Mutares SE & Co. KGaA (MUX) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Earnings Call Financial Year 2019. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Jessica Albert, who will lead you through this conference. Please go ahead.

Good afternoon, everyone, and welcome to our earnings call for the full year 2019. On our call today, our CFO, Mark Friedrich; and our COO, Johannes Laumann, will present to you the financial results of 2019. After the presentation, we are happy to answer your questions. The presentation shown is available on our website. Before I start, I would like to remind you that this call and presentation contains forward-looking statements, including projections, which may not develop as we currently expect. I, therefore, kindly ask you to take note of the precautionary warning about forward-looking statements that is included in the materials on our website. Now let me hand over to Johannes Laumann.

Good afternoon, everybody, and welcome to our presentation today. Before we will go into details of our financial year-end results 2019, presented by my colleague, Mark Friedrich, I would like to give you a short insight to our business 2019 and to our changes we have also done in the previous year. So basically, when we talk about our business model, we aim for a maximum value creation. This is created by 4 steps where we decided to go into a risk position because we understand the risk we purchase. Secondly, we requested the seller to fund the business for us. And with our operational experience, with the consulting team of roughly 60 people, we will go into full responsibility and try to manage the situation and further improve the business. And last but not least, at a certain point of time after restructuring of the business, we shall look into further development of the business or have a structured way of exit in the business. So we, as management, are very much convinced in our business model, which you also see on the shareholder structure, where more than 40% of the shares are in hand still of the management team. A quick intro and in a nutshell, because I guess most of you have already listened to the presentation of Mutares. We divide our model in 2 and break down into the 4 sectors coming from the 4 phases talked about in the previous slide. So -- and I would like to give you that with an example. In the end of 2017, we bought Donges Group. Donges SteelTec was roughly EUR 40 million in sales, slightly below our target to acquire companies between EUR 50 million and EUR 500 million in sales. We did the turnaround with our operational team, and conducted consulting fees in net proceeds, which are very important pillars of the profitability of Mutares holding. And then surely -- slowly but surely, we added companies inorganically, like Kalzip, FDT and the larger footprint in the Nordics, following our buy-and-build strategy. This buy-and-build strategy can consist of dowry deals but can also consist of equity deals. And this is what we have followed with the Donges Group. So 3 steps of the Donges Group are completed. This business model and this 3-step approach has brought roughly EUR 90 million in cash in the last 5 years to the Mutares holding level, which we -- a significant amount of that was dividended to our shareholders. We have grown in 2019, and we have already started the further growth in 2020. We now have 6 offices. Last year, we opened in the Nordic after the acquisition of the companies. And in April, so a few days ago, we opened a facility in Frankfurt. 2019, some figures, we saw more than 4,000 opportunities throughout all our offices, and we have targeted 10 acquisitions at the end of the year. With those 10 acquisitions, we grew close to EUR 1 billion in sales in 2019, and it was on the acquisition side, the most successful year of Mutares' history ever. When you look at our portfolio and what is our main measurement also looking forward is the return on invested capital. When we look at our Vintage portfolio, the Vintage portfolio so far has contributed a 5.6x return on invested capital. And for the whole portfolio existing, including potential exit proceeds, we look on the return on invested capital between 5x and 10x. So this is, for us, going forward, also a very important measure of success of our business model and of what we do. In 2019, consolidated, we have achieved more than EUR 1 billion in sales, which is an increase of roughly EUR 150 million, of course, driven by our acquisitions we have conducted in 2019. EBITDA -- adjusted EBITDA grew. Cash and cash equivalents slightly decreased, so did the equity ratio. Mark Friedrich will, in the future slides, also speak about that much more in detail. But let me take the major developments and then give you a quick last insight on the 10 acquisitions we did in 2019 and the ones we have already done in 2020. The 10 transactions in 2019 were on buy-and-build and platform acquisitions. We did also with our consulting team great success stories in the development of the Donges Group. We realized the first synergies. The day before, we received another EUR 25 million order for Donges on a large bridge project, and we are currently quoting on similar-sized projects in Germany and in the Nordics. Balcke-Dürr is a successful separation of the Rothemühle business, which we separated from the core Balcke-Dürr heat exchanger business and which is quite profitable and on the harvesting side of our life cycle. Elastomer Group delivering again sustainability results after a quite challenging year 2018 and had a great development in terms of sales, but especially also in terms of coming back to a more or less market-outperforming profitability on EBITDA level. Our adjusted EBITDA solidly increased, which is mainly driven by the engineering and technology there in the words of also Gemini, which is an important measurement there, and the Elastomer Group, as said before. And again, as you could see out of the press release, the dividend which we have proposed is EUR 1 per share, identical to the year before coming from our successful 2019, coming from the consulting fees plus the dividend of the successful development of our companies. 10 acquisitions in 2019, I will guide you through very quickly because the last time, we also had questions on the portfolios and such. We did a significant development of the Donges Group, Normek, FDT and Ruukki. Ruukki is still under merger control. However, we have a strong belief that we can expect the closing by end of this month. We bought TréfilUnion and Plati. We bought a platform, the keeeper Group, where we had already a massive tissue business and close to Cologne, producing napkins, which are also technically able to produce toilet paper and similar products, which at least for the German-based listeners of this call, toilet paper was perceived a little bit as gold in the last couple of weeks here in the country. So we bought KICO and the largest transaction in 2019 was BEXity, which we bought from the Austrian railway company. 2020, we already had 2 acquisitions, Loterios as a strategic add-on for Balcke-Dürr to strengthen product portfolio and geographic footprint in Italy, and then Nexive, which is the postal service provider, the #2 in the Italian market, and we expect the closing here by summer of this year. So this was it from the acquisition side, and I would like to hand over for the financials deep dive to Mark Friedrich, our CFO.

Thanks, Johannes. And I start on Slide 13 with an overview of the P&L. As Johannes already mentioned, our P&L is mainly driven by the acquisitions that we did in 2019. And you see here that we are slightly above EUR 1 million (sic) [ EUR 1 billion ], and we are quite proud of it because we kind of forecasted it during the year to go above EUR 1 billion. And we finally reached it. It's an increase of 17%. Normally, you would expect that pretty much all expense line also increases when the portfolio increases. You see that it's true, except for the other expenses, which slightly decreased, and that's mainly due to the IFRS 16 effect, which is approximately EUR 20 million in 2019, which is moving from other expenses to depreciation and interest expense. We ended the fiscal year with approximately EUR 80 million in EBITDA mainly due to the bargain purchase income, which we will see on the next page, and ended the fiscal year with an adjusted EBITDA of 7.5%. On a run rate basis, including the acquisitions that Johannes just mentioned we already did in 2020 together with the ones we closed in the Q1, we expect sales level in 2020 to be somewhere around EUR 1.5 billion. On Page 14, we have here the split of the adjusted EBITDA. You see that the main income comes from the bargain purchase, which is related to the transactions we did, mainly TréfilUnion, keeeper and BEXity. On the other hand, we started the restructuring in most of these acquired entities already in 2019 and had one-off expenses, especially for social plans of EUR 17 million, but also other restructuring and consulting expenses of approximately EUR 5 million. That's mainly due to the add-on acquisitions we did, so where we have some special consulting that we need to close these transactions. In 2019, we had no deconsolidation. We believe that this will be differently in 2020. But 2019, we had none so therefore that is 0. On Page 15, balance sheet again increased. In terms of total assets, we reached approximately EUR 850 million. Half of the increase is due to IFRS 16, where you can see on the asset side in the noncurrent assets, the right of use assets with approximately EUR 120 million, which is the effect that we pretty much have no off-balance leasing anymore. Therefore, we have the right of use and that is then depreciated over time. But on the other hand, we have also the liability in noncurrent and current, which is pretty much the same size. The equity ratio dropped from 31% to 24.5%. This is also due to the IFRS 16, which accounts for approximately 4 percent points and on the other hand, the increase in total assets. Coming to the segment financials on Page 16. Starting with Automotive & Mobility, which is clearly the segment which is highly impacted by corona in 2020. But not all of the companies have the same effect. STS and KICO are the ones which had -- with the STS, a good year 2019, at least in the second part of the year. KICO started the restructuring in 2019 and could fulfill 2 major steps out of 4. And these 2 companies are looking forward to a challenging year 2020 with the plant closed in Europe. On the other hand, we had -- we have Elastomer Solutions where we already heard that the company really strongly recovered from 2018 and came back to a profitability level in the double-digit numbers in terms of EBITDA. And together with Plati, this company was actually producing until last week. And this is kind of a very good sign that we see that our portfolio strategy really kicks in here, that we have companies that deliver all over the world, and these companies deliver to, for example, to Asia, where the economy is already recovering and also Plati, for example, delivers only 50% into the automotive sector and the other 50% into, for example, the health care business. Coming to Engineering & Technology, which is the strongest or biggest segment in terms of sales in 2019 and probably also for the year 2020. We saw Donges Group, and Johannes already explained it all the time and in the calls during 2019, and already mentioned again that we're looking forward to the closure of the add-on acquisition called Ruukki by the end of the month, which will significantly impact Donges Group positively, we believe, and we're already prepared with the team in the takeover. On the other hand, we have Gemini in this segment, which contributed quite positively since the company and the team was able to execute the restructuring plan on time by closing one site and reducing the cost and increasing the efficiencies in the processes of the 2 other sites, and the company is looking forward to a quite good year 2020. Turning to Page 17 to the segment Goods & Services, where we see most of the acquisitions with TréfilUnion, keeeper and BEXity and also, for example, the acquisition of Nexive will be part of the Goods & Services segment. Revenues, therefore, increased quite significantly, and BEXity was not even contributing to that sales level since we acquired the company at the end of 2019. In this segment, we saw that keeeper -- or the acquisition of keeeper can be quite fruitful for the group. The company was able to accomplish major steps of the restructuring plan already in 2019 and is looking forward to a positive year in 2020. Cenpa is undergoing -- or it looks like that Cenpa is undergoing the same as Elastomer in -- did in 2018 and '19. It was quite a challenging year, 2019, after a very good year '18. And now we see that the company is recovering quite well in 2020. And we believe that the company can come back on track to a very positive level in 2020. Coming to Slide 18, which we consider as quite an important slide, and that should give you also some more transparency and some guidance how we view our business model. You see here the 3 phases that Johannes already mentioned, realignment, optimization and harvesting that portfolio companies normally undergo when they are part of the Mutares Group. In the realignment phase, we execute our restructuring plan. And therefore, you see here the 6 platform investments, including BEXity and PrimoTECS, that we currently have in the portfolio. And it's also, for us, totally normal that this is negatively contributing to the adjusted EBITDA with -- in 2019 with approximately EUR 14 million. This company must be always red, and there must be always a certain number of portfolio companies in that phase due to our goal to have a very diversified portfolio and the number must be red since we then acquire the right target for our business model. Companies should normally move on to the optimization phase. In the optimization phase, we target to enhance the profitability after we have completed the first social plan after we have probably closed the site or removed machines from one plant to the other. We look for a second wave, a cost-efficiency program, we look to find the right people and to the right positions. And we also look for add-on acquisitions. And normally, the companies from the realignment phase should move on to the optimization phase after 9 to 18 months. In the optimization phase, the companies should have at least a breakeven adjusted EBITDA, which we also see here. Gemini contributed quite positively. Donges Group with the add-on acquisition, contributed actually negatively to it, which is also quite normal when we acquire add-on acquisitions that are loss-making. The final phase in our business model is the harvesting phase. In the harvesting phase, we normally expect that the companies contribute dividends to the holding or where we target for an exit. And in this phase, the adjusted EBITDA must be positive and must be sustainable-positive. And this slide should give you a good guidance. What we actually have in mind for 2020, for 2021 and should give you some more transparency about the cumulated adjusted EBITDA of only EUR 7 million, which is quite differently along the phases, which is quite normal in our business model. Then on the last slide, coming to the outlook. 2020 will be a year that is impacted heavily by the coronavirus pandemic, but we expect that the M&A activity will be -- will kick up again in the second half of 2020. We still look at transaction or potential transactions also this time of the year, but we believe that the M&A activity will increase significantly in the second half of the year. We already did 2 transactions in 2020 that we -- where one could be already closed, and the other one will be closed end of Q1, probably also Q3. Together with the acquisitions that we still have to close and the acquisitions that we expect in the second half of the year, we believe that we have revenues in the group in the fiscal year 2020 of more than EUR 1.5 billion. This all should contribute to the final goal that we want to sustain our dividend capacity and our attractive dividend policy of at least EUR 1 for the next years. And with this, I hand over back to the moderator.

[Operator Instructions] And the first question is from [ Alina Kula ], [ Haaken Afuerda ].

I actually have 2 questions. I realize that you didn't report net asset value this time, but rather focused on return on invested capital. Are we going to see any more changes in regards to investor communication? Or what's your general strategy there?

I think we will. As said before, one of our key measurement -- or the key measurement is return on invested capital rather than the NAV. We will also come out with a more detailed description of that in the following weeks. And I think our main focus is the creation of value for our investors, which we have done significantly in 2019, which you also see with our dividend policy, which is stable and with a potential upside also over the next years. And secondly, I think it's important that we follow the growth path because the overall sales and the creation of value in comparison to the sales is one of our main targets also for the upcoming years.

Okay. And my second question would be, could you provide a little bit more color on the coronavirus and the impact on the portfolio companies, like what companies should be hit the hardest? And like, for example, STS comes to my mind there. What is the future going to look like and what is Mutares going to do?

I'll start, and Johannes will add. First point that we actually want to highlight is that the portfolio is -- or not all portfolio companies are hit hard by the coronavirus. We also have companies that kind of profit from the coronavirus, for example, Cenpa, where all main competitors are in Italy. And therefore, they have kind of a free road. And on the other hand, you already mentioned correctly that the hardest-hit industry currently is the automotive industry. And what we believe is that we will ramp up the business after the shutdown. So we will start the current strategies of the OEMs by the end of April and then ramp up the business during the Q2. We also have -- through STS, we have plants in China. And we heard this morning in the call from the STS management that the Chinese plants already are close to 100% production level again. So we believe that this could also be the same road for other parts of the world to follow that way and to see that kind of recovery. We, as Mutares management, have already reacted to that pandemic by implementing pretty much a project office where the Board is part of, and we have separated the portfolio companies or allocated the portfolio companies to each of the Board members. Everybody follows closely on a daily basis, the liquidity level, the measures or countermeasures they take, the production level, absenteeism rate or things like a corona case. We currently have no one in the Mutares holding that mentioned that -- a case. So we are quite lucky so far. And we have sent pretty much everybody into a home office, but we can really work quite well for a couple of weeks together just by phone and laptop. So we already addressed the problem, and we believe that we have to refocus already again, and that's what we also did with the consulting team already, to prepare the ramp-up because that is going to be also challenging for us and for our suppliers and customers to increase now the production again. And we look for smart ways to have the right resources at the right time in the production at the right shift.

Yes. Maybe I can add 2 examples, which Mark was mentioning and one I was flagging earlier, for example, a company like the Donges Group, which is a, so let's say, a large and heavy asset in our portfolio. The construction industry is still doing okay. So we received large orders. There is, as we speak, no short-time work in the whole entire group. So they are not impacted by this so heavily. And on the other hand, I think it's now more for us. We made sure in the last weeks that we kept the liquidity in the portfolios together, but it's now the time rather to think about the ramp-up and how it goes forward. And I think even in the automotive sector, if we take some of our companies, which are not so long in the portfolio, and based on the business model I've explained during the very beginning, it's, I think, a very, very nice situation also to come out of this situation with a very strong cash balance and with a very strong cash on hand. So you can make the difference there as well. And we see quite also potential here to have the companies, which come out of this crisis with a strong cash position to use this as a great opportunity to outperform the market, get more of this and make the company much, much better than it is today. And last but not least, of course, no one could expect that. We acquired, as I said before, for keeeper, and I explained the toilet paper thing. The acquisition of the add-on for keeeper was at the right time. We produce now a part of toilet paper. We produce masks there. So -- and they're all able to do that. So this was, so let's say, a little bit a lucky shot then, that this is a great upside on a great company. So we were very much convinced about the business. And now we had -- if you could say that, we had the luck of the need of these products which they make, which speeds up a lot our measurements and restructuring plan we had initially.

The next question is from Holger Steffen, SMC Research.

I have a couple of questions. The first one is an additional question about STS Group and other companies. In your annual report, you've mentioned that especially STS and KICO need additional financing to manage the crisis. Do you see both companies as candidates for public help and which other companies of your portfolio may use public finance programs?

Correct. Those are candidates for public help, but we -- I explained what we did in terms of project management and the situation with the Board. And one of the goals to implement that on a Board level was to share the information that we actually gain in the different countries and to make sure that every portfolio companies or every portfolio company is trying to get the maximum of public help they could get. And the easy form is to go on short-term work, but also to obviously apply for every program that they are eligible for. And that is not -- kind of not narrowed to companies that potentially need. It's more like we consider every company to be affected by the corona pandemic. And therefore, every company has to do as much as possible in the current situation in terms of saving liquidity and trying to get access to an official program.

Okay. Fine. You expect now to finish the still-pending Ruukki transaction by the end of April. What is the basis for this assessment?

The confirmation of the merger control authorities in Finland.

Okay. It's still working and...

Very simple.

Okay. In 2019, the depreciation in the group increases significantly to EUR 53 million partly due to IFRS 16. Can you give us a short note about the main effect and your expectation for 2020?

So the effect of IFRS 16 in the depreciation is EUR 16 million. And I think the level in 2018 was something like EUR 30 million. So approximately 80% of the increase is due to IFRS 16 and the rest is just for the -- is due to the increasing portfolio.

And do you expect the same level in 2020?

I expect even more. For example, Ruukki owns every location they have. So therefore, I would expect that the depreciation, that it substantially increases.

Okay. But it depends on the coming acquisitions, right?

Yes.

Okay.

And exits.

And exits. So we will come to exits later. You have mentioned Rothemühle, which was separated from Balcke-Dürr, as an attractive growth story. What are the perspectives in the actual environment in 2020? Is the business stable growing? Or what can we expect here?

The business is as expected. So there is a portion in Poland and a portion in -- a company in Germany, but which acts internationally. So what we saw in Q1 is more or less stable. So Poland is a little bit up and the German entity a little bit below plan, but on average, we don't see that significant impact. It's also a project-driven business, which is not reacting in weeks. For 2020, I see a certain stability in this business. And I don't see too much trouble or pain in that, rather light and sun.

Okay. We didn't speak about the holding P&L until now. Maybe you can give us some short comments about the revenues and the staff cost of the holding in 2019 and your expecting -- expectation for 2020.

The holding sales level increased to approximately EUR 20 million from EUR 10 million. That's partly due to a change in the way we send invoices that is all coming now from the -- from the Mutares and not anymore from the country, Mutares entities. And on the other hand, it's clearly EUR 5 million that we had in new sales that is due to the acquisitions. Therefore, we have in the report that we just -- that we published this morning, you see a slide with the number of employees that the group has, but also the number of employees Mutares has, and you see a significant increase here. And that's quite important for us since we want to grow the portfolio, like you heard from Johannes, and we believe that we can do it in 2020, again. And we believe that the sales level will substantially be above EUR 20 million in 2020. On the other hand, you also see that our business model relies on the income from our participations and we believe that this is going to be, again, the case in 2020, where we will have an income from dividends, but hopefully also from exits.

Okay. So we are still planning exits in 2020, even in this environment?

Yes, we do.

Okay. Last question now. You didn't publish the annual report of the holding company spent alone. Is it a plan for the near future?

No, no. We will publish it together with the invitation to the annual shareholder meeting, which will be digital this year, fully digital.

Okay. When do you think this will happen?

May 18.

[Operator Instructions] The next question is from [ Tim Schultz], [ Peraje Securities ].

Actually, I have 2 remaining questions. First one, could you give us the cash level on holding company level end of the year? So that would be one. And secondly, could you elaborate a bit in more detail why in the current situation, which is characterized by a lot of uncertainty, you have actually decided to keep the dividend at the EUR 1 level?

So first question, holding cash at the end of 2019 was approximately EUR 10 million.

And on the dividend, I was expecting that question much, much earlier actually. I don't want to say we were thinking of even more, and we reduced it to EUR 1 because of coronavirus. But I think we had an extremely successful year 2019. We generated the cash through the dividends out of the portfolio and consulting income. So even without an exit. And our main target is the value creation for our shareholders. But I think the success of 2019 and the positive outlook in terms of growing portfolio companies, growing sales, our operational excellence and our planned and expected exits in 2020, we didn't see any reason why not to dividend EUR 1 per share.

Your next question is from Helmut Kurz, Bankhaus Ellwanger & Geiger.

Helmut Kurz, Ellwanger & Geiger. Actually, Mr. Schultz asked the question I was going to ask as well. In the presentation, it was very often mentioned, growth and opportunities. And of course, unfortunately, for some investors, 2020 will have opportunities for active buyers like Mutares is. And to use those opportunities better, indeed, we would have really liked that you rather pay less dividend and use the money to go after attractive acquisition opportunities because if you would have to do a capital increase in this environment, it would be much more difficult to raise the funds, and you would probably be diluting existing shareholders. So could you again explain why you really -- and indeed, in the outlook for 2020, you even said that you are going to look for another EUR 1 per share to be paid, which I find a bit adventurous to say this now.

Maybe I start on this one. I think the one you said is very much understood but does not neglect the other one. So by letting our shareholders participate in the success of the company, and in fact, I think this is also the nature of our business that we have great opportunities on the buy side when there is a crisis and when corporates or a company tried to focus on their core or when a company try -- are coming into difficult situations. For us, it's a great opportunity to make nice deals. But nice deals in our world does not necessarily mean take a lot of equity and hunt for deals. On the other side, we want to use our equity to sustainably grow through add-on acquisitions, our existing platforms. Such as we do with the Donges Group, such as we did with keeeper, and we will continue doing that in 2020. So I think the -- it's fully understood what you said, but in this environment, it's important to have liquidity in order to hunt for the great opportunities upcoming. But I think this does not neglect the participation in value creation for our shareholders. And we have no plan for a capital increase on our level here.

As we have no further questions, I would like to hand back to the speakers.

Thank you very much for joining our call today, and we wish you a good day and happy Easter. Stay safe.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.