we'll see you in a city soon. Talk to you and take care.