Eurazeo SE (RF) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the presentation of the half year results of the Eurazeo Group. I will now give the floor to Madame Virginie Morgon and Mr. Philippe Audouin.

Thank you very much. Good morning, everyone. Thank you for being here this morning for the presentation of the half year results of the Eurazeo Group. I'm with Philippe Audouin, the CFO, in order to give comments on these results. The first half of 2020 and reflects the strength and relevance of the Eurazeo strategy. Our group has fully played its role of stabilizing and accelerating. In order to stabilize, first of all, our share price in a highly volatile market environment, stabilizing our resources in order to face the crisis and also to stabilize our portfolio companies by providing human operation and financial support on a daily basis, and also to step up the digital pivot in our companies to accelerate the recovery in the company -- in companies hosting the general public since the end of lockdown in Europe; accelerating the growth of companies, which had growth and expansion, external growth projects, such as crèche and hotels; and finally, to step up the recovery of our fundraising activities. This is the message that we wish to convey this morning: our group has been responsive and dynamic in order to limit the impact at the height of the crisis. You can see here the reflection of the stabilizing power of the diversified model of Eurazeo. Assets under management are stable. Our revalued net active (sic) [ net asset value ] is resilient and prudent. The excellent results of fundraising in an uncertain market environment over the past 6 months also bear out the momentum of our fund management activity. This model fully exploits the diversification that we have implemented in recent years through the stability of the value of Eurazeo Patrimoine, Eurazeo Brands, Eurazeo Development and all of our management activity since the 31st of December 2019. A greater impact for Eurazeo Capital and PME, but -- whose assets for the most part, apart from those with exposure to travel and tourism, are performing well. Strong momentum for Eurazeo Growth at plus 11%, reflecting the relevance of our investment strategy in tech companies. Diversification has enabled us to contain the impact of the crisis on our portfolio. This is also a model which has reduced our risk exposure. 90% of our revalued net asset is stable at 30th of June and picking up in the second half in value terms. EUR 65 million only have been reinvested in order to contribute liquidity and guarantees to 4 of our companies. We, thus, have a model, which exploits synergies between investments in shareholder equity and the asset management business, which is up strongly by 18% in the first half. Here are the foundations of the model. Private Equity identity, 71% of assets under management, the majority of which on the balance sheet of Eurazeo are now directly invested in high added value businesses generating a yield in management fees to the tune of 2%. Foreseeable income, 2/3 of the assets of the Eurazeo Group are now managed for -- on behalf of investor partners with the assurance of recurring revenue over the long term, an integrated platform where each of our divisions benefits from the financial and human resources of the group. In this very uncertain period, this model is a differentiating asset, providing protection for shareholders who have seen during the crisis the major benefit of investing in a group where no asset represents more than 10% of our revalued net asset, synergies and the expertise for entrepreneurs and business leaders who benefit from the contribution of this ecosystem representing 430 companies, significant international growth potential for each of our companies through a business network present across 3 continents and dozens of companies. Diversified model with reduced risk and increasingly foreseeable this -- greater visibility. This is the result of the sustained growth of our management activity for third-parties. In an uncertain world, we can depend on the firm commitment over a 6- to 10-year horizon on the part of our partners. We have a high level of average fees at 1.4% through our high private equity content with strong value-added management. Recurring management fees are up by almost 25% over the past 4 years and up 18% on the first half of this year. Adequate financing for our group companies, a stabilizer at group level and a stabilizer also in terms of our portfolio companies. First and foremost, regarding liquidity. The great majority of our portfolio companies went through -- went into lockdown with adequate resources. This reflects an acquisition policy that has remained prudent in terms of leverage, which, by end of 2019, were well below average LBO levels for European and American companies. The result is that we have a limited number of companies and the amount of -- the degree of assistance we will have to contribute should be around 2% of our net asset value by the end of the year. A few words now on WorldStrides, which is one of the world leaders in student travel and has been severely impacted by the impact on tourism. First of all, we have sought to preserve the brand equity of the company by ensuring repatriation of students and by reimbursing as best as we could the families, conducting a conciliation procedure which has led to the reinvestment -- limited reinvestment of $50 million for Eurazeo. We have fully played our role as an active, responsible long-term investor based on the convention that the company will come through this period. And with our support, it will be one of the rare companies in its sector to be able to bear out its future value -- potential value creation through accelerated external growth, the best illustration of our external growth with average leverage levels which have been below that of the European sector. Eurazeo invests in healthy companies, which have strong profitability records. This is managed by an experienced team and accounts for the very low historical default level of this business, which, of course, is a differentiating asset in a -- against the backdrop of recovery. During our crisis, our debt -- private debt portfolio did not have any difficulties in terms of liquidity. Going beyond financial support, this -- we also have day-to-day support with the proximity of our teams in order to help these companies come through this crisis: internal support on HR, funding issues, cybersecurity and much broader support through the establishment of a shared digital platform in order to share best practices and the know-how. This platform has been extremely useful for some of our companies during the -- after the lockdown period. The last pillar is our ESG leadership. I am convinced that experience and the results we've achieved for over 15 years have also protected us since this has enabled rapid decision-making concerted across the whole of the portfolio with best standard governance, responsible support provided for companies in order to deal with the social consequences of the crisis and constant attention on supply chain and subcontracting. ESG is a major lever for value -- major driver for value creation in a growth period, and I will come back to this in concluding. This has also been one of the key responses through the period of turbulence that we have gone through. I will now give -- hand over to Philippe Audouin, who will provide more detailed comments on the financial results of the first half. And I will conclude, of course, with the outlook for the months ahead.

Thank you very much. I will now present the activities in the first half. Our asset management activity has demonstrated its resilience. Our third-party asset management is up 4%, close to the strong results of the first half of 2019. Management fees are up by 18%. Net asset value per share came out at EUR 70.7 with -- down 12%. Our portfolio accounts is overall stable for the first half. The leisure and travel category was more impacted. We have established this -- we have been stringent in the method in terms of the analysis of the prospects for the companies, and I'm convinced that we have a prudent approach. And finally, the net income group share comes out at minus EUR 390 million, 80% of which is due to the impact of the crisis on the travel sector, in particular, the impact on WorldStrides. And we have a financial structure, which is extremely robust. In order to better analyze our portfolio, we communicated in the first half the breakdown of our assets based on 4 categories depending on the impact of lockdown on their business and on the revalued net asset. The first category includes resilient companies, which generate recurring impact (sic) [ income ] and which have limited exposure to the consequences of the pandemic. This includes defensive companies such as health care, technology and our -- the most part of the third-party asset management represents the rest of this first category. The second category includes companies, which have only been indirectly impacted by the consequences of the lockdown. The third category involves companies that had the direct impact of the lockdown, in particular, consumer -- the consumer sector or receiving the public and for which we expect a quick recovery. And the last category involves companies directly -- whose business is exposed to travel and leisure, which were severely impacted by the pandemic and for which recovery is expected to be more gradual. As you can see on the screen, you see the monthly variation per category. The resilience of Category 1 is borne out as expected without taking into account the figures for Eurazeo Growth, which recorded growth of over 60%, which are not included in these figures because they're not consolidated. Category 2 has been resilient. Category 3 was more impacted in March, April because of the lockdown, but these categories have seen their business recover from May onwards, and in particular, since June. These 3 categories, which represent over 90% of our revalued net asset, reestablished their precrisis level of business. And Category 4 is the most impacted since it involves leisure and travel and represents very different situations depending on the assets. WorldStrides, Virginie has referred to this, and the recovery plan is pending approval from the American authorities. And this will enable it to benefit from the recovery at the end of the crisis. And Planet has been significantly impacted, and its healthy cash situation has enabled it to exploit acquisition opportunities. I will go back to this. And Hospitality has been impacted by the lockdown, but we're seeing positive signs of recovery with an occupancy rate that is back above 50% for over 80% of the hotels that have reopened. And finally, Europcar published its financial statements yesterday, and I will not dwell on that. This resilience of the portfolio is also reflected in EBITDA. The companies in the first 3 categories have seen their EBITDA grow by 5% in the first half of this year. Let us now move on to the income statement. There were a few disposals in the first half. Revenue has been mainly due to Eurazeo Growth companies, which have recovered strongly in the first half. High depreciation levels, mainly impacted by WorldStrides, as you can see on the screen, do not have an impact on net. OpEx is down due to the strong savings policies. Asset management activity has continued to grow. Management fees are up by 18% due to the buildups that have been achieved since 2019. Costs are under control. And recruitments have been made in 2019 in order to support our businesses. And fee-related earnings are up by 56% and are enjoying the strong base effect on the first half. Overall, net income for the first half is minus EUR 390 million, which is mainly due to value adjustments that have been booked on a limited number of assets in the first half. In the current period, we have a strong financial position, which is particularly important in this particular situation. Gross cash position is EUR 587 million, of which EUR 400 million from a syndicated loan. And a revolving credit facility of EUR 1.5 million (sic) [ EUR 1.5 billion ] that we have extended for 5 years and potentially 7 years with the 2 extension options. Dry powder, in other words, commitments that have not been drawn down by our investment partners, stand at EUR 4 million (sic) [ EUR 4 billion ]. So we have a EUR 5.7 billion of financial resources that are available to take us through the crisis and exploit opportunities. Overall, our assets under management is almost stable at EUR 18.7 billion and this is particularly -- EUR 18.5 billion. This is due to fundraising and management for third-parties, up 4% over the half year, amounting to EUR 1.1 billion. Now over the last 6 months, we haven't sat on our hands. We have had some -- raised some cash for somewhere around EUR 400 million. We invested EUR 18 million to support our portfolio companies plus support to WorldStrides worth EUR 50 million. As Virginie was telling you, support to our companies should only account for some 2% of our NAV given the ability of our companies to manage and weather the crisis. We invested some EUR 8 million in our general partners, acquiring 10% extra. And our shareholdings has increased in Global Partners. After closing, we announced a number of investments: Thought Machine, Eurazeo Growth and Eurazeo PME. Other statements and other announcements may be made in the future. The Eurazeo China Acceleration Fund made its first investment at the end of July, investing in DORC, which should therefore boost its business in China, thanks to our partnership with CIC. Now together with the direct investments I've mentioned, we have also seized to build up opportunities for our companies, 15 buildup over H1. Two examples: Planet, which is really very big in this business, has invested in 3C, which manages online and off-line payments and therefore supplements the Planet product offering. I'm sure you're familiar with Shift4, which was IPO-ed recently and which was noted then; Reden Solar, it is building on its business through organic capacity through a course of tenders in France, but there's also dynamic growth in Latin America, amongst other places. This has meant that the group has been to shore up its financial performance over H1. Briefly, NAV. All in all, our asset value is stable over Categories 1 to 3, which, again, is almost 90% of our net asset value. In fact, this is up 5% over the last half year. And paradoxically, market assets have gone up and we haven't actually factored all this into our valuation. 11% increase in Eurazeo Growth, which accounts for 7% of our NAV, results from the recent fundraising. And NASDAQ, for instance, has been up 14% year-to-date. The drop in NAV is, in fact, mainly due to Category 4 that now only accounts for 10% of our NAV when -- which has gone down 56% in value. WorldStrides has been completely depreciated and finance has been brought down as a prudential measure. NAV per share is EUR 70.7, so 36% drop, something that we haven't experienced over the last 10 years even though Eurazeo has become more diversified, resilient and less volatile and enjoys more recurring income, thanks to asset management for third-parties. Virginie?

Yes. Thank you, Philippe. So stabilizing at the heart of the crisis and accelerating a recovery, this is even more swift in that we rely on basic companies for the recovery. This is obviously particularly due to technological companies, which now account for 1/4 of our business. They now account -- these technological companies do account for 1/4 of our assets, AUM or NAV. You have pure tech companies in Venture and Growth and also Eurazeo Capital and Eurazeo SME, which are 100% digital, such as Planet, Elemica and Trader in the U.S. and also EasyVista within Eurazeo SME. Over the last few years, Eurazeo Group has built one of the handsomest track records across Europe in digital investment: EUR 4 billion invested in tech over 20 years; 17 IPOs in the U.S., including Farfetch; one of the largest European venture funds with 20 years of experience; has position as a great backer of French tech with 27 Next 40 companies financed and supported by Eurazeo. And 2 investments have, indeed, been announced this year in Eurazeo Growth and Venture. I'm convinced that we are at a turning point, a key point. The number of unicorns has increased eightfold over the last 5 years and there's, therefore, greater need for support over the -- and has been over the last 2 years. The need to inject European capital alongside American investors. There are great tech entrepreneurs in Europe and there must be great European tech investors. And our experience, our track record in this field means that Eurazeo is the better place to speed up this trend and become the European leader in tech investment. The best way to explain this and show this is looking at Eurazeo Growth portfolio. It has increased, on average, 11% over 6 months and there have been boosts in Doctolib or ManoMano, for instance, who have outperformed their initial ambitions. Now over and beyond this, the business in Eurazeo Growth are doing well -- very well indeed. They have good equity, they are active on the markets, not significantly affected by the crisis. They have raised more cash recently. And as from the beginning of the year, Eurazeo has invested -- or reinvested EUR 200 million in these digital companies. These prospects for value creation are good, and we are very confident for the next few months. Can I also mention the way in which the economy has been -- undergone faster digitalization as you can see with Eurazeo Capital and Eurazeo SME. B2C has seen digitalization during lockdown, and that has boosted transformation in such a way that it has, in fact, offset the direct impact of the crisis, the closedown of the brick-and-mortar retail business in Europe or in the U.S. Now this is no surprise. Everything that Eurazeo started before the pandemic has, in fact, been very positive. Look, for instance, at digitalization for B2C. For instance, NEST and Bandier, for instance, have increased two or threefold their online sales during lockdown. Linvosges, as I was saying this morning on BFM, has moved from a catalog to e-commerce, increasing its share of e-commerce from 25% to 40% today in its sales mix. So imagine how talented the digital transformation teams have been. Over the course of 3 months, we have been able to do more than we would have expected to do over a few years. Then there's process optimization and digitization B2B. Look, for instance, at health. If you can replace, for instance, the existing practice, look at DORC -- what is done at DORC and Péters Surgical. They have completely overhauled their communications practices vis-a-vis their customers. Other companies have completely disrupted their sector through their digital practices, for instance, digital natives. For instance, Doctolib, over a few weeks has been able to reach its multiyear targets. This means, as I have said, that we have been to do over a few months what we expected to do over a few years and that will require a massive investment, but Eurazeo will be ahead of the games. So digital transformation, but also business transformation. I'm convinced that civil society must play a role in reconfiguring the current environment and world. Private Equity will be at the forefront of this. First of all, because we represent something like 5% or 10% of the GDP in Europe and the U.S. If we -- indeed also, it increases the growth of the companies, and therefore, creates jobs. In this context, Eurazeo has been a leader amongst its peers on ESG, on governance, inclusion, environmental sobriety, which I mentioned earlier. And we will boost this over the next few years. We are even more convinced that this must be done at the heart of this crisis. Which is why I'm delighted to announce that Eurazeo Group is committing itself to zero net carbon emission in 20 years across the group. We will set clear pathways. We are also announcing -- or will announce at -- in September greater governance commitments, more parity, more gender equality, more inclusion. These are the sorts of targets and goals that people would think might take a backseat during the period. We feel the opposite is true. So a reliable basis, a strong potential for loan growth. That is why we have been able to raise fund with third-party investors. Compared it to last year, EUR 1.1 billion raised in H1 this year, whereas, in fact, the limited partners has seen its market go down globally. Our dynamic is basically fed and fueled by Private Equity, which is actually more income-generating. And this is something that's only just starting with Eurazeo Growth, and we have good cause to be -- good reason to be confident that we will reach our goals by the end of this year. We will, therefore, go along with this and at least a dozen also funds will be on the road over the next 18 months. Obviously, given the current health situation, we will have to reschedule, but we will keep this momentum for a number of reasons. First of all, we now have a 25-man strong fundraising team organized per geography in a cost-cutting approach according to asset classes, which means that we can address this best -- in the best possible way the needs of the clients and match it with the products in the company, also because we have a very broad investor basis from private investors and small family investors to sovereign funds and pension funds and insurance companies. Allocations in Private Equity across-the-board are still quite low, some 5% to 15%, and therefore, there's a tremendous potential. And lastly, because we have great international potential. As you know, 70% of our assets managed for third-parties are, in fact, the French assets. So we have a very deep market. Out of the EUR 13 billion managed for third-parties, 70% of that is managed for French investors. So we clearly couldn't do even better on the French domestic market. But if you look at this from a dynamic point of view, 51% of the funds raised last year, 2019, were raised from international investments. So there is -- investors, sorry. So there is clearly great potential still. So as you will have understood, Eurazeo has good performances, reliable and dynamic and in a good position to manage the recovery. In this choppy period, our assets are actually stable, our NAV is still resilient -- is both resilient and prudent. Growth potential is still strong across-the-board because of our quality assets and relevant assets in the current world. The first signs of recovery can also -- already be felt. And partner investors are working with us, are trusting us and we have seen that over the course of the first half year. So we have been a stabilizing factor in our shareholdings in the crisis. We are already turning towards recovery in our growth dynamic. Thank you very much for your kind attention. We'll be happy to address your questions alongside members of the Management Board. Thank you.

[Operator Instructions] First question from Mourad Lahmidi, Exane.

Can I ask a question relating to the way in which you compute your NAV? You had said last time that you were probably going to be a little more cautious in the way you calculate it. Can you tell us more about it, please?

Thank you, Mourad, for this question. Can I first say that there's no change in the method? We have calculated our NAV according to previously established methodology. We use the usual impairment method, but you will find the specifics or slight differences under Annex 7 of the press release. So if you'll allow me, I won't go into the technical details, but do have a look at Annex 7. And if you do have any questions, we'll be delighted to answer them and address them later. Thank you.

[Operator Instructions] First question, Geoffroy Michalet from ODDO BHF.

You said you have 25 people working on fundraising. Can you tell us how many you had a year ago? And do you feel that you have the right kind of platform for fundraising now? Or do you think you'll be further hiring on that job?

Thank you, Geoffroy, for that kind of question. And yes, we are doing well. Thank you for asking. The reason why we have nowadays a strong dedicated team working for the whole Eurazeo Group on fundraising is the result, of course, of organic developments. A few years ago, we only had really a couple of people working with the investment teams in Capital and SMEs to support this. The 2018 Idinvest purchase and development within Eurazeo mean that we are working in a fully integrated way given the talents that had been grown at in Idinvest for a few years. And it really is the fact that we had the small Eurazeo gifted teams and the very expert teams from -- and well-established teams from Idinvest that have served as a basis, and we've added to it over the last few months. Now you ask whether we have a strong enough team. The fact is we do intend to add to it in a very specific way to cover geographies that require coverage. I've told you about the significance of France as concerns AUM but also the great international potential. So I think you can expect to see over the next few months a few strategic hires to cover other geographies. But I think we can say, reasonably say, that we have the right kind of tool to manage the further upcoming situation, if that's clear.

Next question is from Pierre Bosset, HSBC.

I have 2 questions, if I may. First, in the 430 companies where you have either debt or equity holdings, what is the amount of PGE to which you called upon? That's the first question. And the second question regarding fundraising, you have showed the 10 funds, which are planned for the next 18 months. Without going into all the detail per fund, these fund rating campaigns are intended to raise how much from investors? And what will the contribution be to the Eurazeo balance sheet overall?

Well, I will start off with the fundraising aspect further to the question that was posed by Geoffroy, and I will go back to one of the last slides with the fundraising program. Several comments. First of all, if you refer to the fundraising program that we presented in the past, there is, in fact, very little change or impact, just a few adjustments. And I think that we are now more optimistic in terms of our ability to achieve targets since the 12th of March with so little visibility. And I think we should be looking at a postponement of 6 to 9 months for fundraising. Now investors have stated their faith in us. Some programs have been postponed by a few months, but others have actually been stepped up. So overall, I can't give you the full details on this, but I think we should have a fundraising program for the second half, which will be extremely robust and I think it should bring significant additional resources. And I think that 2020 should reflect strong momentum in fundraising versus 2019 even though 2019, you will recall, was a new record year for fundraising with EUR 2.4 billion raised in 2019. And regarding the amount of PGE. We have 21 companies, which have enjoyed an approval of their request for PGE. Just one additional point, Pierre, regarding your question on the impact on the balance sheet, 2 indications here without giving you the overall picture. Eurazeo Growth is -- we have a goal of raising funds of EUR 450 million to EUR 1 billion, which is the overall amount that we are seeking to raise in this Eurazeo Growth fund, whereas [ hitherto ], you know, we had funded capital growth investments on the balance sheet of Eurazeo. And if you look at our press release from this morning, Eurazeo Growth accounts for EUR 900 million for the most part of the balance sheet of Eurazeo. Looking ahead to a new fundraising campaign for Eurazeo Growth, we intend to invest up to 25% in the fund, in other words, EUR 200 million to EUR 250 million. That's the first indication I can give you. And perhaps a second indication regarding Eurazeo PME, Eurazeo PME IV planned for the beginning of next year. Eurazeo PME has announced the first transaction last week. Philippe gave some information on a new transaction, which may be announced in the days ahead. And Eurazeo PME will be one of the priorities, and we intend to invest up to 50% of the balance sheet of Eurazeo, 40% to 50% of Eurazeo's balance sheet across the Eurazeo PME Cap fund. And I will hand over to Olivier when the time comes to discuss the total amount of investment that he's envisaging.

[Operator Instructions] We have a question from Mr. David Cerdan from Cheuvreux.

I'd like to go back to the press release on the need for supporting shareholders' equity. You're talking about 2% of the revalued net asset, approximately EUR 100 million. What are the amounts that have already been invested? And second point, looking at the situation regarding Europcar, clearly, there will be a need for reinvestment on the part of the main investor, the principal investor. Will this total amount of 2% take into account the needs for Europcar?

Thank you, David, for that question. Now we have invested EUR 18 million in 2 companies in the group. And as I said, we plan to invest up to $50 million as part of the financial restructuring of WorldStrides. The additional amounts on top of the 2 amounts I've just mentioned have not yet been allocated, and this is more a reserve that we are keeping should the need arise. In terms of what is already been done, on Europcar, I cannot answer the question. The company has released its financial outlook. Caroline Parot, I think, I believe, announced that she does not expect any short-term requirements in terms of cash. Eurazeo is in the process of exiting from the company when the time comes of divesting. So Europcar, to be clear, is not included in the overall amount. Okay.

Okay. And in terms of needs that have not yet been allocated, this only applies to Category 4? Or does this relate to other assets?

No. This may concern other assets. And for Category 4, in fact, I did not include the guarantee that we had given for the state-guaranteed loan for Europcar, which was outside of the scope, but we have 2 companies only Euro Stride (sic) [ WorldStrides ], and we intend to reinvest $50 million in Euro Stride (sic) [ WorldStrides ], not necessarily in Category 4. It might be a need to rebuild the capital base to a limited extent in the company. It might involve adjustments in working capital. There might be a need for working capital with temporary support. So this may involve different types of help, but in Category 4, there are 4 types of asset, WorldStrides, Europcar, Planet. Planet, Philippe referred to it, was severely impacted, less on the dynamic conversion currency activity and less on the activity on the 3C business that we bought. But the point here is that Planet was well capitalized. It was in a strong position going into the crisis with a strong cash position in the company, which means that there is no need based on our assumptions for what will admittedly be a slow recovery over the next 12 months. There is no need to consider reinvestment. It might involve companies in Category 3.

And when you look at the 2 -- first 2 investments, we invested in Next (sic) [ NEST ] and this was more to facilitate the company's cash management in what was a difficult period with companies paying -- clients paying late, revenue that was impacted and an impact on -- and also the response of our B2C companies, which manage the digital pivot with great skill. And half of the distribution -- physical distribution was closed down. So you can imagine the impact in terms of working capital requirements, the disruptive impact. So those are the kind of reasons that might mobilize reinvestment needs. Now looking at Next (sic) [ NEST ], it's interesting because this is a company most of whose distribution was handled through large distribution chains. And the company, of course, was severely impacted when large stores closed, in particular in the United States, but it was able during the period, to triple its online sales, which means that it is now back on its precrisis track in terms of revenue. And what is very interesting is that all of this development that has been achieved as part of -- through online sales is an investment in the future for Next (sic) [ NEST ] and the other company that we helped out temporarily. Virginie was referring to 2 companies. In Sommet Education, we provided additional funding during the recent period.

And as concerns the price of assets, have you seen anything change significantly over the last few transactions, valuation or something else?

Well, no major changes on the multiples. And as I said -- except maybe for the growth category, we've been up 14% year-to-date, but we haven't seen an increase in multiples. We have tried to be fairly prudent, and we hope that the achievements and progress of these companies can be sustained so that we can capture all this.