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

Good afternoon, everyone, and welcome to the Mutares earnings call for the first half year of 2020. On our call today, Mutares CFO Mark Friedrich and Mutares CIO Johannes Laumann will present you the results and most relevant events of the first half of this year. After the presentation, they are happy to answer your questions. The presentation shown is available on their website. Before we 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.

Hello. Good afternoon, everybody. We would like to follow the agenda which you've seen projected, starting with a quick sum-up of the business model and activities on the M&A side in the first half year; followed by a quick summary,; then financials and outlook, which will be presented by Mark Friedrich, the CFO of the Mutares Group. Short overview of the business model, which most of you are aware of. We target -- and a short reminder of our success driver. We target a return on invested capital between 7 and 10x over the 4 phases, which consists of consulting income in the acquisition phase, realignment, optimization and harvesting, which you will see later on which is basically the life cycle of our investments. And at the end of the day, the creation of shareholder value is driven by the 7 to 10x ROIC which we target for our company. What do we do on a day-to-day basis to achieve that? This is what we call our value creation circle. We do take and evaluate risks by taking over companies in special situations. We request cash funding from the seller. And in addition, depending on the transaction if a platform on and on, we also contribute some equity from our side either for certain financing needs, for equity strengthen; or in add-on acquisitions, also for purchase prices. Due the turnaround with our own people, we continuously have grown the consulting team. And last but not least, after the turnaround is done, we either go for a strategic and organized sales process. Or we grow further inorganically through add-on acquisitions to finally then come to the 7 to 10x return on invested capital which is our main target. To give you a little bit of track record on this 7 to 10x which is our target, including the 4 phases. As we speak, the portfolio we have and which is at least for 12 months in our portfolio has already contributed 4.8x of return on invested capital, which is obviously mainly driven by consulting income and dividends paid out of the portfolio into the Mutares holding, plus the exit proceeds which are outstanding for potential exits, should then drive to the 7 to 10x. So what you see is that we have already materialized the 5 -- almost the 5x cash on return on invested capital without an exit of the company. And maybe let me stress out one more thing, which you see on the bottom of the slide where it says we want to have an average holding period of 3 to 5 years. This is only a certain guidance, but this is, of course, different from portfolio to portfolio, very much depending on how do we want to develop the company and how do we see the best shareholder value creation over the life cycle. Short highlights of the first half year. We have acquired 5 new platforms, and in the following slide I will show you our total portfolio in a minute; and 3 add-on acquisitions, so a quite intense first half year. I think we are holding the pace of last year and even overachieved that in the difficult times of COVID-19. This is an outstanding performance. We already have realized 3 exits. So 2 very small ones: BEXity sold its Czech business, and we sold Klann Packaging. And then we sold the restructure Balcke-Dürr part in Poland, which was sold to a strategic buyer here in Germany. Restructuring efforts, of course, were heavily impacted by COVID-19, but we made sure also as the Board we were involved very actively in safeguarding the stabilization of our businesses. And we have achieved that we have brought the whole portfolio through these COVID times. Beginning of the year, we have also successfully placed a EUR 50 million bond, especially for add-on acquisitions and further portfolio development, where we do now evaluate further an additional EUR 30 million which you have also seen maybe this morning in an ad hoc. The general annual meeting decided on a dividend of EUR 1. The outlook for 2020 also looks very positive from this side. And we are still very strongly committed to our sustainable and successful dividend policy and which will be also in 2020 our main target and even maybe overachieved. So a quick summary of the portfolio. You see automotive, mobility, engineering, technology and Goods & Services. We also significantly grown there. Maybe a few highlights on this one: So the STS Group, which is still in the Automotive & Mobility segment, has divested with last Friday its acoustic business to refocus on plastics and materials which is the core business and the main driver of the success. And then let me also point out Nexans with this -- which is an acquisition of roughly more than -- a little bit more than 200 million of sales, which is a perfect fit and also have synergies potentials with our Plati Group as well as with the TréfilUnion group. So we will carefully bring those synergies together of these 3 companies. And then last but not least, our latest acquisition, here on this slide you see NCC, the road operation and maintenance business which we acquired and which will be closed most probably by end of September, right -- at the right time when the winter starts and road operations and maintenance are needed. So this is the business which we acquired from NCC, a little bit above 100 million in sales, and it also strengthens our footprint and focus on the Nordic markets. So overall you see, also in the numbers later on, a quite robust portfolio which went through the toughest time of COVID-19 and then a robust portfolio with great exit potentials. And as already said in the annual meeting and in several communications before, we do expect a heavy workload in the second half of the year on the buy side. So we do see great opportunities. We are very selective on this one, but we see maybe the once-in-a-lifetime chance of a outstanding growth also in the second half of the year, which we will work as a team very hard on to achieve that. So far on this one. And let me hand over to Mark Friedrich for the financial part and the outlook. Thank you very much.

Thanks, Johannes. So I'm starting with Page 10, with the overview of the financials for the first half of the year. Normally I say that our group is impacted by the M&A activity. This is true again for the first half of the year, but this time, the group is highly impacted also from COVID-19. We see significant increase in sales by approximately 40% due to the M&A activity, this time namely the BEXity Group, PrimoTECS and the Ruukki transaction that's part of the Donges Group now, which contributed quite positively to the increase, but on the other hand, we saw, compared to the budgets that we had with the group, quite a shortfall in sales in our existing portfolio due to COVID-19, especially in the months March, April and May. The group EBITDA is impacted by approximately EUR 66 million of bargain purchase income. On the other hand, the adjusted EBITDA is highly affected by the negative impacts of COVID-19. We will come later to it, and I will explain a bit more about the phasing of these effects. Cash and cash equivalents increased due to the bond that we raised. And the equity of the group decreased due to the increase in total assets but also due to the loss in the first half of the year. Looking at the overall P&L of the group, you see here again the increase in sales and revenues by approximately 40%, which is quite significantly. All other figures also increased. And we end up with a net result of minus EUR 30 million, impacted by especially in COVID-19. And here between EBITDA and net income, there is especially also the depreciations and amortizations. And we had to account for an impairment of approximately EUR 20 million due to the impact of COVID-19. Looking at the balance sheet -- on the detailed slide for adjusted EBITDA before we come to the balance sheet. So here you see the bargain purchase income of approximately EUR 66 million in the first half of the year, slightly lower than last year. So this is due to the adjustments that we already made in the acquisitions and in the accounting of bargain purchases of the transactions that we closed in the first half of the year. The second line is the restructuring and other nonrecurring expense, which is only EUR 9 million in the first half of the year because we were also not able to execute the restructurings measures that we actually had planned for due to the COVID-19. So we would actually have expected more here and had planned for more due to the number of acquisitions that we did and especially abroad. We were unable to travel there and to execute our plans. So the restructuring and nonrecurring expenses relate mainly to the STS and the Donges Group. The second -- or last line is deconsolidation effects. You see EUR 1.6 million, meaning that we have a gain of the deconsolidations in the first half of the year, which were Balcke-Dürr Polska, Klann Packaging and the BEXity activities in Czech Republic, which were -- or which led to a total gain of approximately EUR 1.6 million. And to give you the adjusted EBITDA, we have subtracted it [ here ]. To give you a bit more color about the adjusted EBITDA phasing. We see that the adjusted EBITDA was -- and the EUR 16 million that you see here were actually accumulated mainly in February, March and April. And the months May and June were actually both already breakeven on adjusted EBITDA level across the group even including the new acquisitions that normally contribute negatively. Looking at the balance sheet, again an increase of approximately 16% or EUR 140 million to almost EUR 1 billion. So we are quite confident that we will cross EUR 1 billion in -- or until third quarter financials due to the acquisitions of SST and Nexive. And you see here especially that the financial liabilities increased from EUR 120 million to approximately EUR 200 million, and that's mainly due to the raise of the bond of EUR 50 million. Coming to the segment financials and starting with the segment that was hit most by COVID-19, which is Automotive & Mobility. And here we see or we saw across the entire portfolio companies that COVID-19 led to a substantial shortfall in sales and almost a significant decrease of up to 35% in sales compared to budget level across the portfolio companies, but on the other hand, we already see quite a steep increase again in sales in June and also in July, again across the entire portfolio with the main increases, for example, here at KICO and PrimoTECS which are on budget level or way above budget level in July. The focus, like Johannes already mentioned, was obviously for all portfolio companies but also mainly for the Automotive & Mobility segment on securing the liquidity. And we were able to successfully implement certain measures; and we're able to kind of sign subsidies from governments in France, in Germany and in Italy. Looking at the Engineering & Technology segment. We have a total different picture here with a segment that increased the adjusted EBITDA from minus EUR 7 million to a slightly positive figure of approximately EUR 1 million. And this really in this kind of environment really a great success for the group and that success was mainly driven by Donges Group and the Gemini group. Both were able to kind of finalize and finish the restructuring of Donges, its first phase of restructuring, at the end of 2019 so and -- so that we see the positive contributions in the first half of the year. And with Ruukki, the Donges Group was able to acquire a positively contributing asset to adjusted EBITDA; and we are able to start the integrations, the optimization of the group in the second half of the year. Balcke-Dürr is one company in that segment that was a bit more affected by COVID-19 and was actually contributing negatively to adjusted EBITDA of approximately EUR 6 million. Coming to the last segment, the Goods & Services. And here again we have a really positive surprise since pretty much all companies in this segment, except for TréfilUnion, contributed positively to the adjusted EBITDA. Even a company like BEXity that we just acquired at the end of 2019 was able to contribute positively to the adjusted EBITDA. On the other hand, keeeper closed the transaction of keeeper tableware in that same business from Metsä in February and was starting the integration and the combination of the two. And keeeper was really one of the highlights that we saw in the first half of the year. So the company was able to overachieve the budget sales level for the first half of the year as one of the only companies in the group that under these circumstances were able to deliver even more compared to the budget level. In the end, we saw just an adjusted EBITDA of only minus EUR 1.5 million, with way higher revenues compared to the first half of the -- of 2019. So quite positive segment development here. Coming to the life cycle status, which is unchanged compared to Q1, but to give you a bit more color here and to explain a bit more what we actually would like to see here. The realignment phase is the phase where the portfolio companies enter our group. So these companies have to be negative in terms of adjusted EBITDA, and that's exactly what you see here, with approximately minus 13 million or an EBITDA ratio -- or an adjusted EBITDA ratio of approximately 7%, which is quite high. But it shows that we are on the right track since we were able to add new portfolio companies to our group. The companies normally move on to the optimization phase after approximately 12 months, and this is also important. We'll see a good mix here. We have 4 companies in the realignment phase. We have 4 companies in the optimization phase; and the optimization phase should be actually a phase where the companies, portfolio companies, included in that phase have a total adjusted EBITDA of at least 0. This time, you see here minus 7 million. And I already mentioned that the main contributor negatively is the Balcke-Dürr Group with approximately 6 million, whereas other companies like keeeper, Cenpa actually were contributing positively to the adjusted EBITDA. After 24 months or after more than 24 months, the companies normally move on to the harvesting phase. And the harvesting phase is the final stage, like Johannes explained in the beginning, and this is a phase where we actually expect an -- definitely a positive adjusted EBITDA. And this is obviously, during these days in the first half of the year, not true for all companies, but in normal circumstances it should be that the adjusted EBITDA is positive so that we are able to sell the company for a positive price. This brings me to the outlook on Page 17. We experienced quite a challenging environment on -- due to COVID-19, and we believe that this will continue. Nobody actually knows what will happen in Q4 or Q1, but we have to prepare ourselves. And we will prepare ourselves for a situation that might change compared to the current situation, but on the other hand, we definitely have the expectations that we see even more M&A activity in the second half of the year compared to the first half of the year which was already quite active. And that is one of the reasons why we want to or why we currently evaluate the increase of the bond of up to EUR 30 million. We had in July already 2 closings. First one was Nexive or the Italian post business. And the other one was SFC, an acquisition in the automotive segment from Cooper Standard. And we already had 1 signing in July, which was SABO, a company in Germany, where we expect closing end of this month's. Taking all these acquisitions in one part, we currently see that we are well on track on the targeted sales level that we have set as a target for the full year 2020 of more than EUR 1.5 billion. And looking at a run rate of our current portfolio, we are close to or even above EUR 2 billion in sales already. And we are quite confident that this figure will grow in the next couple of months. [ And finally ], sustain the dividend capacity and the attractive dividend policy is always kind of the ultimate target for the group. And for this, we pretty much run our M&A activity, run our operations so that in the end we are able to create shareholder value that we actually want then also to distribute to the shareholders. We actually would like to see you again, and that's why we sent out an save the date for the Capital Markets Day. We had the first one last year. We would like to do again a Capital Markets Day in 2020. We have invited you already. We are not sure yet if it will be a virtual meeting or not. We are definitely looking forward to meet you again in October. And with this, we are through with our presentation and are happy to answer your questions.

[Operator Instructions] And first question received is from Holger Steffen of SMC Research.

At first, I have one question about the bond [ you mentioned ]. You have announced a possible discussion about changes of your bond conditions. What are the topics of this discussion?

[ Yes, you can do this ].

We like -- it's like to be expected. And we noticed that there are 2 things in the bond terms where we believe that a change makes sense. And the first one is that we want to have shift of the bucket that we have where we are allowed to give commitments to the group or to partners of the group, but we don't want to increase the overall exposure. So we shift from one to the other where we believe it makes sense to have it a bit more balanced. So it's, first thing, not negatively for the bondholders; we believe, even positively. Second thing is that we want to have a change and also a positive change again for the bondholders about the insolvencies and where we believe that we want to enhance our ring-fencing model. And therefore, we asked for a change of one clause, but we believe that also again makes sense for the bondholders but obviously also for the shareholders.

Okay. I may come to your figures. You gave us an short overview about consolidation effects in the first half, and I tried to derive the organical development. Is it correct that the revenue of the existing portfolio decreased organically roughly 20% in the first half?

We will give an answer quite soon. We'll just check immediately if the 20% is a good guess.

Okay. Then I come to another question [ so long ]. You have -- first, I think you called the acquisition of Nexans an add-on acquisition to Plati. Now it is listed as a platform in your segment Engineering & Technology, and you said something about synergies with Plati and with TréfilUnion. Why do you change it? Have you any further information?

Well, it's not really changed because the synergy potential and -- that the 2 companies are contributing positively to each other is still there. So basically it's an extension of the value chain which Nexans provides for the Plati product so we can offer our customer a higher- and deeper-value chain and therefore also a better flexibility and customer service overall. Why is it a platform -- shown as a platform investment? We are currently looking also to have it together -- termed together structurally. However, in the beginning of a company acquired, we would like to keep it separate; also the fact that actually Nexans is 8x larger than Plati. So the 2 companies will be fitted together very soon. For the moment, we keep it separate until closing, but shortly after closing, it is still the plan to put those 2 companies together.

Okay, great. And about SABO, I missed some operating figures about this company. Could you tell us some?

It was stated by John Deere that they don't want to disclose those numbers. And as SABO is in platform investments, you can guess about the financial -- the profitability of the company and the purchase price. What we have to pay, though, it is a typical Mutares deal, a very strong brand. We are very happy with the very competitive process. And this is a great platform to do a buy-and-build strategy for outdoor and garden with a very strong brand. I cannot disclose actual figures because the transaction is not closed. Of course, after closing, when we own the company, we can speak about it. Before closing, I can't disclose the numbers. The only thing I can disclose is that it's a platform and platform investments at Mutares are typically coming with a bargain purchase.

Okay. I will wait for revenue figures then...

And the other question. Just to come back to your question regarding organic growth. It's a bit less than the 20%. Leaving aside also the add-on acquisitions of Donges Group, we see across the portfolio minus 18%.

Okay. That helps me very much. And maybe one, another or further questions about your portfolio development. In your report you mentioned the investigation of strategic alternatives for Eupec. Can you give us a hint what these alternatives could be?

An add-on or an exit.

Okay, that's very -- you think -- Eupec was, I think, with the environment, a complicated business in the last 12 months. You said that it's now improving in the second half. And why and what's the main source of this improvement? Or where is the main source?

Well, as you know, Eupec is a quite small company. And it's a project business, so one project can really make the year or the financials of this company. So Eupec actually have booked a large order which is in the Middle East, and this gives us the outlook that Eupec will be a -- will close the year with a positive operating profit. Company is very small. Main customers do sit in the Middle East, where the COVID impact on those projects, it's very minimal. Either COVID is not there. COVID is forbidden or the projects are very long lasting, and the impact is not shown yet. So we -- the positive outlook on Eupec simply comes from the order book and the long-lasting projects, which you can predict quite okay-ish what will come in the next 6 to 9 months.

Okay, fine. Maybe we come, may come to a much larger company. In connection with the acquisition of Ruukki and the competition authority's request Donges to sell a factory in Finland. And what are the consequences for Ruukki and Donges regarding revenues and the market position in this country?

The factory roughly made 10 million to 15 million in sales, which we are obliged to sell. It's a Normek factory. And the competitive factory of Ruukki, which is much better invested in the -- 50 kilometers away. So we don't expect too much an influence on the business, but we are in the process to sell that and meet the requirements of the merger control; and we have time for that, another 6 months.

Okay. So my last 2 questions. And first, you've only reported STS as a company and whose existence is actually not sure. Is KICO now [ safe ] if the company will get federal credits?

Correct.

Okay. And TréfilUnion is not in danger. You -- I saw you made impairments with an amount of EUR 11.8 million in the first half.

It's also correct. The company is then quite well financed, has a lot of liquidity, but on the other hand, we saw that the equity position is quite high. And that -- combined with a triggering event and the impairment testing, we came to the result of minus EUR 11 million as an impairment.

[Operator Instructions] As we received no further questions, I hand back to Mr. Laumann.

All right, thank you very much for the time and participation. We look forward to the second half of the year. We -- I strongly believe and we strongly believe it's going to be a successful year. We will follow the path of what we have started in the first half year. And this COVID was a big challenge in the first 6 months. However, it was also, in my view, an even greater opportunity for our business to accelerate growth, to accelerate the returns, to accelerate profits; and then at the end of the day, will lead to also a potential acceleration of value creation for our shareholders. So thank you very much for participating in the call. And stay safe. Have a great summer and take care. Bye-bye.

Thank you very much for participating in this call today. Have a nice day.