EQT AB (publ) (EQT) Earnings Call Transcript & Summary

Welcome to the EQT year-end report January through December 2019. [Operator Instructions] Just to remind you, the call is being recorded. Today, I'm pleased to present Christian Sinding, CEO. Please begin your meeting.

Thank you very much, and also a very warm welcome from me to the year-end report for EQT, where -- this is our first financial report since our IPO. And it follows up the Q4 announcement, which we released on January 23, where it's -- probably most of you also listened to. Today, it's going to be primarily me and Kim, our CFO, presenting, while Caspar, COO; Åsa, Head of Shareholder Relations; and Pawel, also in shareholder relations, are attending, and will be answering questions. So taking a step back, wanted to reiterate that EQT is a purpose-driven company. So the financial results we're reporting today are really an effect of our commitment to future-proof companies and make a positive impact. Our vision is to be the most reputable investor and owner. And our mission, as you can see there on the screen is really through our talent and our network and our thematic investment approach to work every single day to create superior returns for our customers and also have -- make a positive impact with everything that we do. Now to the next page, recapping 2019, primarily on the investment side, starting there. It was a record year with our total investments by the EQT funds amounting to EUR 11.9 billion, which is 38% versus last year. Now the market does remain competitive with high multiples for assets but we continue to find attractive companies where EQT can really add value and drive superior returns for the long term. Our good investment pace is a result of the focus on thematic investing in the prioritized sectors. And in private equity, that's primarily health care, TMT and services, while we also have energy and environmental and transport and logistics in our infrastructure business. On the exit side, it was quite a busy year with gross fund exits of EUR 8 billion, which is 58% versus last year. Now following the deal, which was announced earlier this week by Infra IV to invest in Deutsche Glasfaser, a very exciting investment in the fiber space in Germany, the investment level in Infra IV has actually increased to 70% to 75%. And given our investment pace in that fund, we've initiated work to find solutions to bridge or extend that existing fund or by also using the secondary market. So that is in process, but still in an early stage. We, of course, want to make sure that we have sufficient capital in place to continue to make investments in Infra IV through this initiative. And as I mentioned last time, we do prefer not to raise 2 of our flagship funds at exactly the same time, both for internal reasons, but also for customer service reasons. So therefore, we are working on this bridge alternative. For EQT VIII, the investment level remains at 70% to 75%, which is the same as a few weeks ago in the Q4 announcement. And we did set the target for EQT IX at EUR 14.75 billion. That fundraising is going according to plan. And as you might know, due to marketing rules, we cannot comment further on that fundraise at this point in time. On the value creation side and our key funds, this develops according to plan. And one of the Infra fund is still above plan, and Kim will come back to that later. And that, again, is due to our intense focus on driving value creation in our companies. And a critical part of our value creation plan is centered around sustainability. It's really integrated in everything that we do in our investment process and during the ownership phase, and we are now also raising our ambitions to take our sustainability efforts to the next level, both for ourselves as a company, but also importantly, for the portfolio companies in the EQT funds. And I'll come back to this a little bit more later. So the record year is also reflected in our financials. Our adjusted revenues for the full year increased 54% to EUR 606 million, and adjusted EBITDA grew to EUR 275 million, up from EUR 156 million a year earlier. With that, the Board is proposing a dividend of SEK 2.2 per share, which will be paid in 2 installments during 2020. And this corresponds to the EUR 200 million dividend that we communicated during the IPO process. So reflecting on the current market environment, again, we do see healthy pipeline investment opportunities across the board in all of our investment strategies. And we do also see a relatively supportive exit market for high-quality companies and a continued fairly good fundraising environment as well. Having said that, there is some uncertainty in the market relating to the coronavirus that may affect certain exits in certain companies in our portfolio or others. But we have not seen a material effect yet. For EQT, our exit pipeline is strong, but it is tilted towards the second half of this year. Now as I stated, the financial results are an effect of our commitment to future-proofing companies that are making a positive impact. And we want to take a step back and talk a little bit again about how we drive our returns. And we really have a set of differentiators that sets us apart from competition. First of all, we are intensely focused on future-proofing through thematic investing, which is really following long-term secular trends across our investment strategies. And we do this with our local with local infrastructure, if you want to call that, where we're investing in each country with local people using our global thematic approach. Our governance model is also unique with our industry-leading network of industrial advisers where industrial advisers are always driving a lot of the board work together with the EQT teams. On our value creation toolbox, we have -- we've really institutionalized our approach to value creation, while staying entrepreneurial and we call that the EQT way. And we have a number of tools the teams use to really drive value creation in private companies. And importantly, we have a lot of focus on sustainability and digitalization. This is a part of the future-proofing strategy. We have in-house resources for both of those areas. Like I said, we're integrating sustainability every day more and more into how we do and what we do. We also use it for deal selection and driving value creation plans and even setting up the companies for exit. We are guided there by the UN Sustainable Development Goals. And what that means is that we only make an investment when we conclude that a company's product or service is actually delivering a positive impact or where it has potential to deliver a positive impact on society through the transformational support that EQT can provide. And we ask kind of a rhetorical question. If you have 2 companies that are exactly the same, one is more sustainable than the other or can become more sustainable than the other, which one will be more attractive over time? Which one will be more interesting to work for? Which one will attract the most talent? Clearly, we believe it's the one that's going to be the more sustainable one. On digitalization, we're also continuing to invest a lot in both our Motherbrain effort and our own internal automation and digital business development. Now we don't think this is enough. So as a market leader in the private market space, we believe we have an opportunity and obligation actually to accelerate action towards sustainable business practices. So we've decided now to elevate our societal ambitions. And as a first step, we're setting new targets for EQT AB in both -- in transparency and accountability, on diversity and upskilling and also the climate. And a little bit more detail. On transparency and accountability, we're committing to publish even more clear ESG data. I think more importantly and impactful is that we're linking incentive schemes at EQT to our sustainability objectives. Secondly, we have -- we believe that diversity in general drives innovation, and it also helps drive returns, which is proven in our industry. And it's something very positive for everybody involved. Right now, we're focusing on gender diversity, and we're really committed to improving the gender imbalance at EQT. So this year, we set a goal that 65% of our investment professionals shall be female and that we're recruiting. And that will help us, over time, get to the long-term goal, which, of course, should be an equal gender balance. We also require our advisers such as commercial, legal, banking, et cetera, to have at least 25% of their teams being from the underrepresented gender. Otherwise, we won't allow them to serve EQT. Thirdly, tactic on climate issues. We've actually already, since 2014, measured our carbon footprint, and we're now carbon neutral as a firm. And we continue to take steps to become carbon positive over time. Today, all of our offices are on 100% renewable energy or where it's not possible to fully reduce emissions, we ensure that they're positively offset. I think more impactful than that is that we were -- we're requiring now all of our portfolio companies to start their transition to renewable energy. And finally, we have the EQT Foundation, which we launched at IPO. And this is going to coordinate and drive EQT's philanthropic efforts and EQT Foundation's mission is to help create a more inclusive world and to push the frontiers of societal impact. Good. So talking a bit more about the business side, we -- 2019 was a record year for our -- for EQT and also probably for private equity industry. We are operating in a very long-running bull market. So I wanted to spend a little bit of time on how we act and invest in this market environment. Like I said, we're focused on thematic investing in relatively noncyclical industries and companies like Galderma, Deveron, in the fiber initiatives in Infra with Zayo and Deutsche Glasfaser, and [ Xeo ], et cetera. And taking that from the company up to the fund and portfolio composition side, we're really working to ensure that we have a good and wise portfolio construction. We, therefore, use our co-investments with our LPs and deal syndication to make sure that we have the right allocation across sectors, geographies, currencies and other drivers that we had little correlation in the funds to any particular theme. This also helps us actually rightsize our funds' sizes and it's something which is very good for our clients, so we see that as a real win-win with the co-invests. We have a global investment forum, which is really focused on, what we say, performance, performance, performance. And in the global investment forum we are ensuring that we have a really consistent approach to our investments, to refinancings, to exits and value creation plans in each of the funds that we're working with. And right now, I must say that our focus is to drive exits this year. We do know it's a good time to exit. And we want to really make sure that we continue to take advantage of that during the year. Like I said, the exits are skewed for a bit later this year. Now on the portfolio company level, we're really working -- thinking about the long-term value creation for each company that we can really drive transformation during our ownership phase but we do also have each company preparing a plan B, what happens in case of a downturn? Or what happens in the case of some kind of external shock? So we're prepared in terms of governance, in terms of financing structure, cost structure, et cetera, to act if we need to. Very important is the financing side of things where we're trying to work to make sure that we rightsize the financings for the long term with the right level of cushion and the right level of flexibility with covenant-light and other elements, and EQT is not -- we're not the firm that maximizes the leverage of our companies at all times. We'd rather try to work over time to -- as we own the companies to create more and more flexibility so we can invest in building the business and building a better future for the company. We're in a long-term journey, and we're continuing to grow. So this is the growth chart that you've seen before. And we believe, like I said, that we've -- our model really works well across geographies and investment strategies. You might remember me talking about people and performance, we're a very performance-driven organization. And with this performance, we can invest in our people and with our great people, we can invest more in our -- in driving performance, and this is a positive trend. And we're going to continue to do that, and Kim will come back to that side of things in a few minutes. Now we do see some interesting opportunities for continued growth and development of EQT across investment strategies. Now we talked about our IPO as a watering station on a long journey, and we feel now that this is the case. We have now capital to pursue, a number of opportunities out in the world and give you a quick update here on how that looks. First of all, on EQT Growth, this is a part of private capital, which is an opportunity to invest in the market segment between venture capital and private equity, where we have a lot of deal flow and a lot of opportunities, but we don't have a strategy yet to really attack that. And we're working on that now, preparing with the team build up and also making sure that we build a very sharp and unique strategy around it, including being fully data-driven with our Motherbrain initiative. On -- in Asia Pacific, I'm very happy to say that our Sydney office opened yesterday. We had a big celebration out there with Thomas von Koch as our representative and the Wallenberg is also being there, representing our network. And we look forward to continued investments in Australia and New Zealand. We're also opening up a -- or planning to open a Tokyo office. And we believe that both for infrastructure and for private equity, the Asia Pacific area, somewhere -- is an area where -- which gives a lot of opportunities. And as you might have seen, we've done several deals already this year in that space or in that geography. On the real estate side, we're continuing to scale and build the business. Our fundraising is on track for real estate, too. And we're looking at opportunities in the managed to prime space as well as increasing our geographic footprint. With regards to M&A, we are considering M&A for EQT AB, especially in areas where we want to scale further. And what I would say is that we see more opportunities in the M&A side than we had expected. So what we have quite a few inbound initiatives, people coming to us wanting to cooperate. And there are a lot of opportunities out there, both in terms of different product areas, but also in terms of new geographies. And we're evaluating those, but we're going to be very selective when it comes to M&A, whether we're looking at companies and or teams. On the credit side, we announced in January that we're reviewing strategic options. That project is proceeding according to plan. And until it's concluded, we're operating the business as usual, so we're investing. We're preparing for fundraising, and we're -- all in the normal course of business. And we've launched the CLO where we've actually also committed equity from our balance sheet due to the first 2 CLOs that the team is driving. Good, now the operating platform. As you can hear, we have a lot of exciting opportunities ahead, and we're continuing to grow and develop. Of course, to pursue these opportunities, we need to continue to invest in our business and to really scale and digitalize our business so we become more automated and more efficient over time. So we're going to continue to invest in the platform, our people with the EQT Academy and our -- and training and leadership development as you know, this business is very much about people and leadership. Digitalization, diversity also being other elements that we're investing in sustainability, to give you some of the bullet points there. And I wanted to reiterate Caspar's comments from when we were on the roadshow that we plan for our central functions cost to be growing at about half of the pace of AUM growth over time. And with that, actually -- with the platform, I think I'll hand it over to Kim to talk more about our financials.

Thank you, Chris. Let me start with a reminder of our business model. And maybe you've seen this slide before. But it's an important one. So I'd like to reiterate that our focus is always, first and foremost, on creating attractive returns for our clients. And this, in turn, will lead to growth in fee-generating assets under management. And with these assets under management, we will have 2 integrated revenue streams. We will have management fees that are sort of contractually recurring, and we will have carried interest when we perform, which we will. And our cost base is, as previously mentioned, 2/3 are directly personnel costs. And the rest is also highly linked to the number of employees we have and consultants. With that, let's have a look at our value creation in 2019. EQT's approach to investing in and developing companies has led to continued value creation across the key funds. In 2019, you can see here the 3 fund generations in -- of our flagship funds and that we have during the year increased gross MOIC in all of the key funds, which we are pleased with. This also means that all of the key funds are at least on plan when it comes to delivering, according to the expectations of our investors, and we have on them with EQT Infrastructure III even being above plan. That brings us to the first financials here. You can see that there's some first signs of us demonstrating scalability in our business model. And total revenue increase of 54% during the period, this is principally due to the full year effect of Infra IV and of EQT VIII. So that is in line with expectations. As you can see also, the vast majority of our revenues continues to consist of management fees, and we will get back to carry at a later stage. The revenue growth has also translated into EBITDA growth at a higher pace even. And therefore, in robust margin expansion, ending up at 45% margin for the year. Let's have a quick look at the 3 segments and what is going on there. From a financial point of view, Chris mentioned that we've had a good investment and exit environment, while competition has remained strong for high-quality assets. In private capital, the AUM is in line with 2018, which was the year when EQT VIII was raised, so there has been no dramatic changes there. But the full year effect of EQT VIII drives the revenue growth close to 30% and the same then at EBITDA or gross segment result as it is called here for Private Capital. Moving on to Real Assets. The investment and exit activity has been high and almost double the pace in '19 as it was in '18. Revenue has increased significantly, primarily due to the Infra IV closing in March. And here, a reminder that also investors who come into a fund at the later stage than the first close will anyway pay fees from the first close of such funds. So there is a catch-up effect in the numbers for 2019 here as well on the revenue side. Obviously, you can see the effect of that revenue increase in the scalability with a significant increase in the gross segment results as well. With regards to Credit, revenue is in line with 2018, although it is less contribution from carried interest according to the IFRS revenue recognition we use, there is less carried interest in 2019. We have also continued to -- and we continue to invest in the team, and during 2019, in the preparations for the launch of the CLO program that Chris mentioned, and thus, the margin is not at the same level as in 2018. Moving on to the group operating expenses at a consolidated level. As you know, the cost base mainly consists of people and related expenses to that. And we have continued to invest in people and in our business, both on the business line side, as you have seen, but also in digitalization initiatives and in 2019, also in creating the prerequisites for life as a public company. So we have invested in certain functions that we did not have before. The increase in personnel cost was thus driven both by a number of the FTEs, which grew and then the growth in average cost per FTE. And a reminder here, again, that the partner compensation model has changed. So in 2018, there are no bonuses for our partners, which there -- but in 2019, there is. So '19 is a better starting point to estimate future costs at that -- from that perspective. Let's have a quick look at the full income statement on the next page. The column marked adjusted here is -- that is the way that we follow the business internally. And let me take you through a few of the adjustments. The revenue adjustment has to do with the acquisition of carry we did in April 2019. And in order to have the same accounting effects of that revenue as our other carry revenue, there is this adjustment of EUR 6 million in 2019. It will go away over time then. We had a special year, clearly, in 2019, and there are some one-off or items affecting comparability here. Firstly, it is the cost for preparing for the -- restructuring and preparing for the IPO and the IPO, including some IPO bonuses that were paid out to the teams. And secondly, we have made a one-off provision of EUR 32 million due to the VAT ruling that we announced here -- that was announced in late January. And that, obviously, that provision is there to cover for the historical costs. And then we have the -- we are of the opinion that the ruling is not expected to have any material impact on our future results and financial position. Our -- moving on to the cash flow and balance sheet side of things. 2019 was, of course, a special year also on the cash flow and balance sheet side, with the restructuring first and then leading into the IPO. So if you dig into the details here, I have sympathy for it being slightly challenging to follow. But if we, again, take a step back from that and see what has really happened, we have increased operating cash flow due to the reasons discussed before in terms of our operations doing well. And we have the primary issuance from the IPO, leading to an increased cash balance and to an increased total equity on the balance sheet side. So that's kind of the high-level view of our balance sheet and cash flow. You can see here that at year-end, we had roughly EUR 900 million of cash on the balance sheet. So with that, I will hand over to Chris to say some concluding remarks on our financial targets and dividend policy.

Thank you, and this remains the same as we discussed last conference call where our targets remain unchanged. And this year, we achieved revenue growth of 54% and EBITDA margin of 45%. If you look over the long term, we expect our revenue growth to exceed the private market's long-term growth rate. And we expect our profitability to increase to an adjusted EBITDA margin of 55% to 65%. And our dividend policy remains the same. This year, it's going to be EUR 200 million as planned, a level that we will build from. And then the target here is to generate a steadily increasing annual dividend in absolute euro terms. So with that, with those comments, then we will open up for questions.

[Operator Instructions] Our first question comes from the line of Liz Miliatis of Bank of America.

Congratulations on the results. I've got a couple of questions. Firstly, on the M&A point that you had made earlier. What kind of size are you looking at? Are there any particular regions or product categories that you're looking at? And would you expect that there'd be significant synergies out of it as well? And then secondly, on the infrastructure bridging between Infra IV and V, would you be able to give us a sense of then when you might be thinking to raise Infrastructure V given that EQT IX is currently being fundraised?

I'll take those. On the M&A, it's -- right now, we're -- well, let's say, we're going to be focused on M&A in regions where we have, call it, more growth potential, where we're not already significant in size or whether -- and/or in product areas where we'd really like to scale. So we're -- we actually have a number of opportunities that we're considering. And like I said, we're going to be highly selective, but we find it interesting that there are more opportunities out there, and we think that we will, over time, find some firms that have a really great fit with EQT, and we can then together build a strong platform and a strong future. And right now, it's still early days, so I can't really comment any further on that. When it comes to the Infra bridge, we -- we're not at liberty to talk about when we believe Infra V is going to be raised, but we are working now on the bridging alternatives. And we expect those bridging alternatives to be something like 10% to 15% of the size of the existing funds. And depending, of course, on the size of that and the actual investment pace that continues in Infra IV, that will then lead to Infra V thereafter.

Our next question comes from the line of Peter Kessiakoff of SEB.

So just a follow-up question on the M&A side. I mean, first of all, the -- when we look at the IPO funds that you raised, could we see this as a potential reallocation of the use of those proceeds to perhaps, I mean, doing some M&A rather than ceding some of the new funds that you had expected over the coming, say, 4 to 5 years? So that's my first question.

I don't think it will be instead of, I think it's going to be rather to help scale, either scale existing strategies or help grow newer strategies faster or to support the growing regions of EQT. So very strategic, thoughtful, but it certainly won't exclude our inorganic initiatives.

All right. Then just a few questions on the expense line. Given kind of the significant changes that have happened with EQT going public and the changes in the corporate structure. In terms of expenses for next year -- or rather 2020, is there anything kind of material that we should take into account in terms of, kind of, average salary expenses or on other expenses and so on that we need to take into account?

It's Kim. I'll take that. On the -- the main part of the expenses are, as you mentioned, on the -- are personnel expense line, and adjusted personnel expense lines is the one that you should be looking at. We have said that over time, the regions where we are increasing our presence are slightly higher -- have higher compensation models on average than our sort of traditional -- more traditional Northern European regions. And so that will have an effect over time, but it's not a dramatic one. So no, I wouldn't say there is anything special.

Okay. So then there's nothing in the structure that -- kind of changes in the structure that should be reflected in 2020?

No.

Okay. Then just -- just to understand, in terms of disclosure, I mean, we had a bit more disclosure on perhaps cost breakdown in connection with the IPO, is what we're getting now is that the kind of level of disclosure on the cost side that we will get ahead.

Well, there will be further footnotes to the financials in the annual report, but they are not -- I don't see them as material from the sort of point of view of getting an understanding of our business and performance.

Okay. Then just my final question with the VAT ruling. And I know that you're saying that it will not have a material impact on the results. Is it possible to kind of quantify this to any extent? I mean, what's the definition of material?

You saw that we took a EUR 32 million provision for the historical costs. And that's for a time period of 4 or so years. So that gives you a sense. And then in addition to that, we will, of course, study the ruling in quite some detail and expect to be able to have also mitigating actions. So that's approximately what I can say.

But if I then -- sorry, but then just to pick your brain a bit. When I look at the level of provision made now and I split that out over the period that it relates to and perhaps make an assumption of what could be the run rate increase of, say, expenses on the back of this. Is that the way to get an understanding of what the impact is onwards?

We expect to be able to sort of mitigate some of that as well.

And our next question comes from the line of Jakob Brink of Nordea.

The first question -- I think, Christian, you said in the beginning of your introduction regarding the credit review or the credit business review. You have initiated that everything is so far is business as usual, and you'll be doing fundraising, I think you said as well as usual. Does that mean that even though you're in this review, it will still be possible to go out and then raise funds in Credit?

Thanks for that question. And I'm glad you asked for the clarification. What I meant is that it's business as usual and whatever the business needs, whether that's continuing to make investments or building out the CLOs, which we're supporting or even future fundraises, we would then support that. But I didn't mean to imply that there was anything imminent going on. It's rather -- it was rather just several examples to show that we think it's important that as long as we're owning -- as long as we're owners of the business, we want to support it in the best possible way. We also promoted 2 partners in Credit now recently with the partner-promotion cycle. So rather just showing that we have a very good cooperation with the team, and we want to support them as long as we're owners of that business.

So I guess my question was more related to, so in my model, I have new Credit funds being raised further on. The question is, is it actual possible to go out and get, let's say, new money into a credit fund when at the same time, you're thinking about potentially selling it? That was more my...

I understand the question. I don't think that -- I think that this process will be concluded before anything like that would arise.

Okay. Great. And then regarding just coming back to M&A, how big could it be? So of course, you have quite a big cash position now, but could it potentially be even bigger than that? Or should we think of something within that size?

Maybe I'll let Caspar comment a little bit on how -- he's on the line -- on how we're thinking about M&A, to just give his perspective. He's also on the line from another location. But you shouldn't expect anything earth-shattering in terms of size.

Yes. No, Caspar Callerström here. I agree with that. I think -- I mean, we, of course, have the cash that we have on the balance sheet, and that should be not only for M&A, of course, but mainly to drive our other organic initiatives. I mean, it's -- I think it's also fair to say that with an IPO, we now always have another currency, and that is, of course, our own shares. So that would also be one method of doing M&A. That said, I think -- I don't think you should expect anything very big in the very near future. So in general terms. So we're going to be careful here. And I think we will be also be careful about buying 2 large organizations because of the challenges that, that would have in integration and culture.

Some of the approaches that you have had from -- I think you mentioned that you had been positively or had that been more approached than you had expected. Some of those approach has been so large that you would have to use your CRS currency?

I think that remains to be seen. I think we've been positively surprised by the amount of inbound calls that we have received. And I think it's fair to say that the vast majority of those inbound calls, we have actually dismissed fairly early stage. But there are a few things that we are looking further into. And let's see when and if we get further into that, what such this could look like, but it's too early to tell.

And then as a final question.

And I think it's also important to say that, that's not only a size issue. I think for us, even if -- for a fairly small deal, I think we would want to -- the sellers of such business to become shareholders of EQT rather than to get the pile of cash. So I think from a conceptual point of view, I think we would prefer to work with shares rather than cash when it comes to M&A or a combination of them both.

Okay. Makes sense. And then just final question, sorry, but coming back to the Infra IV bridging, how sort of -- how should this work in -- will this mean that, for example, the commitment period of EQT IV -- or Infra IV sorry, is prolonged? Or does it mean that it's sort of separate funds, more like an Infra 4.5, with its own life or -- so just we can get it correctly into our management fee calculations, et cetera.