Naspers : and Prosus FY20 results call transcript

Conference call transcript

30 June 2020

FY2020 RESULTS

Operator

Good day ladies and gentlemen and welcome to the Naspers and Prosus full year 2020 results call. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing * and then 0. Please note that this call is being recorded. I would now like to hand the conference over to Eoin Ryan. Please go ahead.

Eoin Ryan

Thanks Irene and hello everyone and welcome to the full year 2020 results call for Prosus and Naspers. On the call with me today we have our CEO, Bob Van Dijk, and our CFO, Basil Sgourdos, who will walk you through the financial and operational progress we made during the year. And then we'll open the call for questions. After that section of the call we'll have our broader team including Martin, Larry and Laurent, our CEOs of Classifieds,

Food Delivery and Payments. As you know, Prosus is a subsidiary of Naspers and its financial accounts almostcompletely account for Naspers' results. So to ensure that the shareholders of Prosus and Naspers are provided the information simultaneously we're having just one results call. So with that I will turn it over to Bob.

Bob Van Dijk

Thanks Eoin, and thanks everyone for joining the call today. On this call we will cover Prosus mainly as itrepresents the lion's share of Naspers too, but of course if there are any specific questions on our South Africanassets we would be very happy to take them as well. As the world begins to re-emerge slowly from lockdown we remain in a period of great uncertainty and change. And I wanted to start this call with my best wishes to you wherever you are in the world, and I hope that you and your loves ones are keeping safe and healthy. On the call we had in April we took you through the impact of COVID-19 on the business and our response to it. We will spend additional time on that today, but first I thought it would be helpful for Basil and I to take you through the financial and operational progress for the full year 2020, and ultimately that will serve as the basis for thegroup's longer term growth trajectory once we emerge fully from the pandemic, so let's start there.

FY2020 was a truly transformational year for the group in many respects and one which sets the company on a path to making a real difference for our partners, for our customers, for our employees and for the communitiesthat we serve. And it's a path which I believe will generate significant value for shareholders going forward. Solet's turn to slide four and I will walk you through the highlights. Prosus ended its inaugural year in a position ofsignificant strength, with accelerating revenue in our e-commerce portfolio, improved profitability and substantial net cash position which provides us with ample liquidity. Now, this is an enviable position duringnormal times but it's really a differential one in today'sclimate. And I'm confident thatit will serve us well.

Underpinning the results Tencent continued to grow strongly and we remain very excited about Tencent'sfuture potential. Beneath the financial figures there is also significant strategic progress across our coresegments. As economic lights begin to switch on again across the globe it is increasingly clear that the impact of the lockdowns will be profound and will be long lasting. And every day we see data that consumers are increasing their usage and increasing their activity and their spending online. And that change is structural. As a business that is 100% online we expect Prosus to emerge from the crisis in a stronger position.

So we turn to slide five. Let's touchbriefly on the financial and strategic highlights which Basil will discuss in more detail. Overall revenue grew 23% with our e-commerce revenue accelerating to 33% year on year. Trading profit and core headline earnings grew 16% and 13% respectively despite the fact that we stepped up our investment in food delivery. We saw really strong execution across our three core segments. Classifieds delivered excellent results, particularly strong results from Russia, from Europe and Brazil. In Food Deliverywe're starting to see very strong results from the significant increase in investment that we've made over thelast year. IFood, Swiggy and Delivery Hero all grew very strongly and in total the number of food orders increased 102% and GMV by 76% year over year from an already high base.

In Payments and Fintech transaction volumes increased 29% to $37 billion. More than half of that comes from India which continued to gain momentum. So at the group level we took perhaps the larges structural step inthe company's history by successfully listing Prosus in Amsterdam in September. We are at the beginning of our journey in Europe. Prosus is increasingly on the radar of a larger and deeper pool of international investors. And based on current data Prosus has good prospects for joining the Euro Socks 50 index in September this year. We will stay focussed on creating and unlocking more value for our investors by building more valuable businesses but also by taking sensible financial and structural steps where possible. I can assure you that the team is hard at work there too.

While the world has become increasingly volatile we actually have a lot of confidence in our operating structurewhich is has been tested through recessions and many periods of turmoil. On slide six we set out the group'slong-term strategy and priorities. And I am more convinced than ever that our approach is a real differentiator. We are very active participants in our investments and we have become increasingly close to our partners during the crisis, making sure they have our support. Being both an operator and investor helps us to prioritise and share best practises at a very concrete level. We always take a long-term view. As many peers are cutting costs to the bone our focus is on building sustainable leadership positions which is key to reaching profitability on a sustainable basis.

We continue to be disciplined in our capital allocation and we have walked away from high profile transactions where it was the right thing to do. Finally, we have a responsibility to all stakeholders. This has been at the heart of our response to COVID. Looking forward our core objectives are unchanged and longer term I believe strong market dynamics underpin our structural growth. In 2020 we made progress in driving our core segments to profitability while outgrowing the market. We build out integrated ecosystems such as transactions in Classifieds and logistics in Food. These can deliver superior consumer value. They can enhance winning positions and deepen moats around them. Finally, we pursued attractive consolidation deals in our segments.

Underlying our strategy is a long track record of deploying capital and generating high rates of return. If you turn to slide seven you can see our general philosophy. I thought it was worthwhile to spend some time on it here. Simply put, we look to invest early in quality assets in growth markets where we can make a return for our investors far in excess of our cost of capital. It drives our decision making and it applies to all investments, big or small. The strategy has already created enormous value over many years. If we can continue to do so it will unlock value over time without a problem. In FY20 we invested $1.3 billion in Food, Classifieds, Payments andVentures. And behind that sum lies a very disciplined and highly selective and structured investment process. To give you some context, over the course of the year we considered over 5,000 potential deals and we executed 54. This focus and diligence has enabled the group to maintain a low impairment rate of only 10%. Going forward you should expect us to continue to follow this playbook.

So moving to our operating segments. Slide eight sets out the key highlights for the Classifieds segment which had a transformative year in 2020. OLX grew revenue 37% year over year organically, which is about three timesthe pace of the industry. We continue to expand OLX's ecosystem to get even closer to our industry partnersand consumers as the business develops into a highly profitable global market leader. In FY20 we held leadingpositions in all 22 of OLX's largest markets with over 300 million active users per month, making it the leading classified group globally by usage. Pre-COVID0-19 and before all the volatility began a strong engagement drove monetisation that enabled 22% average monthly paying listers growth. Of course the onset of the pandemic negatively impacted the business, but we are now seeing real signs of improvement.

In the year the team executed three strategically important deals. In Brazil you would have seen we announced a $650 million deal to buy Grupo Zap which is the leading vertical online property classifieds site. This will accelerate innovation and enhance user experience in a key vertical which real estate is for us. We merged LetGo with OfferUp in the US, and that was a 40% stake in the combined entity, which is now a truly national, well-capitalised business which is ready to compete. In May we injected Dubizzle and our Middle Eastern assets into EMPG for a 39% stake. We are also participating in a $150 million financing round valuing the group at over $1 billion. We are building our ecosystem by offering fully integrated transactions with pay and ship features. We also help with the valuation of an item. We help with offline inspections, instant cash offers and much more. In December we moved to majority ownership of Frontier Car Group for $320 million which will accelerate what we want to do on the transaction side of the business. So looking forward we are well placed to grow our footprint organically, but we are also constantly screening the market for potential acquisitions.

If we move to Food, food is a massive opportunity for us. In terms of growth our Food business led the way in2020 as we show in slide nine. As you know we've invested heavily and early in this space, particularly in India and Brazil. And I think we are still in the early innings of what this can become. Already our investment is showing real return, and across our three properties order and GMV growth has remained very strong in 2020. That translated to more than 100% growth in revenue year over year. The growth that we see is driven by increased customer loyalty. It is also driven by higher frequency of monthly orders and also by increased restaurant loyalty. We are experimenting with several exciting growth adjacencies. Some to call out are groceries and convenience deliveries, but also new food supply and restaurant software. These will further expand the growth profile and improve the ability of the leading food platforms to compete successfully.

If I can take you to slide 10, FY2020 was also an important year of progress for our Payment platform, PayU. So payments in emerging markets area huge opportunity and it's a data-rich business and it's core to all e-commerce. In the financial year PayU grew the total payment volume to $38 billion, which is up 29% year on year. By now 52% of all transactions come from India and their volume grew by 32%. The business in India actually continues to gain market share, and that is driven by gains in share of check out in the enterprise segment but also across the board by increased conversion, and that's thanks to our Wibmo integration. PayUhas also delivered new payment products for small merchants and the bank has focussed on deepening bank relationships and it has also gone into new verticals, government and bill payments. Laurent and his team'sstrategy here is to broaden our fintech ecosystem in India and expand into credit by leveraging our strong PSP platform through the small use of data. In FY20 we issued more than 2 million consumer loans every month. Inthe short term the current COVID-19 crises presents challenges and we are proceeding with caution in credit as you would expect.

On slide 11 we turn to our Ventures portfolio where we invest in earlier stage companies that will be the nextwave of growth for the group. Everything that we are today once started small, so we've done this many timesbefore. Once we have sufficient proof points and conviction there is the potential for a business to graduate to the core segments. So far we have invested about $850 million in our Ventures portfolio. In the portfolio India isa key focus area and that's because the underlying market drivers represent significant potential. In the lastfinancial year we invested in Meesho and in ElasticRun, and in the year before we invested in BYJU'S. These areall great local and new businesses. Our Edtech investment is by far the largest In the Ventures portfolio. It is clear that the pandemic has had a transformative effect on this space. We are supporting efforts to use our Edtech assets to provide remote learning for students while schools are closed and also for out of office training for businesses. Beyond the pandemic it is becoming increasingly clear to us that all areas of schooling and professional life can and will be augmented by Edtech.

Turning to slide 12 I would like to touch briefly on the efforts we are making on the sustainability programme.

Over thelast three years we've made good progress, but there is still more work to do. As an operator and investor we are looking for ways to best align to international frameworks from a responsible investor perspective and from a business sustainability perspective. We have identified a number of sustainable development goals which we believe most closely reflect our business matched reality and we will continue to make sure these are reflected in our strategy. We are a unique company and there is no off the shelf approach that we can follow. We will make sure to pursue an impactful and tailored approach for the group. You will see a lot more in our integrated report which we issued yesterday, which I encourage you to read. We are committed to making ESG central to our strategy and business.

Before I turn the call over to Basil I wanted to touch briefly on our overarching approach to the COVID-19pandemic which is outlined on slide 13 to help you better understand what we're doing, but more importantlyhow we are positioning the business to emerge from it. Our main focus continues to be on three things. First weprioritised the health and wellbeing of our people and the communities in which we operate. I'm really proud asgroup CEO that this crisis has brought out the best in people across the Naspers and Prosus family. I want to take this opportunity to thank our employees once again for that. Secondly, we look to safeguard customers, partners and businesses. As two main examples, in South Africa we contributed R1.5 billion of aid to support theSouth African government's responseto the COVID-19 crisis and in April we committed 100 crore Rupees to the Indiangovernment'sresponse to the crisis. Third, we have the financial flexibility and liquidity to navigate the challenging economic environment. As you can see from our numbers today the fundamentals of our business remain very strong and Prosus is well positioned to weather the storm and also emerge successfully. With thatI'll stop here and I'll turn thecall over to Basil. Basil, go for it.

Basil Sgourdos

Thank you Bob. Hello everyone and thanks for joining us on the call today. Many of you are new to these calls, so a special welcome to you. I look forward to speaking to you in the future. And to those who have supported us over the years, welcome and thank you for your continued support. Before I run through the headlines, a few important points to note when assessing our numbers. Revenue and trading profit are on an economic interest basis. We link [?] that to our proportional share of results in our associates and joint ventures. Secondly, we report Tencent, Mail.ru, Delivery Hero and our other associates on a three month lag basis. Third, free cash flow and core headline earnings are consolidated numbers. And finally, I will focus on organic growth-that is growthin local currency excluding the impact of M&A. Since Prosus makes up the bulk of Naspers, I will be focussing on

Prosus' reported numbers in this call.

Turning now to slide 15. Overall the group ended the financial year in a position of significant strength. I am very pleased with the progress we have made during the year. Revenue grew 23% year over year with an acceleration in our e-commerce portfolio both on a year on year basis and versus the first half. Of course this is great to see. E-commerce growth was 32% year on year. Profitability improved by 16% even as we significant stepped up our investment in food delivery. This was mainly driven by Classifieds and Payments & FinTech which remained profitable at the core. We are investing further to expand our ecosystem and routes in both these segments. This bodes well for long term growth but is affecting profits in the near term. Excluding our increased investment in new initiatives in our Food core segment, e-commerce trading losses reduced by a healthy 28% or $78 million.

Tencent continued to grow strongly and showed significant resilience in an uncertain macro environment. Our share of Tencent revenue and trading profit grew 21% and 22% respectively. Core headline earnings, our measure that reflects after-tax operating performance, increased by 13% year over year in local currency, translating to $2.07 per share. In mid-March many of the markets in which we operate implemented lockdowns in response to COVID-19 and consequently we did see some initial effects in the last two weeks of the financial year. However, the full impact of the trends Bob mentioned will be felt most in the first half of the new financial year. I will also remind you that we report our associates, including Tencent, Mail.ru, Delivery Hero and Swiggy on a three month lag. Therefore the impact of COVID-19 on these associates has not yet been reflected in the full year 2020 results. Finally, FY20 was another year of good cash flow from our profitable businesses. We ended the year with a substantial net cash position with sufficient liquidity to fund our growth strategy.

If you turn to slide 16 you will see the healthy growth in e-commerce. E-commerce revenue grew strongly, up 33% year over year to $4.2 billion. This was ahead of Tencent and most of our general peers. This growth represents a 7% acceleration from last year. Classifieds grew their revenues 37% year on year. Payments & Fintech continued considerable growth, particularly in India. Food delivery grew 105% as we stepped up investment to catch the increase in market opportunity. Finally, on the right-hand side of the slide you can see we had a strong second half of the year despite COVID-19 related setbacks in March. All segments accelerated growth in the second half of the year except for Classifieds where growth in the six months remained stable.

Let'smove on to the financial performance of our core segments starting with Classifieds on slide 17. You cansee that it's another strong year, growing revenues 37% year on year and trading profit $40 million despite the step up in the investment to build out our transaction business. If you want to get a better view of the underlying trends we have split the business into core classifieds and transactions as they operate on different revenue and marginmodels. Let's take a look at core classifieds. Revenue increased 20% to $888 million andtrading profit margin improved a strong 10% compared to last year. Our large markets in Russia and Europe continued to drive growth with strength in the car and real estate verticals. Their leading market positions and operational execution drove significant improved monetisation. Avito and OLX in Poland continued to fire on all cylinders, growing revenue by 22% and 21% with exceptional trading profit margins of 51% and 58% respectively. This is particularly impressive as both continue to invest in transactions and pay and ship, thus extending their ecosystems.

OLX Brazil grew revenues by 20% year over year in a competitive market. As Bob mentioned, in March we announced the acquisition of Grupo Zap, which when closed will position us well to compete in the fast growing