Edited Transcript of RKET.DE earnings conference call or presentation 2-Apr-20 8:00am GMT

Rocket Internet network of companies has grown to over 200 companies. When you look at Page 10, the values here as of year-end 2019. So the cost of the private portfolio was EUR 0.4 billion, and the internally ascribed fair value as of year-end 2019 was at circa EUR 1.1 billion. As in the past, let me reiterate that valuations are subject to significant limitations and should not be read as an indication for the price that third parties would be willing to pay in a future financing round, potential trade sale or a potential initial public offering.

In addition, as of today, COVID-19 is a developing situation with to date unknown duration and very significant negative economic impact. The recent COVID-19 outbreak and related post year-end market conditions may have a significant impact on the total fair value of the private companies. Such events are beyond the company’s control, and the likelihood that they may occur and the effect or the estimate of the impact on the total sale value cannot be projected today.

With that, let us have a look at the 2019 consolidated financials for Rocket Internet SE. Consolidated revenue increased by 51% to EUR 67 million. Revenue in our case is primarily comprised of revenue of the fully consolidated companies and interest income from lending activity. Income from associates and joint ventures was EUR 20 million lower than in 2018. This line captures proportionate losses from companies consolidated under the equity method as well as disposal gains and losses from, for example, HelloFresh, Jumia and Westwing. Finance cost and income reflects primarily the result from companies consolidated at fair value. On a net basis, this was EUR 119 million positive in 2019.

All in all, we had an improved consolidated profit for the year of EUR 280 million in 2019, which translates into EUR 1.90 earnings per share.

The balance sheet total for 2019 is almost unchanged from 2018 at EUR 4.2 billion, and also total noncurrent assets is also quite comparable to last year. Please note that subscribed capital shown here in the balance sheet is still at EUR 150.8 million. However, post the share buyback program announced and executed in December 2019, shares were canceled in Q1 so that now the new shares issued is 137.2 million shares and shares outstanding is 135.7 million. You can find the precise numbers on our website under the Share section.

To preempt some of your questions about what happened since the start of the corona pandemic, we have updated the numbers on Page 14 for as of end of March 2020. Net cash was at EUR 2.1 billion, and we’ve provided further disclosure now around the public stock by splitting it into liquid stock, low liquidity stock. The liquid stock had roughly EUR 300 million worth of stocks in there, and the lower liquidity stock was at roughly EUR 100 million. In addition, the company had granted loans worth EUR 600 million. And as of end of March 2020, COVID-19 is a developing situation with to date unknown duration and very significant negative economic impact. The recent COVID-19 outbreak and related post year market conditions may have significant impact on the loan portfolio granted. Such events are beyond the company’s control and the likelihood that, that may occur and the effect or the estimates of the impact on the loan portfolio granted cannot be predicted.

Let me give you a brief update on the Rocket Internet Capital Partners funds. The first fund was launched in 2016 and has drawn and invested circa 80% of its commitment. Rocket Internet is also a limited partner in the first fund with 15% of commitments. The second Rocket Internet Capital Partners fund had its final close in January 2020 with over EUR 1.1 billion of commitments, of which Rocket Internet holds 11%. Circa EUR 100 million are drawn and invested from fund 2. These funds allow us to leverage our own capital.

And then with regards to the financial calendar, as of today, we don’t have any changes to announce to the financial calendar. But we are, of course, watching the development of the pandemic. And if anything were to change, we would update you in due course.

With that, operator, please open it up for questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) And the first question received is from Christoph Bast of Bankhaus Lampe.

——————————————————————————–

Christoph Bast, Bankhaus Lampe KG, Research Division – Analyst [2]

——————————————————————————–

I have actually 3 questions. So the first one, could you elaborate a bit on the development of net cash, liquid stocks and granted loans compared to the last published numbers? Is it fair to say that out of the EUR 500 million decline in net cash, EUR 300 million were invested in loans given to your portfolio companies and EUR 200 million were regular investments? And I guess the decline in liquid stocks, is that due to divestments or based rather on a lower share price? That would be the first one.

And the second one, on Traveloka, again. I mean this is probably one of your most prominent portfolio companies. And against the background of the current crisis and the impact, in particular, on global online credit, are you able to make any comments about the operating performance of Traveloka or about your long-term commitments to this company?

And the third and last one is you stated that since 2018, you have incubated only 20 new businesses. But at the same time, the Rocket Internet fund 1 has drawn EUR 800 million. So I thought this fund would act as a coinvestor to the Rocket Internet SE. So how does that fit together? Rocket Internet invests only in 20 companies, but the fund has already drawn EUR 800 million. Yes, that’s it.

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [3]

——————————————————————————–

All right. So thank you, Christoph. Let’s take them maybe one by one. So on Page 14, which was your first question, sort of how net cash changed relative to the numbers we reported in November, I think the major adjusting items there that you were aware of also maybe during the quarter, the last couple of months is that we resolved the cross-shareholding with United Internet. So we turned our — well, a portion of our shares into United Internet’s share buyback program. They, in return, turn out their shares into our share buyback program. But on a net basis, this was a cash outflow for us.

Then on the loans granted, now those were roughly EUR 300 million at the end of November and is now at EUR 600 million, so that’s an increase there, so that was cash outflow and then, yes, of course, there’s also some ongoing regular investing activity that had an impact on cash that we did not break out on a company-by-company basis.

With regards — does that make sense? Yes?

——————————————————————————–

Christoph Bast, Bankhaus Lampe KG, Research Division – Analyst [4]

——————————————————————————–

Yes.

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [5]

——————————————————————————–

Okay. And then with regard to Traveloka, unfortunately, it’s still the same as in the past that we can’t really comment on the company, neither on operating performance nor on funding rounds.

And then lastly, with regards to the Rocket Internet Capital Partners funds, I mean they co-invest with Rocket Internet, not only in incubated companies, but also in investment opportunities that we find. So the capital deployment there is into all the equity opportunities that we see in the market and that we choose to invest in. In addition to Rocket Internet’s commitment in the fund, Rocket Internet is also always investing 20% of our allocation directly, plus then indirectly via the funds so that economically on a look-through basis, you get to roughly 30% capital provided from the balance sheet. Yes.

——————————————————————————–

Christoph Bast, Bankhaus Lampe KG, Research Division – Analyst [6]

——————————————————————————–

Do I understand it correctly that fund invested already EUR 800 million. So the drawn amount is comparable to the…

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [7]

——————————————————————————–

In 2016

——————————————————————————–

Christoph Bast, Bankhaus Lampe KG, Research Division – Analyst [8]

——————————————————————————–

Okay. But isn’t that significantly more than Rocket Internet’s investors?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [9]

——————————————————————————–

Well, I mean some of that money is from Rocket Internet, right? And some of it is from external third parties.

——————————————————————————–

Operator [10]

——————————————————————————–

And the next question received is from Nikolas Mauder of Kepler Cheuvreux.

——————————————————————————–

Nikolas Mauder, Kepler Cheuvreux, Research Division – Junior Equity Research Analyst [11]

——————————————————————————–

Three from my side. Continuing with the new information provided on the Capital Partners fund, is the value of the fund investment reflected in the private company portfolio or somewhere else in the financial results? Or should we — how should we think about this additional information, how does it reconcile with what you gave us previously?

Second one, any color on the potential impact on the loan portfolio and the private companies from COVID-19? I know you already made the disclaimer, and I think you won’t give much more, but maybe you can answer the question whether you already saw companies in those portfolios failing, i.e., reducing the values between the end of the year and the day of — and today.

And finally, a bit of color would be appreciated on your exposure to the company Revolut. There have been repeated press articles regarding your involvement in the company, both on equity and debt. Color appreciated here on who actually holds those stakes. Is it in the capital partners funds, i.e., and then is it reflected in the private company portfolio, which steps have you invested into the company, things like that?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [12]

——————————————————————————–

Thank you, Nikolas. So basically, our participation in the Rocket Internet Capital Partners fund and therefore our indirect sort of holding of private companies is reflected in the private company numbers. So you don’t need to add that on top. So if you basically just take the numbers given in the presentation, that’s already included there. You’re asking, basically, if it’s already sort of visible in March that there’s more companies failing. I mean generally, there’s always some companies failing in a large portfolio. It’s just the nature of venture capital also. And yes, we expect to see more companies having a hard time in the coming months and weeks as sort of growth in revenue is severely impacted for some of the companies.

And then lastly, with regards to Revolut, yes, we have disclosed also in the past that we made an equity investment there that’s partially in the funds and partially also directly on the balance sheet, and then Rocket Internet has also provided debt directly to Revolut.

——————————————————————————–

Nikolas Mauder, Kepler Cheuvreux, Research Division – Junior Equity Research Analyst [13]

——————————————————————————–

Okay. I guess, no — because I couldn’t find it in the list of holdings in the annual report. I guess it must be in some sort of sub entity then.

And regarding the question number 2, whether you already saw companies failing, having this cost of Traveloka and Revolut, which should be a larger part of the private company portfolio total fair value, where do you expect to — sort of the hammer to fall hardest from COVID-19, on the like early-stage company or do you envisage like larger or more mature companies coming into trouble?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [14]

——————————————————————————–

I think it’s too early to tell at this point. We, I guess, have to wait and see for the coming months and weeks. And I think it’s all very individual based on business model, funding situation, how this will impact the company. So we’re working very closely with our portfolio companies, but it’s not a one size fits all. It’s really a very bespoke and individual to the situation, the way we’re working with them.

——————————————————————————–

Nikolas Mauder, Kepler Cheuvreux, Research Division – Junior Equity Research Analyst [15]

——————————————————————————–

But I guess, given your net cash position, you’re willing to prop up those companies that you have conviction if they get into trouble due to circumstances they cannot control.

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [16]

——————————————————————————–

Yes. I mean both through the fund and the balance sheet, we obviously do still have cash available to invest and to sort of support companies with good teams and good business models.

——————————————————————————–

Operator [17]

——————————————————————————–

And the next question is from Sarah Simon of Berenberg.

——————————————————————————–

Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [18]

——————————————————————————–

I’ve got a few questions. First one was on Jumia, which you seem to have dropped reference to. Is your holding in Jumia within the low liquidity stock category? Or have you sold out completely?

Second was on the loan. So you’ve told us now the loans include a loan to Revolut. But can you give us a bit more color on what other companies are in there? And generally speaking, when you look at — you’ve got a huge cash pile. Oli has been fairly explicit in the past that he felt valuations were too high. So now you’ve got a big cash pile, valuations are much lower. Did you think about doing more investment? Well, first of all, are you going to stay with your big net cash position? Or are you going to put it to work now valuations have gone down? And if the latter, how are you thinking about companies that you know well that might need capital, i.e., former portfolio companies as compared to new companies that you don’t know as well? Because obviously, there are companies — there are former Rocket companies that need capital, which seemingly you would be able to provide quite easily at more limited risk to you in the sense that you know those businesses well.

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [19]

——————————————————————————–

Thanks, Sarah. So Jumia is not included in the low liquidity stocks. We currently don’t have a holding in Jumia. So what’s included in the low liquidity stocks currently, for example, are our stakes in Global Fashion Group, Home24 and Westwing, the more liquid…

——————————————————————————–

Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [20]

——————————————————————————–

Okay. So you are (inaudible) entirely now?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [21]

——————————————————————————–

Yes. And then the more liquid stocks, you have companies, let’s say, like United Internet, Tele Columbus and other publicly listed companies that are bigger and highly liquid. Yes. We just wanted to provide that additional detail. Yes, because obviously, it would also be much easy to realize the certain others with low liquidity.

Then your question on the loan portfolio. So Revolut, it’s a large position in that loan portfolio. The other loans are much more, I guess, diversified. And it’s mostly venture loans to companies in the Internet sector, and most of these have been granted pre-corona so up until February.

And your question with regards to cash. As in the past, we will hold it that we don’t really preannounce sort of how we’re going to deploy it or what kind of opportunities. But yes, I mean we are also looking at opportunities in this market environment. Public valuations, as you all have seen, have come down significantly. Private markets tend to be a bit slower to adjust, but we also expect opportunities in the private market as well.

——————————————————————————–

Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [22]

——————————————————————————–

And generally speaking, would you say you have a preference for investing in companies that are already public so that you have a sort of more obvious exit route? Or are you — I mean, assuming the private market valuations adjust, are you equally as interested in those?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [23]

——————————————————————————–

I mean, we really look at it on a case-by-case basis, company by company. We currently still have very significant cash balance, so it’s not necessarily exclusive, one excluding the other. So I think it’s really just each opportunity on its own merit.

——————————————————————————–

Operator [24]

——————————————————————————–

Next question received is from Marcus Diebel of JPMorgan.

——————————————————————————–

Marcus Diebel, JP Morgan Chase & Co, Research Division – Research Analyst [25]

——————————————————————————–

Maybe following up on Sarah’s question, I still — I would find it very helpful to get an idea about the use of cash. Because on the one hand, you’re very likely to now deploy cash into new ventures, given your valuations have come down. On the other hand, probably you have to inject cash into current companies in the portfolio. Could you help us understand what kind of like your firepower, if you want to call like this actually, is in the current market to invest in new assets, yes, that will be quite helpful. How do you find the right balance here?

And then secondly, on Jumia. In November, I got the impression that this was still a core holding for you. And you seem to have sold it quite at the low. I think that there might be some criticism from some investors that similar to HelloFresh, you sold too early, yes. And now we’ve got the cash for this asset. So how do you also answer questions on timing of those disposals when it seems there’s no need for now to run the size of balance on the cash pile?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [26]

——————————————————————————–

Thank you, Marcus. So I mean, use of cash and sort of firepower to make investments between, I guess, the balance sheet and liquidity that we have, plus what’s in the new fund is significant at this point. At the same time, I mean, there’s very large uncertainty in the market at this point and also to be seen how this is shaking out and what kind of opportunities the next couple of months will provide or not. So we’re obviously very actively monitoring the market, our portfolio and so on. But also, as in the past, don’t really want to commit to putting a number out of how much will be invested in the coming months, right? And usually during times of large uncertainty or so, it might also take a while for new pricing levels to be found, especially in the private markets.

And on Jumia, we sort of founded the company some 8 years ago, supported it during its growth phase, took the company public, now no longer have a Board seat or had a Board seat post-IPO in the company and sort of also have less control over the company. So that was the reason for us to sort of exit the company at that point.

And — but obviously, I wish the company luck and hope it will develop very well.

——————————————————————————–

Operator [27]

——————————————————————————–

And the next question is from Nizla Naizer of Deutsche Bank.

——————————————————————————–

Fathima-Nizla Naizer, Deutsche Bank AG, Research Division – Research Analyst [28]

——————————————————————————–

Bettina, I just wanted to confirm, how much do you still own in United Internet and Tele Columbus? And what else is in that liquid stock portfolio that’s worth EUR 300 million as of end March? Secondly, in the 20 business models that you’ve said you’ve incubated in FY ’19, could you just give us a breakdown of which sectors they were in? And which sectors are more interesting to you as a company on the private side going forward?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [29]

——————————————————————————–

Okay. So United Internet, we held over 5% in December, then tendered a significant stake into the share buyback program, dropped below 3%. And then we recently filed again a working rights modification saying that we had above 3% of the company.

As for Tele Columbus, we currently have a 10% stake in the company. And sorry, your second question was on the private sector, which subsectors we find interesting in the private portfolio?

——————————————————————————–

Fathima-Nizla Naizer, Deutsche Bank AG, Research Division – Research Analyst [30]

——————————————————————————–

Yes. And also the 20 companies that you incubated in 2019, which sectors were they in?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [31]

——————————————————————————–

Yes. So they are various sectors and also geographically quite diverse. So we have looked at some prop-tech models. We have some consumer-focused companies on there like Vitable. We also have some more B2B-focused businesses in there in terms of logistics, procurement. So it’s really a rather broad — and also some financial services. So it’s really a rather broad spectrum that we are looking at and sort of ultimately what we are investing in, in the private portfolio. It’s consumers’ marketplaces, but also very broadly, other sectors like fintech, real estate tech, some health tech that we find interesting at this point and where we see new developments.

——————————————————————————–

Fathima-Nizla Naizer, Deutsche Bank AG, Research Division – Research Analyst [32]

——————————————————————————–

Great. And Bettina, in the other liquid sort of stock, are there any other large companies that you’ve previously referred to like Tencent, et cetera, back in the day? Are they still in there in that EUR 300 million that we talk of?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [33]

——————————————————————————–

Yes, next to United Internet and Tele Columbus, there’s also some other large public-listed tech stocks in there.

——————————————————————————–

Fathima-Nizla Naizer, Deutsche Bank AG, Research Division – Research Analyst [34]

——————————————————————————–

Okay. You can’t disclose which they are, is it?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [35]

——————————————————————————–

No, at this point, we don’t.

——————————————————————————–

Operator [36]

——————————————————————————–

And the next question is from (inaudible) Asset Management.

——————————————————————————–

Unidentified Analyst, [37]

——————————————————————————–

Yes, just 2 quick questions. One on Westwing, any particular reason why you’re not showing it under selected company since you’re owning 25%, which is double the value or roughly double the value of your holding in Home24? And the other question would be on interest on your cash. Is there any negative interest up to now? You always said you don’t have to pay negative interest on that balance.

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [38]

——————————————————————————–

Yes. I mean, so for Westwing, I mean, we had exited the company and then also rebought a 25% stake in the company subsequently when the share price had dropped significantly. And that’s the reason why we sort of don’t report them as part of the selected companies anymore. And the second question with regards to negative interest, no, currently up until today, we have not had to incur negative interest on the cash balance.

——————————————————————————–

Operator [39]

——————————————————————————–

(Operator Instructions) And the next question is from Nikolas Mauder of Kepler Cheuvreux.

——————————————————————————–

Nikolas Mauder, Kepler Cheuvreux, Research Division – Junior Equity Research Analyst [40]

——————————————————————————–

On governance, is the 2-person Board as of today sustainable? Or are you looking into the option of hiring someone like a CFO?

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [41]

——————————————————————————–

For right now, we’re actually very happy with the current management team overall, and I think it also extends beyond the Management Board. We have 2 Management Board members at this point. But below that, we also have a group of people who’ve been with the business for a very long time and are running the various functions also for the corporate business and on the investment side and on the company incubation side. So we actually feel quite comfortable with the current setup.

——————————————————————————–

Operator [42]

——————————————————————————–

(Operator Instructions) We received no further questions, so I hand it back to Mrs. Curtze.

——————————————————————————–

Bettina Curtze, Rocket Internet SE – SVP of Finance & Investment [43]

——————————————————————————–

Well, thank you very much all for dialing in. I take it many of you are probably also in your home offices and following the call. So thank you for joining us today and keep well and speak with you again in May when we report the Q1 results. Thank you very much. Bye.

——————————————————————————–

Operator [44]

——————————————————————————–

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.