Prosus N.V. (NPN.JO) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Prosus Investor Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Eoin Ryan. Please go ahead, sir.

Thanks, Chris and everyone, for joining the call today. On the call with me today is our CEO, Bob van Dijk, and our CFO, Basil Sgourdos, who'll walk us through the impacts on our business of the war in Ukraine. Bob and Basil will make some short comments, and then we'll open the call for Q&A. We have 30 minutes scheduled for the call today. And with that, I'll turn it over to Bob. Bob?

Yes. Thanks, Eoin, and good morning and afternoon for all of you. Thanks for joining on the call. We are in disturbing times in the world so I'd appreciate your attention. We know you have a lot of questions today, and Basil and I will -- we wanted to take a call and give you a sense of what we know now of the impacts of the war on our business and investments. And we will open for questions after that. I'm sure you can appreciate that the situation is changing every single day. So we'll answer all the questions we can with the information we have up today. Firstly, it is important to say that we're absolutely appalled by the invasion of Ukraine, and we're highly concerned for everyone affected. And we're closely monitoring the rapidly changing situation, and we continue to hope that a diplomatic solution can be found to de-escalate the situation as quickly as possible. Now the safety of our people is always our first priority. We have 350 people in our OLX Europe business in Ukraine. And we're in close contact with all of our Ukrainian team and we're taking all actions we can to support them and their families. So what we've done is arranged accommodation for employees and their families who wanted to relocate away from either the East or Kyiv into the West. And we're also helping those in Ukraine who are willing to leave wherever this is possible. To support this effort, I'm really humbled to see that many of our people in neighboring countries, so Romania, Poland, et cetera, have offered to take in our Ukraine-based employees and their families into their homes. And so far, more than 300 people across the group in neighboring countries have offered their accommodation to displaced Ukrainian colleagues. As the situation is very dynamic and things are moving quickly, but I'm happy that as of today, I can report we have no knowledge of any of our people being injured, but obviously, the world is racing every single day. In addition to the specific help for employees, we've committed $350,000 to the International Committee of the Red Cross, which is providing humanitarian aid at this time to the different local communities in Ukraine. And as well as our team in Ukraine, we have thousands of employees in Russia working for our classifieds business, Avito. And Avito is doing all it can to support its team through a very uncertain time. We have a smaller team in Russia in our PayU business who we are also supporting. In addition to our operating businesses in the region, we also have a 27% noncontrolling minority stake in the online platform, VK Group, where we also had 3 Board seats. So over the last week, international sanctions have been imposed on many Russian entities and individuals, and they include sanctions on the CEO and the indirect shareholders of VK Group. And as a consequence of these sanctions, Prosus has asked its Directors on the VK Board to resign their positions, and they've done so last Friday. So our focus in the region is making sure our classifieds and our fintech employees are safe and that we can serve our local customers where it's feasible. And Prosus will continue to run its operations in Russia, including Avito and PayU, and neither of these are subject to international sanctions, and both of which continue to provide a really valued service for millions of ordinary Russian citizens. I would like to turn to what we know right now of the impact of the crisis on our business and investments. First, we've run several financial scenarios. And while our operations will undoubtedly be impacted by the conflict, we're confident that the financial impact will be manageable. So additionally, we expect our strong financial position should enable us to maintain our investment-grade rating. Secondly, we're very aware that the macroeconomic and geopolitical environment has changed meaningfully from just a few months ago. We will take this context and its impact on the group into account as we execute our long-term strategy that's served us well. So our businesses outside of Russia and Ukraine are performing well and are on a path to create significant incremental value. And actually our broad geographic spread and the diversified business profile, it mitigates risk from a particular geography or business segment. And finally, we will work prudently to retain the flexibility to pursue any opportunities that present themselves in a very disciplined manner. And with that, I'll ask Basil to address the expected financial impact for the group. Basil, over to you.

Thank you, Bob. Good afternoon, everyone, and thank you for your time today. I echo Bob's concern about the invasion of Ukraine. As Bob mentioned, we are focusing our efforts on ensuring the safety of our people in the region and have preserved the continuity of the businesses there. We have built great businesses in the region with outstanding employees, and we are taking all the necessary actions to protect them. Before I provide the update, first, let me reiterate what Bob said because it’s very important and a key message. We have run the financial scenarios, and we believe that we will be able to weather the storm and continue to execute our strategy. In terms of the group's exposure, the businesses that we operate in the region in order of size are Avito in Russia, OLX in Ukraine and PayU in Russia, with the latter being quite small and less than 2% of PayU's global revenue. On a consolidated basis, in the first half of the financial year ending 31 March 2022 -- sorry, I just wanted to check if people can hear me. Let me start again. On a consolidated basis in first half 2022, the business represented $349 million in revenue or 11% of group revenues, and that produced a free cash inflow of $165 million. Turning first to Avito, which is an exceptional business with a long track record of profitable growth. Avito represents the vast majority of the numbers that I just mentioned. In the first half of 2022, Avito generated more than $300 million of revenue and was growing very strongly year-over-year. The business still continues to grow, but the conflict is only days old, and it is unclear what the impact of sanctions will be on consumer and advertiser spend. Avito does not have meaningful cross-border commerce and its revenues and large portion of costs are denominated in rubles. So as a result, the decline in the ruble will not impact the business significantly, although it will impact our reported results given that we report in U.S. dollars. The sanctions will also impact our ability to extract dividends. So turning to OLX Ukraine. This is the more meaningfully impacted business. And while the site is operational, it has seen a drastic decrease in supply and demand. We will, of course, continue to support this business and the team. Until we see an end to this crisis, we're not expecting revenue or trading profit from this business. In the first half of 2022, OLX Ukraine generated $34.5 million in revenue. So first, to summarize on operations. We have outstanding businesses in the region and we will do all that we can to protect them or position them well for recovery in the future. Today, they represent approximately 5% of Prosus' accounting value and a good deal less than that in terms of fair market value. So the impact to the group should be manageable. Outside of the affected regions, it's also important to remember that each of our segments continues to exhibit excellent growth and very strong consumer demand. I will touch briefly on our minority investment in VKontakte, which has underperformed significantly and now represents less than 1% of our market value. Any further change to VKontakte value will not have a material impact on the group. In total, we invested approximately $700 million, but we've also received $500 million from dividends. We've invested those dividends in other areas of the business, which have generated very good returns. We expect to write down the full carrying value of VKontakte, and that carrying value is $769 million in the books right now. So we'll do that in the current reporting period. Finally, from a cash perspective, at the group level, we have approximately $10 billion in cash pro forma for the close of the BillDesk acquisition and net debt of approximately $6 billion, and that again is after taking into account BillDesk. Additionally, we have an undrawn revolving credit facility of $2.5 billion, which coupled with liquid stakes in public company assets, provides us with ample flexibility. We have adequate capital to fund our strategic objectives. Additionally, given our financial flexibility, healthy liquidity profile and the importance of debt capital to our business, we plan to manage the balance sheet within our investment-grade rating. So folks, this covers what we know now. We'll open the call for questions. Operator, could you please advise participants how to use the system?

[Operator Instructions] Our first question is from William Packer of BNP Paribas Exane.

Two for me, please. Could you help us think about how you're thinking about capital allocation in the context of some of the share price moves and the change in your discount? While some segments have derated, the discount has blown out. Does this make renewing the buyback more appealing? And then secondly, any day, as I understand it, you'll be getting the JD.com stake distributed by Tencent. Could you talk about how you think about that holding? Is it long term? Is it short term? Does Tencent remain the only way in which you want to play China? And I suppose this also talks to any future stake distributions that Tencent may pursue.

William, thanks for your questions. Let me answer your question on capital allocation. The capital allocation process and our ambition remain unchanged, right? We are deploying capital to build large, profitable, leading businesses in high potential markets. And I think the -- we're very mindful that the current environment is different from what we saw just a few months ago. The cost of capital is higher, the geopolitical backdrop is more volatile. And we will recalibrate our investment priorities to adapt to this reality. And I think you call out, we're trading at a significant discount. The discount has widened based on a variety of geopolitical changes. And I think it's fair that we're very aware of that, and we think we take all of that in consideration, but our long-term view on deploying our capital remains the same. And maybe Basil, could you say -- could you take William's second question?

Yes. So -- hi, William, Basil here. As I said, indeed, look, the JD.com shares have still to come to us. And then we have this lockup. And as we make decisions, we'll let you know. I think for us to guide ahead of that is not helpful to our shareholders.

The next question is from Marcus Diebel of JPMorgan.

Just on your assets again in Russia and thanks for the update. Just on Avito, how shall we think about it? I understand that the write-down in VK. For Avito, you obviously highlighted the fact that it is obviously a very local business. But do I read it right that at least for now, you don't think there's a case to be made to reassess whether you want to be involved in Russia or not? I know it's very early and very different businesses. It's just obviously a lot of other players made their decision here already.

Yes, Marcus, I can answer that, right? So I think indeed, it is days into a terrible, violent episode. And we employ in Avito 4,000 people, who are our people, right? And they depend on their livelihoods for the business that we run and the business benefits ordinary Russians. So for us to rush out and leave those people without their livelihoods in the short term, it feels like the absolute wrong thing to do. Over time, we will see how this influences us, but we can really not comment on this right now.

[Operator Instructions] The next question is from Ken Rumph of Jefferies.

Gentlemen, you answered perhaps my question on Avito there. The other thing I was going to ask, firstly, that the free cash flow figure you commented on, I'm not sure if it was $165 million or $155 million in the first half. But basically, more than all of the free cash flow for the group in the first half. And if I remember, it was $0.1 billion. Obviously, there are positives and negatives. So I appreciate that's a strange comparison. But Basil, could you go a little bit more into what you think the impact on the cash flow of the group is? And your comment about it being manageable, what -- how are you thinking about what the effect could be and for how long? And secondly, your comment on writing down VK is probably a moot point about trying to sell it. But are you saying that you intend to hang on to the stake? Or just that you're writing it down and anything else is in the present circumstances impractical?

Yes, I can answer your second question and Basil, you can go deeper into the impact of the EBITDA dividends on our free cash flow. Look, what we communicated -- actually, last week, we asked our directors to step down from VK. They've done so on Friday, and we've fully written off the asset, right? So I think you said it in your question, it's a moot point, right? We have no investment of value, and we don't have any people associated with the assets. So what we'll do with shares when -- as you know, like you can't trade the shares at this point in time. We will evaluate that in due course.

Thanks, Bob. Ken, good to hear your voice. So just to confirm, you weren't -- you said the number wasn't clear whether it was $155 million or $165 million. It's $165 million of free cash inflow, and that comes from all the impacted businesses, not just Avito, but of course, Avito is the largest amount. So yes, look, first of all, I covered the situation for a Avito in rubles, right? But we do report the numbers in dollars. So the consolidated dollar value will fall given where the ruble has gone. So that's clear, and we can state that today. What we can't state today is what's going to happen to Avito profitability, Avito trading position. I've told you what we know today, and you know we don't provide forecasts. And even if we wanted to, we couldn't right now, it's a volatile situation that's still evolving. Avito dividends account for 20% of the inflow into the group. We have a very healthy inflow also from Tencent, and that is good. So we don't provide forecast on free cash flow. Is it going to be different from what we reported in the first half? Yes. But for a number of factors, not just Russia. What we have done is we've run several financial scenarios, including ones that show meaningful impact on the free cash flow. And the points that I made on the call remain. We have the financial flexibility to navigate and manage those and continue to execute our strategy.

The next question is from Andrew Ross of Barclays.

Thanks for setting up this call, it's very helpful. I've just got one more just to push you a bit harder on the debt, Basil. So I know that the rating agencies look at interest coverage, loan-to-value and then kind of broader liquidity. And as you mentioned earlier, Avito clearly is a big part of the cash kind of coming into the group. So I don't know, have you run a scenario where all of that cash gets trapped in Russia? And if that were the case, if you didn't get any of it for a couple of years, what would be the impact on the interest coverage and kind of the broader implications for, a, your ability to do M&A and, b, for that credit rating? It would be helpful just to kind of have some more precise stress case scenarios around that.

Sure, Andrew. Thanks for the question. I think both Bob and I made very clear statements in the script that we spoke to earlier, saying that we will manage the situation within an investment-grade rating, right? So that -- those are our plans, and we believe we can do so. We have indeed, Andrew, run scenarios that assume the dividends don't flow for at least a couple of years, right? And even in that scenario, we think we can manage within -- we believe that we can manage within an investment-grade rating. Remember, no one rating on its own determines whether we are investment grade or not. There's a balance, right? There is the interest rate cover. There is the loan to value of our assets, and then there's also liquidity. And we have a very strong liquidity buffer. And remember that we only have debt maturities up in 2025. So we look at all 3 metrics and having applied our minds to it and having looked at scenarios, we've made the statements that we made earlier. So yes, we do believe that we can manage within an investment-grade rating, even if dividends don't flow for some years.

And just sorry to push on a bit more. In that scenario, would you need to pull back on any other bits of the business? Or could you do so whilst keeping the investment elsewhere exactly the same?

I think Bob made the statement earlier when -- he was asked the question earlier, and I think he's answered it well, right? Look, we remain committed to our strategy. We don't provide forecasts, but as Bob outlined, our strategy will be cognizant of the environment we're in, and we will continue to execute thoughtfully and understanding current circumstances.

The next question is from Silvia Cuneo of Deutsche Bank.

My question is related to Avito and given Avito and OLX Europe are part of the broader OLX Group that operates in many known classified brands and countries. Can you please just remind us to what extent these businesses share in terms of products and product development? Just wondering if you can reassure us that the disruption in the Russian and Ukraine operations would not impact the other brands?

Yes. Thanks, Silvia. And a very strong question. The bottom line is that the Avito technology stack is very much a Russian stack run in Russia by a Russian engineer. So it's a very independent stack. OLX Europe is on a multi-country stack that basically is run by the central team party with a lot of local customizations. So the bottom line is that the Ukraine site can continue to be run from outside of Ukraine, if necessary, and the Russian site is run by the Russian team in Russia. Does that answer your question?

Yes.

The next question is from Jonathan Kennedy-Good, JPMorgan.

Just one quick question from me on the Avito valuation. From a book value perspective, you mentioned VK, you're going to write off completely. Just trying to understand whether we should expect similar write-downs on Avito? And if you could comment on what the current book value is.

Yes, Jonathan.

Sorry, go ahead, Bob.

Yes. Sorry, I was mainly going to let you answer Basil. But maybe briefly, I think there's a range of valuations from analysts on Avito. I think consensus about $6 billion. Obviously, there will be an impact on the business. I think it is too early to say what it exactly will be. I think Basil gave good qualifications on the income streams and cost base being mainly in rubles. So what will happen to the ruble is obviously quite uncertain. And I'm not sure we can say anything else, Basil, what do you think?

No, we can't -- look, the difference is VK is listed. So you take the market price and you apply it, right? So that's very clear. For Avito, we need to take a forward view, right, on -- as Bob outlined, the revenues and the costs and the exchange rates and inflation rates and all those things. And it's an impossible task to do now. We will have to address it as part of our full year results. And we will deal with it then. So we announce those results in June, and it will all be clearer to everyone at that point.

Chris, I think we have time for just one more question, please.

The last question is from Joren Van Aken of Degroof Petercam.

Yes. Just a small one, could you remind us of which type of VK shares do you own? Do you own the shares from the Moscow Exchange or from another one?

We own the LSE shares.

Okay. Very clear.

Okay. Well, thanks, everybody, for joining the call. I must say I appreciate all the questions, and I'm happy we took the time to speak with you. Time is precious, as you can imagine. As you are busy, we are very busy managing the situation on the ground. If you have further questions, Eoin and his team are always available to answer them. And if there is further material updates, we'll obviously get back to you. But thanks a lot for your time today.

Ladies and gentlemen, that then concludes today's conference call, and you may now disconnect.