Kinnevik AB

Good morning, and welcome to the presentation of Kinevix results for the second quarter of 2023. I'm Jorg Ganev, Kinevix CEO, and with me today is our CFO, Samuel Sjöström, and our Director of Corporate Communications, Torun Litse. On today's call, we will walk you through the key events during the quarter, including our most recent investment activity. We will lay out the key valuation changes, and finally, we will track our progress against the priorities and expectations we set at the beginning of the year. On the one hand, the environment continues to be challenging, both for companies and investors. Some of our companies are struggling to navigate a changing and uncertain outlook, and our NAV is yet to return to a meaningfully positive trajectory. On the other hand, we're uncovering investment opportunities that we believe are some of the strongest long-term opportunities we have seen over the last five years. Our number one priority in these circumstances is to take advantage of the current market to deploy more capital into the highest conviction companies at a more balanced valuations. We're able to do this by leveraging our strong financial position, our permanent capital and our long term horizon. Unique competitive advantages for us as an investor and in particular in this type of market environment. Let's start today's call by looking at the key highlights during the quarter on page four. Our net asset value amounted to 54 billion SEK. That's down 3% in the second quarter. And in just a few minutes, Samuel will go through some more details on how the valuations of our private companies have developed and why. On the investment side, we have made a number of follow-on investments in the quarter, most notably in Spring Health, but also in travel perks, recursion, and InstaV. New investment activity was more muted, with two smaller investments during the quarter, Envera Biosciences, which we covered in our Q1 report, and Charm Industrial, which is a clear emerging leader in the carbon removal space. With recent commitments from Frontier and J.P. Morgan, Charm has secured the largest offtake amount of any carbon removal company in the world, and is scaling rapidly. And speaking of which, I am pleased to report that we're tracking ahead of our climate target for the portfolio, which I will come back to shortly. On a more general note, the market deterioration that started last year makes it even more important to be active, hands-on owner in our companies. We have supported them in setting strategies, making trade-offs between growth and profitability, and deciding which initiatives to pursue and which to abandon. The Schoeneweg team is spending significant time and resources to ensure that our companies have the right focus, strategies, and capabilities in place to set them up for long-term value creation. This kind of times mean taking difficult decisions in the short term. Two companies in our portfolio that have faced significant headwinds in the past 18 months are Oda and Matam. They are under severe pressure from weaker consumer spending, slower growth of online sales post-pandemic, and a ramped-up cost base. Oda recently made the difficult decision to shut down its expansion into Germany and Finland. And while decisions like these will have a negative impact on the short-term growth, we think it's the right decision for some of our companies to adjust their footprints and focus on efficiency in the current core markets. Lastly, as I'm sure you have already seen, Babylon Health announced in May that it will be taken private by its main creditor. We decided not to participate in the financial restructuring, and as a result, we have fully written off our investment in the company. A top priority this year is to be even more disciplined in our capital allocation, and Babylon falls short of the bar that we have set for ourselves. We have learned several important lessons from our times as owners in Babylon, and today we wish the company and the founder Aliparza well. Moving on to page five, where we shed some more light on the follow-on investments we made in the quarter. As I mentioned before, our key priority in the market conditions we find ourselves in is to make sure we accrete ownership and capital commitments in our highest conviction businesses. Now is the time to seek to maximize the impact of those businesses while minimizing the impact of our lowest conviction businesses. We do this through disciplined capital allocation and by leveraging our strong financial position. The most material example of this to date is the $100 million investment we made into Spring Health this quarter. And since the end of 2022, we have increased our ownership in the company from 5% to 12%. And Spring now represents our largest aggregate investment since we set out on our transformation to growth in 2018. We believe in Spring for several reasons. The company addresses one of the fastest growing public health issues, mental health, in the world's largest healthcare market, the US. They have an exceptionally strong founder duo in April and Adam, and they were well grounded in science and have managed to deliver superior clinical outcomes. And last year, they grew revenues by 270%, and they are on a fully funded path to generating positive cash flow in 2024. Our permanent capital, which enables us to invest over multiple rounds as companies mature and prove their business, is one of our key competitive advantages. It's a model we have applied many times before, most notably in investments like Zalando and later Livongo. We're excited now to be on the same journey and path with a company like Spring. We also deployed over 600 million SEC in total into Travel Perk, InstaB, Recursion and Hungry Panda during the quarter. These companies are all emerging leaders in the respective fields and are seeing strong traction and growth. Now on page six, we provide an update on our capital reallocation expectations for 2023. The assessments of our company's runways remain largely unchanged, with some marginal improvements through the funding rounds concluded in the quarter. And during 2023, we expect that 80% of our forecasted follow-on investments will be deployed into these high conviction businesses, where we are either instigating transactions or actively working to accrete ownership. We are taking advantage of the market uncertainty to accrete ownership and capital commitments in our strongest performing businesses, just in line with our strategic priorities. And only around 10% are forecasted to be allocated to more struggling businesses, where we see potential on a more long-term valuation. And as evidenced by the previous slide, we have made significant strides during the first half of the year to seize opportunities in our existing portfolio. With these successes, we expect follow-on investments to make up around two-thirds of the total investments in 2023, rather than the 50-50 split between follow-on and new investments we expected at the beginning of the year. That does not mean that we have decreased our ambition level when it comes to new investments. we remain as firm as ever in our efforts to source and invest in the most promising and innovating new businesses in our focus sectors. And with that, I would like to round off this part of the presentation by talking about the strong results presented in our 2022 Climate Progress Report on page seven. Three years ago, we set target to reduce the greenhouse gas emissions intensity in our portfolio by 50% by 2030 compared to 2020. And in June, we published our annual climate progress report to follow up on this target. And I'm very pleased to report that for the second consecutive year, we're tracking ahead of our targets. In 2022, the six companies included in our target fulfillment decreased their year-on-year emissions intensity by 14% on a value-weighted basis. And since our base year 2020, we have achieved an average yearly intensity decrease of 12%. We believe climate change represents risks in our portfolio, as expectations are increasing fast from customers, investors, employees and regulators. But there are also significant opportunities. which is why we work actively with our portfolio companies to align their businesses with a low carbon future. I would now like to hand over to our CFO, Samuel, to provide some more detail on our private valuations and the development of our net asset value, starting on page eight.

Thanks, Jorgi. So with valuation levels continuing to be fairly stable, Q2 was another rather uneventful quarter for our private carrying values. But I'll do my best to make it interesting nonetheless, because six months into the year, we would like to post an update on the growth numbers our portfolio is delivering. Moving to page nine, on average, we decreased our underlying valuations in the private portfolio by 2% this quarter, or down around 4% when weighted by value. Passing these underlying valuations through the effects of liquidation preferences and currency fluctuations renders this quarter's small 1% SEC fair value write-up. And adding the 2.1 billion SEC we invested into private assets this quarter, primarily our sizable follow-on investments into spring, brings us to the 2.5 billion SEC increase in the carrying value of our private businesses that we're reporting today. Looking at the drivers behind this then, well, Firstly, while the expectations on the rest of our private portfolio have been stable on average in the quarter, downwards revisions of growth outlooks at VillageMD and ODA are holding us back in Q2 in terms of fair value growth. Both these revisions are stemming from measures taken to slim down footprints and hold back growth in favor of profitability. And while we clearly support these measures strategically and commercially, from the more crass perspective we take on quarterly valuations, they do weigh on our NAV. And clearly, with the large weight our portfolio has in Village MD, that specific valuation revision in particular has a material offsetting effect on the totality over these last three months. Secondly, multiples were slightly down in the quarter in our portfolio, while peers were flat on average. In 2023 to date, the average premium to public comps has come down by around 20 percentage points. Now, having said that, We followed public market multiples on the way down, and our multiples will reflect public markets also going forward. But considering the aforementioned outlook revisions, the general uncertainties out there, and a few transaction-guided marks, we have elected to stay measured and let multiples be a bit sticky to end of 2022 levels during the first six months of the year. Thirdly, there continues to be some inertia in our NAV due to liquidation preferences. The impact is coming down a bit in the second quarter by around 150 million SEC, and the aggregate effect now corresponds to around 9% of our private portfolio, down from 11% at the end of 2022. As we lay out in today's report, this effect remains fairly concentrated with more than 75% relating to five relatively mature and well-funded investments representing around 4 billion SEC of fair value. Lastly, and perhaps most material in this quarter, the Swedish Corona continued to depreciate. In Q2 alone, this provided a 1.3 billion sec positive impact on our NAV. With that, I'd like to shift the tension back to the key influence of our NAV and returns over a longer time period than that of one or two quarters, and that is growth. Because in the last two quarters, we've spoken about growth more in terms of by how much our companies have cut back on it in favor of profitability, and in the context of adjusted outlooks for several of our companies as we try to navigate a tricky environment, especially on the back of weakening demand on the e-commerce side. So therefore, six months into what's been a challenging year, we thought it would be worthwhile to take a step back and revisit the higher level portfolio numbers to ensure we're clear on the rate at which our portfolio continues to grow. That means we're on page 10. I hope many of you recall the 2022 numbers we shared in connection with our Q4 report a few months back. Namely that last year, our private portfolio grew top line by almost 100%, and their public valuation benchmarks grew by a bit more than 25% on average. Clearly, we're not expecting the same velocity in 2023 for our portfolio, nor for their more mature listed benchmarks. Rather, halfway through the year, we expect the portfolio to grow top line by more than 50% in 2023 on a weighted average basis, versus a peer set growing at 16%, 17%. As we show in the chart on this page, that is still more than three times faster than the public benchmarks, as these naturally, to an extent, operate in the same dynamics as many of our businesses. Now, to understand this movement, we think it's helpful to consider four main drivers. VillageMD merging with Summit means that our largest private investment has taken a step change forward in terms of business maturity, leapfrogging into a 20-30% growing stable business from the 55-60% growth company VillageMD was on a standalone basis last year. Secondly, as we discussed last quarter, our e-commerce businesses are facing particularly significant headwinds this year for apparent reasons, and Jorgi has mentioned the subset of challenges that our online grocers have faced and are navigating through. This recessionary dynamic clearly also pushes the portfolio's average growth rate down a notch. But while the VillageMD Summit merger is clearly more of a permanent step change, we believe the downdraft in e-commerce is causing more of a temporary dip in growth this year for our businesses. Thirdly, at the outset of the year, many of our businesses traded in that extra 10-15% worth of growth in their plans in exchange for profitability improvements and runway extensions. And these are measures we generally support and help our companies take, but they also mean that aggregate growth rates come down relative to 2022, even though there are also instances where we're pushing our companies to be more aggressive. Lastly, which is perhaps easily forgotten considering the pace of our transformation and the quite strange years we have behind us, our private portfolio is now carried at an aggregate 32 billion SEC, but has an average tenure of no more than around 3.5 years. And looking at some examples in our oldest vintage, the 2018 one, since our first investment, Instabian Travel Perk has grown revenues by more than 30 times, and Pleo has grown revenues by more than 20, 25 times. So as our early stage investments succeed and grow and scale dramatically, percentage growth rates naturally come down from the 100, 200, 300% year-on-year numbers these businesses recorded in the first years of our transformations. Now, as Jorge has reiterated, considering the scale our growth portfolio has reached, we need to be more forceful and more disciplined now in order to move the needle than was the case a few years ago. And this quarter's investment into spring is a great example of how we can use capital allocation to meaningfully rebalance our portfolio towards a more attractive financial and return profile. In H1 2023 alone, the average growth rate of our private portfolio has increased by 10 percentage points just through our work in changing this portfolio's composition. OK. So to summarize, we have four main drivers of the change in growth rate this year. A village MD that's taken a step change in maturity, cyclical headwinds in e-commerce that should eventually abate, an overall focus on profitability and runway improvement, and an early stage portfolio that's scaling along the S-curve, where we're using capital allocation a lot more forcefully. As shown on this page, If you strip out the more mature post-merger village MD and the handful of investees that face these more temporary e-commerce headwinds, the portfolio's average growth rate moves from 50% closer to 70-75% this year. And it's this type of powerful organic growth, together with improved profitability, that we believe is what will determine our NAV and returns in the long term. Moving on then to page 11 to wrap up on our NAV development in the quarter, also considering our public investments. Again, the private portfolio is up 2.5 billion, largely driven by investments and not necessarily impacting NAV in the short term. In the legacy public growth pocket of the portfolio, Babylon has been written off and GFG had another soft quarter. Recursion, the newer public addition to our growth portfolio, traded up 12% in the quarter in dollar terms. And with a bit of a boost by us investing an additional 145 million SEC over the market in May, our stake grew by around 0.3 billion SEC in the quarter. Tele2 was down 1.4 billion and paid 0.5 billion in dividends, decreasing the stake size in our NAV by 1.9 billion. And we're receiving another same size dividend in Q4 this year. So all in all, NAV was down 3% in the quarter to 54 billion SEC, of which 8.8 billion being our net cash position so we remain in a position of financial strength and as jorge stated with the successes we've had in uncovering opportunities in the high conviction side of our private portfolio we're expecting to deploy around two-thirds into follow-ons this year rather than the 50 50 split we envisaged at the start of the year and we will be measuring our capital deployment to ensure that we can continue to capture opportunities that arise also throughout 2024 noting as always that investment opportunities do not arise in an evenly linear quarterly fashion. So to sum up, a slightly uneventful quarter from an NAV perspective, but with continued strong underlying growth in the private portfolio, a narrowed gap to peers on valuation multiples, and a continued focus on improving the portfolio balance and utilizing our strong financial position to maximize the impact of our highest conviction businesses. And with that, I'd like to hand it back over to Jorgi for his concluding remarks.

Thank you, Samuel. Let's now go to page 13, and the last page in this presentation, to take stock of our priorities and expectations for 2023. During the first half of 2023, we have been firmly committed to executing our priorities by investing around 2.4 billion SEC during the first half of 2023 into some of our highest conviction businesses, we're at 1.7 billion in this quarter, we have proven our ability to create and capture the opportunities that arise in more challenging markets. And we have rebalanced our portfolio in a meaningful way. We've also shown the power of our permanent capital, which is a key competitive advantage as an investor. And as I said previously, we expect follow-on investments to account for roughly two-thirds of the total investments during 2023. This is largely a result of our most recent investment in spring health, as well as the opportunities we see emerging in our existing portfolio during the second half of the year. While the macro environment has been somewhat more stable in the last couple of months, We are ready and in a strong position to continue navigating challenging markets ahead as they arise. We are as ever grateful to our shareholders for the continued support as we rebalance our trajectory for the years to come. That said, we are now ready to answer your questions. So, operator, please open up for Q&A.