Deutsche Beteiligungs AG (DBAN) Earnings Call Transcript & Summary

Good morning, everyone, and a warm welcome also from my side. It's a pleasure to welcome you and to speak to you again, our analyst conference call of our annual report 2021, 2022. Next to me is the speaker of the Board, Mr. Torsten Grede. And without further ado, I would now like to hand over to you Torsten Grede.

Thank you, Roland. Also welcome from my side, and we're very happy for your interest in DBAG and we'll start on Slide #3, giving you an overview of the development in the last 12 months. We have seen a decrease of our NAV of the size of 15%. That is due to the macroeconomic environment and the capital markets decline, will elaborate about that, of course, in more detail in this in the course of this presentation. The earnings from our second segment from the Fund Investment Services segment has been stable and in line with expectations with EUR 15.4 million. We have, despite the macroeconomic headwinds, which we have seen, especially in the current calendar year, we have, but continuously working on the strengthening of our team and our organization have significantly increased the size of our team. And that is the basis for we are happy that our strategic initiatives, the implementation of our strategic initiatives with regard to especially to the Italian market and our long-term investment strategy has developed nicely, and we are pretty confident as will also be reflected in our financial performance in due course. Our dividend proposal, which we will also elaborate in more detail a bit later, is EUR 0.8 per share. And our outlook is positive with a double-digit NAV growth expected for the next fiscal year. Talking about our KPI for our 2 business segments, private equity investments and Fund Investment Services as I already mentioned, the NAV has contracted to EUR 573.7 million, which is -- which converts into a net asset value per share of EUR 30.51. The earnings of the segment have been minus EUR 111 million resulting from the macroeconomic changes and from the capital markets decline and the cash flow has also been significantly negative with EUR 131.6 million. The year is reflected the very good investment activity, which we had in last year. As you know, our cash flow figure is not something which you can compare with the companies in other business models. Fund Investment Services business has provided a stable performance, which we have always, also made clear in our communication that this is -- that segment is where we can have a very good view on the midterm development with EUR 15.4 million exactly in our guidance. And our AUMs have not changed with EUR 2.5 billion. And the outcome of the earnings of the group is minus EUR 97.6 million. We thought it would make sense to give you a 1-minute heads up about the changed target system, which we have decided about to change that with regard with -- from October 1, 2022. The change -- there are 2 major changes in our target system. We have reduced the number of KPIs to make it a bit more handy. We have included in the nonfinancial segment. We have included our ESG targets because you see as a high priority for us. And that consequently, we have decided that we would integrate the ESG targets into our target system. I will elaborate a little bit about these KPI when we come to the outlook at the end of the presentation. And the second major change is that we have -- we defined the definition of the NAV, which we -- where we took today where we -- starting with October this year, we will -- the NAV is -- would be defined as equity and will be the KPI for the sustainable increase, measuring the sustainable increase in DBAG's value. In the past, it has been the NAV of the segment private equity investment. That is a change. But when you look to the numbers, it is not very significant. It also makes it -- it's a bit clearer, a little bit more handy and reduces complexity in our communication. Talking about the market, all of you who follow us already for quite a while already know this slide and we have always seen when you look to the left-hand side, the structurally growing market with a pause in the COVID-19 year of 2020 with a significant rebound in last calendar year and our forecast for the current calendar year can be -- would base our forecast on our -- what we see in the market, the right-hand side gives you a snapshot from about our CRM system. And you can see that in the last 2 quarters, the transaction activity measured by investment opportunities coming on our table has been -- has decreased quite significantly. So for the last 6 months, we have a year-on-year decrease of 40%, and that is also what we anecdotically see in the market, we are very happy that despite this contracted transaction activity, we were able to sign a very attractive exit in November, but a bit more to that later. We have always communicated since 10 years, our focus is far more than just manufacturing businesses, and that is also reflected in the transaction activity of the last of the last 12 months, we see have a clear focus on IT services and software. That is also reflected when you look into our -- the structure of all the development of the structure of our portfolio on the next slide, where we show you the development since in the last 2 years. And here, you nicely can see that the proportion of our IT services and software investments has quadrupled in the last 2 years. And that reflects our -- that mirrors our transaction activity and the exit of Cloud flight is the first proof of, let's say, of that the concept is also producing nice financial returns where we were able to realize more than 4x of invested capital within the holding period of some more than 3 years. And as I mentioned before, in the market environment, which is not -- which is not very friendly at this point of time. With regard to our market position, there are no changes. We continue to have a source significant proportion of our transactions from companies where a family succession situation is to be solved. Our proportion of deals from family succession is higher than the market. And that is also reflected in the last 5 buyouts. Four out of five has been the families, respectively, with founders of companies. Talking about the macroeconomic headwinds, this is on Slide #10. We have already in the last calls, had avoided about the question how -- what will be the impact of the direct impact from the war in Ukraine? And what will be the impact from the energy price inflation resulting from the war in Ukraine. And we have always made clear that the direct impact from that are relatively limited and this has not changed. That is what the first 3 pie charts on that slide give a clear message. Having said that, a more significant impact comes from supply chain issues. It's already 16% of our portfolio is quite significantly impacted by supply chain issues that is -- has an impact, especially on our manufacturing businesses. And we see in certain companies, we've seen light signs of an easing of that situation, but we expect that also 2023 will be negatively influenced by that situation. And what almost all portfolio companies are confrontated with is the overall cost inflation also outside of energy price inflation, which is -- which makes it necessary for portfolio companies to have an, let's say, what we say here in active pricing policy with our customers. And that is, I would say, that is one of the challenges also for the coming months because we have -- we have had a situation historically management teams have not been so much used to this procedure with our customers. And to give you a very open statement, some of our portfolio companies performed very well in that. With regard to this pull sales, some of them need to accelerate the speed, I would say implement active pricing policy -- that's something which is portfolio is, of course, supported by the advisory board work on. We have continued our active support of all portfolio companies also with add-on acquisitions. Last round has been a record year with add-on acquisitions further developing our portfolio companies. And as you know, on acquisitions is a tool for us to accelerate the development of the portfolio companies. And as we have, let's say, if you look for an holding period of on average 5 years, add-ons can accelerate the development in that relatively short time span. Basis for all of what I have said so far is our team. And as I already mentioned, we have continuously worked on the development of our team. We have added significant headcount to our team. And I'm very confident that this provides a good basis for future, the activities of our team are complemented by a group of experienced people within an industry background, which we -- which this group of people we organize in the so-called executive circle, and they play an important role, not only in resourcing, but especially serve as Chairman and members of the advisory board of our portfolio companies and having a very incremental, for example, in that what I mentioned before in that implementation of supporting management team and the implementation of an active pricing policy. This finalizes an update about this current status of DBAG and the performance in the last 12 months in last fiscal year, and now I would hand over to Roland to elaborate a bit more in detail about our figures.

Yes. Thank you very much. Yes, taking over and looking at the Private Equity Investments segment at first. Here, you can see the basically the split of the net asset value and the decline by 15.1% year-on-year. That's, as always, adjusted for the dividend we have paid out, so we are adding back the dividends on EUR 573.3 million but we're also deducting the inflow from the deferred management fees of EUR 27.8 million, which we have received in the course of the year in order to calculate a fair growth rate, a negative growth rate in this case. And the NAV shown here, EUR 573.7 million. This is, of course, still the definition of the NAV we had so far. However, the new definition, total assets less total liabilities, Torsten Grede has talked about this already. That would be EUR 579.5 million. So here, you can see it's a minor decline, and we also look backwards the delta between the 2 definitions are not really that meaningful. The NAV per share is EUR 30.51 as outlined before, vis-a-vis our share price EUR 28.70. So still trading at a discount, even though the performance has been quite good in the recent months, I would say. On the next slide, we are going on the split up of the development of our gross portfolio value and financial assets. And here you can see, as always, we're starting off with the financial assets last year, adding back the carried interest deducting the other. These are the mainly the short-term bridge financing. So we arrived at the gross portfolio value. And gross portfolio value last year to gross portfolio value this year has been clearly affected by the additions. We had 6 MBOs and through long-term investments. That's the disposals, the partial disposals, Telio and Pfaudler and the refinancing of Von Poll. And then, of course, the change in value of the minus EUR 145 million, and that is, of course, a very significant amount in this year, and I will come to that on the next slide. And coming from the gross portfolio value for the financial assets we show on our balance sheet. We, as always, deduct the carried interest, which has also declined and we add back the short-term bridge financing. On the next slide, there's a split of the EUR 145 million losses on measurement. We have seen in the past financial year. And you can see that change in earnings less change in debt that arrives at the operating performance is still positive. However, it's only slightly positive. And here, you can clearly see that the last year had its impact also on the change in earnings, which was affected by the macroeconomic changes. The change in debt, the minus EUR 78.6 million, slightly less than half of it is due to the add-on strategy we have carried out add-ons accounting for roughly 45% of that change in debt. Change in multiples clearly had a significant negative impact on our net gains and losses on measurement in the past financial year. It was minus EUR 150.8 million, which has burdened our net asset value in the course of the last year and that's mainly driven by a negative effect for multiple contractions of basically all the key groups more or less we had. And if you look at the small cap index in Germany, the stocks that has declined by minus 36% in the course of the last year. So market decline has taken its toll and negative effects came from nearly all factors, but it's mainly here broadband telecommunication industry, industry technology and industrial services. On the next slide, a few words on our Fund Investment Services segment. And you can see that, that has been developed as expected to put it in a nutshell. The top line only slightly increased, mainly driven by income from the DBAG Fund VIII and Fund VII. Fund VIII contributed EUR 19 million, Fund VII EUR 16 million of income and the next is the ECF. And these are the income that's developed more or less as expected. The earnings also declined from the very high level of EUR 18 million we saw last year that was driven by the start of the new Fund VIII, and the decline was due to the fact that we have built up our team as discussed already before. And also, we had a onetime effect here of EUR 2 million in total for the group, and that is also affecting the Fund Investment Services segment. And the result is -- the result is in line with expectations. On the next slide, we show a longer-term view of the development of 2 very important measures. One is the AUM. Just to show you really the long-term development of the AUM for DBAG was 13% CAGR. And the pattern here is, as usual, with the start of a new fund, there's a steep increase and then a subsequent slight decline with the realizations. And then for the start of the next new fund that was here in 2020. There is a step change. On the bottom side, the NAV the long-term growth rate is here, 9%. We're ending on this financial year with EUR 579 million, and that's EUR 579 million, as you have certainly found out, is based on the new definition. And going forward, based on that EUR 579 million figure, which is relatively low compared to the prior year figure. The growth rate going forward is expected to be double digit both in the short term and also in the midterm planning horizon '24 and '25. Next slide is showing our cash flow statement and the developments here operating activities. We had a positive cash flow that's mainly affected by the inflow of the deferred management fees. Cash flow from investment activities is negative, reflecting our investing activities as it says. And then we had a slight positive cash flow from financing activities. So we're arriving at EUR 19.2 million cash and cash equivalents. That EUR 19.2 million, you find also here on the left-hand side in our financial base. which is added up by the available credit line of EUR 65.7 million vis-a-vis our co-investment commitments of EUR 199.3 million. And these co-investment commitments are exceeding the available liquidity and are expected to be covered by returns from disposals in the years to come. So that's pretty much ends my part on this presentation. And I would now like to hand back to Torsten Grede for the remaining parts.

Thank you very much, Roland. Talking about our -- the our dividend proposal to the AGM taking place in February next year. So now I'm pretty sure that you know our dividend policy that target is to have a stable dividend to increase that whenever it's possible and to provide attractive dividend yield. Having said that we have come to the conclusion, and that is shown on the next slide that we are again in we again have an outlayer in the development of the business due to the significant macroeconomic changes and the changed interest weight value and that has brought us to the conclusion that we would rather have another deviation for more long-term dividend policy and propose to the AGM a dividend of EUR 0.8 per share, which is the same level which we had proposed to the AGM and was approved by the AGM in the COVID-19 year '19, '20 where we had the same -- we had the same dividend. We believe despite the fact that, of course, we are unhappy with the fact that we have to deviate once again have another exception from our long-term dividend policy, we still believe that the yield, which results from that EUR 0.8 is still on an effective level. This brings me to the finalizing our presentation, but I want to take the time to comment to make 2 comments on our on our forecast, our midterm ambition, I don't -- I won't go into every detail on that slide. A few words about our targeted NAV development. You can see that when you see the NAV development that we see a rebound of that. And please keep in mind that we don't include -- we always base these forecasts on the current capital market valuations. So the forecast is based on the valuation of our portfolio as of September 30, where I would say, when you look to the capital market development, was this September 30 was close to the deepest point so far in the stock market performance. So this rebound reflects the development, the trading development of our portfolio companies. And we expect that in certain portfolio companies measures being taken with regard, for example, the cost inflation, we work through the top line and also to the bottom line, and that is also reflected in a significant improved performance, and that is reflected in that goal. Second comment to that side would be our nonfinancial KPI, which I already commented on that we have included our ESG KPI being 3. So for E, we have the CO footprint, which is measured as tons CO2 in relation to FTE. We have the S and for the S stands for employees satisfaction, which we measure on the basis of a softer tool on a regular basis. And the G stands for payments from compliance breaches where of course, our target is to have 0 in that area. We, of course, work on, let's say, on improving the employee satisfaction. And of course, we work on the improvement on the reduction of the CO2 footprint of our team despite the fact that we have also decided -- and this is the gross figure as we have also decided to compensate the CO2 emissions, which are caused by our activities. Despite the fact is what we measure here is the gross CO2 emission. And as you all of you know, the target is not to compensate, but the first step in that logic is to avoid and only to compensate what you could not avoid. So that is part of our revised target system. Let's finalize our presentation. We believe that that we have a very good platform and that we have also a portfolio which offers a significant potential for value appreciation. A good example for that was the is the exit of our investment in Cloud flight. And we have sound basis with regard to our financial basis or reputation to our market position to also to have a successful development in the coming years. Thank you very much. This would now bring us to the Q&A part of our session.

[Operator Instructions] The first question is from the line of Marie-Therese Gruebner with HAIB.

Actually, it's Simon jumping in for Marie-Therese. We have 5 questions, if you allow. Starting with the general one, are you already raising the next fund? And how is investor response? And the second question, can we expect exits in Q1 and/or Q2, and if not, how confident are you to have the flexibility to execute quickly on buy-side opportunities. And third, is it fair to assume that the cash inflow from the sale of Cloud flight was around EUR 45 million? And why are you remaining invested? Is this an approach that you will follow for other high growth investments as well? And fourth, do you see any distressed assets in your portfolio at the moment? And how much -- fifth question then would be how much liquidity do you think you will need to inject to support any struggling portfolio companies in the fiscal year that just started.

Thank you very much. That are very good questions. With regard to your first question, are we raising, are we already raising the next fund. That's something which I have to give you a more general answer when you raise funds then it is a private offering. So when you are in fundraising, you usually not talk about the fundraising to the public because that could concern regulatory regimes could bring you into the situation that the regulator says, now you are in a public offering, and you are in violation of the rule for a public offering. And that is the reason why you usually not talk about raising a fund when you are actually in the process of raising a fund. And what makes it even more tricky is that -- but there are some regulatory reasons why you have to disclose something with regard to fund raising. And when you disclose something with regards to regulatory reasons, that does not bring you into a public offering. But if you would now talk about fundraising that would bring us into that area, and that's the reason why my answer is a bit tricky. I hope you can live with that answer. Your second question was, do we plan exits for Q1 and Q2? My general answer to question, it's always hard to forecast what will happen in the next 2 quarters. The general answer is that we have to have exits every year as we also have investments every year. And ideally, we have a similar amount of exits and investments. In the last 12 months, we had, let's say, if I look to the long-term average, we had lesser number of exits, which is not surprising due to the capital markets environment, but we plan also exits for the new fiscal year. So that -- so I can answer this question with yes, but must say I would not like to forecast whether that will be in the signing and closing in which quarter these will take place. Cash inflow from our exit in cloud side why did we -- why will we reinvest part of the means Poland cash inflow from cloud side exit.

Well, we said we have invested EUR 10 million -- slightly more than EUR 10 million from DBAG's own balance sheet, and we have.

So your figure is pretty good, which you mentioned, yes. Why did we do a core investment? We strongly believe that there is much potential in the further development of the business. And in the market environment, which is where the customers definitely need the support by companies like Cloud flight in their process to digitalize their processes. And that's the reason why we have -- where we have come to the conclusion that we would do a core investment to further participate in the future from the development of the company. It's always more generally speaking, not talking about Cloud flight, but generally speaking, sometimes, the buyer appreciates it takes this as a, let's say, as a component in his decision process where we said, okay, the current owner is believes in what he's telling us about the further potential of the business and is documentating this with a core investment or reinvesting part of the funds, which we realize by the exit. But in case of cloud type, we strongly believe in the further development potential of the business. For your fourth question, do we have any kind of distressed assets in the portfolio? It's always my first question. Counterquestion would be what is the definition of distress? I would say we have some portfolio companies which have significant challenges in certain situations, there might also be capital measures necessary from our side that -- but I don't see that has to be -- that will be a size which will cause headache on our side. Same thing was true in the COVID here. We had also some portfolio companies which we had to support, but that was when it came to the -- I think the figure which we invested in our existing portfolio companies in the COVID year that was a figure around EUR 15 million or less than EUR 15 million. So that was not really -- and I don't expect it to be different this time. That answers your question.

The next question is from the line of Gerhard Schwarz with Baader Bank.

Basically, I have 3 questions. The first 1 is on the operating trends you saw in your fiscal quarter 4. These are quite significant change in earnings on the negative side of EUR 28 million. How does this -- what was the driver of this EUR 28 million decline in earnings as in the quarter so far, this figure was positive. My second question would be about the dividend level. You cut the dividend back to the fiscal year 2020 level despite the fact that we have seen no similar recession yet in the German economy in the Eurozone economy compared to what we saw in the year 2020 after the COVID situation, you cut the dividend even more than consents would have been expecting what are your reasons for that? And the third question would be on the guidance for the net asset value in the press release it state, that the rebound in the net asset value should be driven mostly operational. But in the call, you stated that there is also some valuation upside. Can you elaborate a little bit more what we think about the NAV development in the current fiscal year then?

Thank you very much for that questions. If I may start with your last question with regard to the NAV guidance. Don't -- please don't misunderstand me. That is a pure operational development, which is reflecting in our NAV guidance. Any kind of valuation uplift either from the development of the trade capital market valuations or from certain exits providing uplift. That is not included in that. So it's a pure operational development. And as I said before, the rebound is due to the expectation that we will see an improved trading performance of an altogether improved trading performance of our portfolio companies. The reason for the decrease of earnings contributing to the NAV development in the fourth quarter is clearly due to the fact that we have seen the valuation as of September 30 is based on forecast of our portfolio companies for the current calendar year. Most of our portfolio companies have that fiscal year is equal to the calendar year. And we have clearly seen that certainly some of the portfolio companies have decreased their forecasts and that explains that effect. The dividend, and that was your second question, why do we propose a reduced dividend despite the fact that there is not a recession to be seen. I must say that for me, the question whether we are the recession or not, our portfolio is not -- let's say, is not represent -- representative for the GDP for the German GDP and -- and I would not see a proportionate development of our dividend and the question of GDP growth or contraction. So altogether, we believe that it is a sensible decision to propose a reduced dividend cost of the headwinds, which we currently see. And I personally feel a bit unsure about the economic development in the next quarter in Germany. So I would be a bit cautious to say -- so unfortunately, there is not -- I hope that answers your question or gives at least some more flavor about our decision process.