Deutsche Beteiligungs AG (DBAN) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, everybody. Welcome to the conference call of DBAG. Please note that this conference will be recorded. [Operator Instructions] Without further ado, may I now hand over to Susanne Zeidler, our Chief Financial Officer, for the presentation, and I will share the screen. Please go ahead.

Yes. Thank you, Roland. Good morning, ladies and gentlemen. Another financial year of DBAG is now history, and it's my great pleasure to present our figures of the last financial year to you and to give you an overview on our forecast for the years to come. I'll start with Slide #5. Financial year 2021 was a very special one for DBAG from many perspectives. The net asset value of the group's Private Equity Investments segment increased by EUR 257 million to EUR 679 million. Taking into account distributed dividends of EUR 12 million and the capital increase, this represents a 40% increase over the value as at the previous balance sheet date. Earnings from Fund Investment Services segment showed a marked increase. At EUR 18 million, they nearly doubled compared to the previous year. The aggregate $117 million increase in our financial resources is a key component. We achieved this partly by extending our credit lines, but above all, is a result of a rights issue. Added to this are the returns from recent disposals. Thanks to this significantly greater financial capacity to act, we are in a solid position to finance our planned medium-term investment program. The parent company can report a further increase in its net retained profit to EUR 254 million. EUR 1.60 per share is to be distributed to shareholders, which means a total of EUR 30 million; this, if the AGM in February 2022 will agree with our proposal. Plus our outlook remains positive. Following this truly exceptional year, we anticipate returning to normal, albeit markedly higher levels. Net income of EUR 185 million was the highest by far since we introduced IFRS accounting in the financial year 2005. It is obvious that the improvement was mainly driven by significantly higher result in the Private Equity Investments segment. Besides our financial targets, we concerned ourselves in detail with the topic of sustainability during the financial year under review. I will come to this on the next slide. As already announced 1 year ago, we have enhanced our target system by embedding sustainability as a foundation. Accordingly, our objective now is not only to increase DBAG's company value over the long term, but to do so in a sustainable manner. We have undertaken a clear commitment to responsible investment by signing the respective principles developed by investors and endorsed by the United Nations. This is built on our conviction that environmental, social and governance aspects can positively influence the success of investment decisions. However, that is nothing new for us. Deutsche Beteiligungs has always been committed to the principles of sustainable corporate conduct. It is consistent with the long-term nature of our business that we take responsibility for the impact that our decisions have on others, both now and in the future. This includes the decisions we make in the investment processes as well as in managing our company. We continuously strive to improve. During the year under review, we have identified fields of action that are particularly relevant to Deutsche Beteiligungs. While DBAG has been collecting data on these fields of action for many years in some cases, we requested data from our portfolio companies for the first time. DBAG's fields of actions are reducing or avoiding greenhouse gas emissions, reducing or avoiding accidents in the workplace, improving employee satisfaction, promoting gender parity and, last but not least, preventing compliance breaches. We are now in the process of introducing corresponding key performance indicators for DBAG and the portfolio companies, respectively. Having added 6 equity investments to DBAG's portfolio in the previous financial year, the focus in the year under review shifted to generating liquidity events through disposals or recaps and developing recently acquired investments. Thus, cash flow from investment activities shifted from a negative figure of EUR 33 million in the previous year to a positive cash flow of EUR 28 million in the year under review. The transactions contributing to this cash flow were the disposal of DNS:NET, a broadband telecommunications company; and the partial disposal of radiology group, blikk, in which DBAG reinvested thereafter as we continue to see good development opportunities there. The disposal of Telio, a provider of communications and media systems for correctional facilities, was agreed in June 2021, but not yet completed during the reporting period and therefore not yet reflected in the cash flow statement. In contrast to this, 2 disposals, which had already been agreed upon in the previous financial year, namely Pfaudler and Rheinhold & Mahla were completed in the financial year under review. In addition, we were able to agree 4 new equity investments in the past financial year, of which 2 were completed in the year under review. These include congatec, an international technology company for embedded computing products; and R+S, a leading provider of technical building services and the second company in the portfolio to be financed as a long-term investment independent of any DBAG Fund. Two of the new equity investments were agreed in the reporting period, but had not been yet completed by the reporting date. DBAG invested in Itelyum together with the U.K. Stirling Square Capital Partners. Itelyum is DBAG's second equity investment in Italy. It was agreed in August 2021. Investment in Dantherm, a provider of heating, cooling, drying, ventilation and air-cleaning products and solutions, was also agreed in August 2021. We also executed a spin-off and merger in the year under review. The spin-off of the Nephrology division from radiology group, blikk, managed by operasan, was completed in January 2021. In May 2021, the vitronet and DING investments merged and now trade as vitronet in the market for fiber optics and energy infrastructure. We also supported many acquisitions by portfolio companies, which have enabled them to implement and accelerate their strategic development. In some cases, we've also provided additional funds alongside the DBAG funds. Our 3 financial objectives are: build the value of Private Equity Investments, build the value of Fund Investment Services and have shareholders participate in our success by stable rising dividends. The corresponding KPI do not only show a significant increase compared to the previous year, but instead previously unmatched highs. We see this as a proof for the title of our annual report we published today, Long-Term Planning. Sustainable Growth. Let us turn to the details of the Private Equity Investments segment. We manage this, as you know, via the net asset value. Both net asset value and net income from investment activity are materially influenced by the performance of our portfolio company. The portfolio appreciation, which I will discuss in more detail on later slides, is the main driver of the significant increase in net asset value. In addition, as I had already mentioned, net inflows from the capital increase of EUR 100 million strengthened our financial resources and thus the net asset value. And in addition, we increased our credit line, as already mentioned, from EUR 90 million to EUR 107 million, in other words, by EUR 17 million. The dividend totaling EUR 12 million, which we distributed to our shareholders, on the other hand, had an offsetting effect. Adjusted for the capital increase and the dividend, the net asset value of our Private Equity Investment rose, thus, by a total of 40%. The portfolio value has increased mainly as a result of changes in value. Additions and disposals resulted in a net decrease of EUR 20 million. More specifically, additions were due to the closing of the new congatec investment, which we concluded at the end of the previous financial year and which we have made alongside DBAG Fund VIII; and to the second long-term investment in our process, which we closed in May. The additions also include add-on acquisitions by portfolio companies insofar as we supported them with additional equity. Solvares, operasan and FRIMO accounted for the highest individual amounts in this respect. Disposals mainly relate to the sales of DNS:NET, Pfaudler and Rheinhold & Mahla and the partial disposal of netzkontor in the context of a refinancing and recapitalization. blikk in included in the change in portfolio value with the disposal of the original investment and the addition of the reinvestment. I will elaborate on the details of the change in value later when I'm addressing the portfolio in more detail. Our portfolio value is usually expressed as a gross value, also including imputed noncontrolling interest, which is largely carried interest. This carried interest rose by EUR 21 million in the year under review, in line with the portfolio performance, with a value of EUR 52 million at the end of the reporting period. As at the reporting date, the total portfolio was valued at 1.4x acquisition cost. This value gradually rose during the course of the year from 1.1 as at 30 September 2020. It is still a long way from the multiples, which we were able to realize for sales of our investments in the past, which were 2.7 and 2.9 for buyouts and growth financings, respectively. Let's differentiate between investments in industrial sectors on the one hand side and investments in the new growth sectors on the other hand side. Within these 2 groups, companies report very different developments. Most industrial companies in our portfolio developed positively. On balance, the companies in the automotive sector, however, only achieved marginal value increases since positive contributions from the change in results and debt were all offset by negative changes to capital market multiples. A total of 19 industrial businesses are valued at 0.9x acquisition cost. This multiple remains unchanged compared to the previous reporting date. It is probably fair to assume potential for value appreciation here as soon as we will see an easing of supply bottlenecks. Companies in the new growth sectors showed significant positive development and are now valued at 2.8x acquisition cost, up from a multiple of 1.6x in the previous year. We will look at the drivers of value on the next slide. Operating performance, as the net result of change in earnings and change in debt, contributed EUR 75 million to the net gain on measurement. Especially portfolio companies in the broadband/telecommunications sector generated positive value contributions in the past financial year. All in all, we also achieved positive value contributions from our investments in industrial sectors. Their contributions would have even been higher, had it not been for burden on earnings. For the year under review, these included in particular supply bottlenecks to a shortage of components despite of high order backlog, rising raw material and energy costs and increasing freight costs. Acquisition-driven growth is a core element of the corporate strategy of 4 of our portfolio companies. One portfolio company, in particular, is pursuing its buy-and-build strategy swiftly, contributing significantly to the change in debt and the change in result accordingly. Peer group multiples were mostly higher than 1 year ago. The average valuation EBITDA multiple increased from 8.8 as at the previous reporting day to now 9.7. This is, however, not only due to higher peer group multiples, but also to the, once again, adjusted portfolio structure. Business models, which tend to be valued at higher multiples have gained even more in importance. Portfolio companies with links to the manufacturing industry were valued at 7.7x EBITDA. The previous year's figure was 7.6. And portfolio companies from the new growth sectors at 11.5x, the equivalent in the previous years was 10.1. Net gains and losses on disposals are particularly influenced by the disposals of DNS:NET and Rheinhold & Mahla. The repayment of equity and shareholder loans in connection with the refinancing at netzkontor also had a positive impact. The value contributions from the partial disposal of the stake in Pfaudler Group as well as subsequent revenues from the disposal of a stake in the remaining externally managed foreign buyout fund are also included here. Our growth strategy drives the financing requirements. Investments of EUR 343 million we plan to pursue in the next 3 years are slightly below the level we had stipulated in our last planning. The annual investment volume remains at a high level with approximately EUR 114 million. With the proceeds from our capital increase and the credit line, which we further increased in the year under review, we have a solid financial backing in place. Uncovered funding requirements are significantly lower at only EUR 123 million. This compares to our current portfolio value of EUR 517 million, net of carried interest, from which we generate returns in the event of disposals, which in turn will also be available for future investments. Earnings from Fund Investment Services have nearly doubled year-on-year. In comparison with the previous year, income from fund services benefited from the new DBAG Fund VIII. Fees were higher than in the previous year, EUR 19 million compared to EUR 3 million, as this was the first full financial year for which fees were recognized, whereas in the previous year, only 2 months' worth of fees were recognized. Income from DBAG Fund VI and Fund VII declined as expected after disposals and as the income from DBAG Fund VII is now calculated on the basis of capital invested and no longer on the basis of the committed funds. However, the fact that a new investment was structured using the top-up fund had an offsetting effect in connection with DBAG Fund VII. Income from DBAG ECF remained unchanged. Expenses exceeded the previous year's level mainly due to higher provisions for performance-related remuneration, but also due to a higher number of employees at DBAG. In addition, the number of Board of Management members increased from 3 to 4 as of March 1, 2021. You are familiar with our dividend policy. We defined it in 2016 and have consistently applied it 4 times since then. Thus, we were able to offer our shareholders, which are approximately 15,000 private individual shareholders, family offices, numerous foundations and many institutional investors, an attractive dividend yield. We are now returning to our proven dividend policy after having decided to suspend it due to the pandemic in the 2020 financial year. Against this background, we are all the more delighted that we are able to propose a return to growth based on our existing dividend policy with our dividend proposal of EUR 1.60 per share for the financial year 2021. The proposed distribution per share takes into account all aspects that are relevant for our decision-making such as the inflow of funds expected from the 2 business segments, future liquidity requirements for co-investments and securing the dividend capacity for the long run. As always, we have incorporated a dividend of the same amount in our planning for [ 2022 ] and the 2 years after. Our 3 nonfinancial objectives are: garner esteem as a financial investor in the mid-market segment, garner esteem as an adviser for private equity funds and retain motivated employees. The relevant KPIs are shown on this slide. In order to be recognized as an esteemed financial investor, we have to gain access to attractive investment opportunities. In the year under review, we were able to review 306 investment opportunities, thus exceeding the number of 193 in the previous year significantly. The latter figure, however, have been influenced by the pandemic. A highly active M&A market and the new long-term investment strategy, which we launched in April '20 were the drivers of this development. No new fundraising was carried out in the year under review. Thus, there is no new share of existing investor capital commitments to report on. The average length of company service has slightly decreased compared to the previous year as a result of new hires and staff departures. I would now like to turn to our forecast. The forecast is based on our current medium-term planning until 2024. As you can see on this slide, we continue to aim for double-digit growth rates in both segments. Assets under management or advisory show a marked increase at the start of a new funds investment period. It then gradually declines to disposals as scheduled until the launch of a successor fund, which will in turn lead to another increase. In the past, we achieved an average AUM growth rate of 15% per annum. Looking ahead, we anticipate double-digit growth rates over the medium term and strive to reach growth rates between 10% and 12%. This increase is projected by the end of 2024 financial year, especially due to a successor fund for DBAG Fund VIII and is expected to be in the range of EUR 3.3 billion to EUR 3.4 billion by then. Last year, the pandemic interrupted the growth trajectory of our net asset value of the Private Equity Investments. Historically, we achieved an average growth rate of 11% per annum adjusted for dividend payments and the capital increase. In future, we expect to generate average NAV growth between 10% and 14%. Growth drivers include the existing portfolio, co-investments alongside the funds as well as long-term investments. However, the macroeconomic environment continues to be marked by uncertainty. Production is being hampered by adverse effects caused by supply bottlenecks of primary products, and you can assume that this will ease only gradually. Then there is uncertainty as a result of a rise in coronavirus infection figures in Europe and new virus mutations. In light of the slowdown in macroeconomic developments and having weighed up the opportunities and risk, we expect especially our investments in industrial sectors to show only a muted value appreciation going into the financial year 2022. This slide gives an overview of further key performance indicators for our 2 segments and the group. I already talked about NAV and assets under management. Thus, I will focus now on the earnings figures on this slide. Regarding net income from investment activity, which had reached an extraordinary level in the year under review, we expect a normalization in the financial year 2022 and then an increase in the following financial years. This is based on assumptions on exit dates and money multiples to be realized for each portfolio company and on underlying value creation curves until then. The forecast for 2022 is also driven by the assumption that the pandemic and the supply bottlenecks will still burden on the industrial portfolio. Cash flow from investment activity mirrors the net effect of our assumptions regarding investments and disposals. The positive cash flow for 2022 does also take into account the closing of the Telio exit, which was agreed upon in the last financial year, and another recap with a total amount of EUR 14 million. Income from fund investment services corresponds with assets under management, as fee income is calculated on committed or invested capital, respectively. Regarding earnings from Fund Investment Services, we expect them to be in the range of between EUR 11 million and EUR 12 million for 2022. This figure is lower than in the previous financial year because income will remain largely unchanged while expenses, in particular for the further expansion of the investment team, will increase. However, they will remain at a level significantly above that of the 4 years before. Earnings are expected to rise again between EUR 17 million and EUR 19 million, mainly as a result of higher fee income. As a result of all this, we expect net income of the group to normalize in the next financial year at around the average of the past 5 financial years. That implies net income ranging between EUR 60 million and EUR 75 million. In the medium term, that is in the financial year 2024, we anticipate net income between EUR 90 million and EUR 105 million, in other words, at least 40% above the recent historical average. The reporting year was exceptional. We concluded it significantly above the expectations we had at the start of the 2021 financial year and with the highest net income since the introduction of IFRS accounting in the 2005 financial year. This remarkable performance cannot be continued in the years ahead. Nonetheless, we do firmly believe that Deutsche Beteiligungs will continue to develop favorably in 2022 so that we create value not only in the long term, but also sustainably value for our shareholders and our company's other stakeholders. With this, I would like to thank you very much for your attention and would be more than happy to answer any questions you might have, together with Roland Rapelius and Mirka Derksen. Thank you.