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

Good afternoon, everyone, and welcome to the Mutares conference call on the first quarter of 2020. On the call today, the CIO, Johannes Laumann; and the CFO, Mark Friedrich; will present the results and most relevant events of the first quarter of 2022. After the presentation, they will be available to answer your questions. The presentation shown is available on the Mutares' website after the call. Before we start, I would like to remind you that this presentation contains forward-looking statements, including projections which may not develop as currently expected and therefore, kindly ask you to take note of the precautionary warning about forward-looking statements that is included in the materials on the website. Now let me hand over to Johannes Laumann.

Good afternoon, everybody, and welcome to our Q1 earnings call 2022. As you are aware, I will take you through the key highlights of Q1 and then finish on the outlook of Q2, and Mark will do the financial part of it. On the key highlights of Q1, I would like to stress, first of all, point number one, the M&A circus is still active. And despite all circumstances of inflation, war, COVID and so on, we have a very strong pipeline on the buy side. We do see a lot of attractive targets on the buy side. We do see also incoming interest on the sell side. However, number two, as a key highlight or it's rather on the low-light side, of course, we also have significant pressure on raw material prices in our portfolio, especially on the automotive side, the pricing and the availability of raw material is impacted at the moment, which you also see on the Q1 figures, which is especially happening in March. And then last but not least, the auto sector is already a little bit in trouble by OEMs canceling shifts and building cars. So we see here a good order intake, but we just don't get it out of the door. However, looking at our guidance of 2022 and the one-off 2023, we still stick to the guidance. We do see at least EUR 4 billion of turnover in the group. And we do see at least the EUR 72 million on the lower side of the net holding income, which will then develop over the duration of the years. What happened in Q1? And maybe I would like to stress 3 things out. So number one is the acquisition, signing and closing of Balcke-Dürr, which is an add-on for Frigoscandia company in the Nordics. We basically add strategically the Norway part of business. And we also will see soon an announcement happening on Frigo as well, which clearly underlines that we are going to build and execute our strategic approach in Frigoscandia, and we will build a diamond in cooling logistics up there in the Nordics. We're very optimistic. You see a very, very fast movement of executing our strategy. Then number two, the acquisitions, especially of ATI, then of -- from Siemens Energy in Spain and the Balcke acquisition, which we signed, 3 acquisitions in 3 months. We are on track with our onetime amount target. And those acquisitions will be closed -- ATI and Balcke will be closed in Q2. Siemens Energy in Spain will be closed in Q3. And the last highlight I want to put up there is the office in Helsinki, which is established for the Spanish market, and we also have further plans in the year. We'll come to that later, but we are planning for an office of Eastern Europe towards the end of the year. And we also would like to go abroad into America. Very quick, a reminder on our business model, a reminder of what we do and what are the plans. Also here, 3 things. So first of all, when you look at the 3 segments, we are active, which is Automotive & Mobility, Engineering & Technology and then finally, Goods & Services. If you look at automotive, of course, I said it before, significant under pressure on the raw material in March and April. January, February was still fine. The Engineering & Technology segment was still good, and the Goods & Service segment is as expected as well. And for some of the companies, we are back on pre-COVID level when it comes to sales and when it comes to profitability. We are on track on the Goods & Service parts when it comes to our planned intention and budgets. The second one is the company size. We are looking at EUR 100 million to EUR 750 million. Clearly, we see in our pipeline. Things are moving in that direction, and the pipeline is growing also with larger transactions, where I'm absolutely certain that in Q2 and in Q3, we will see quite a handful of them. And last but not least, you see the growth on the bottom and the growth of the holding income, the growth of the revenue. And here, I would like to stress out that we, as a management -- we are fully behind this growth. We believe in this growth. We believe in the profitability. And we maintain our shareholding of more than 35% in total. And you have seen recent director dealings, which undermine this and for further commitment of the management. Last but not least, on the business model section, how do we grow our business? How do we earn it? So the focus is on the realignment, optimization and harvesting. When it comes to the realignment for this Q1, Mark will report the figures later, but we see a very, very good development. And we do expect between EUR 70 million and EUR 80 million of turnover by pure consulting management income, which is mainly, mainly, mainly earned in the realignment phase, which is the first phase after the acquisition. The second phase is the optimization phase, where we also see very strong income potential for 2022, more, of course, towards the end of the year. Here, you clearly can name companies like SABO, Terranor, Donges or also the LMS Group. And last but not least the harvesting phase, and I'll come to that later. I think on the harvesting phase, we will see also on the exit side things happening. We have closed the BEXity exit in Q1, and there are more to come and bigger things to come in Q2, in Q3, in Q4. And I will emphasize that a little bit later. When you look at our portfolio, the automotive sector, I would like to highlight one company here, which is ISH and KICO. So the KICO/ISH Group, they're clearly on the right path to materialize the synergies they have to get the business in and to base and found on the ground of a combination of the 2 companies with a very, very strong footprint in Europe and in Asia. So we are very, very happy with the development of this company in Q1 and also in Q4 last year despite all the circumstances and all the hits you have in the automotive world. When it comes to Engineering & Technology, we see La Rochette, the company doing papers in France very, very strongly coming into Q1 despite the fact of significant high energy costs and raw material costs which, of course, a papermaker has to digest, but the business is good. The contribution to Q1 EBITDA was very, very good here. And we also see a very, very strong outlook into the year. And then last but not least, Frigoscandia, I already mentioned the Vallourec acquisition, which was the first 1 right after we bought the platform last year or end of last year. This is a company where we see great potential. This is a raw diamond, which we just have to work on and bring it home then through the entire life cycle. So just the 3 highlights, and Mark will go much more in detail of the portfolio companies with the numbers. But we are, in total, automotive under pressure, but very nice development, some KICO and ISH. Engineering & Technology, satisfaction; Goods & Services, satisfaction. Highlights La Rochette and Frigoscandia. And with that, we'll run through the financials. Mark?

Thank you, Johannes. And I start my presentation with the same set of figures that we introduced in the financial call for 2021, where we started with the group revenues, quite strong and pretty much increased 70%, what we pretty much announced 4 weeks ago and achieved more than EUR 850 million. On the other hand, you see in the profitability figures, EBITDA and adjusted EBITDA, what Johannes was pretty much describing. The adjusted EBITDA decreased substantially compared to the first quarter of 2021. And I will go into more detail when we go into the segments, where we see the different developments in the segments. But overall, we saw that the addition of the newly acquired companies that we acquired throughout the year 2021 contribute substantially negative into the adjusted EBITDA. And that's what we see here, and I will explain this when we go into the segment, but already give you some highlights, especially the big ones that we added. So it is the Lapeyre Group, it is the LMS Group that contributes substantially negatively into that figure. On the other hand, Mutares Holding also grows with the revenues and also with the net income, and that is pretty much in line with what we expected when we saw the additions in the portfolio in 2021, where we see already the high increase in the revenues from consulting across the group. It also had some one-off effects in the net result in 2021 with the exercise of share options, which contributed negatively into 2021. What we didn't have in the first quarter 2022, so we were able to contribute more from -- just from the operating part, so the revenues of the holding into the net result, but on the other hand, we were able to control cost better and ended up the quarter with approximately EUR 7 million of net result already. Starting with the first segment, the Automotive & Mobility segment, Johannes already mentioned it. On the one hand, we had a very strong first quarter in 2021 after the COVID year 2020, where pretty much all portfolio companies contributed positively. So we see the EUR 4 million of adjusted EBITDA in '21. We pretty much had also a very good start into the year 2022 in terms of sales. But on the other hand, we had already at that point in time substantial increases in costs, and that's why we see really across all portfolio companies that contribute pretty much all into the negative adjusted EBITDA of almost EUR 19 million. And we foresee that there is some light at the end of the tunnel already in Q2, but most likely in the second half also we foresee that the portfolio companies will contribute more positive in the remainder of the year. Coming to Engineering & Technology, a more balanced segment and that what we see here also in the profitability figures that we are close to breakeven. And here, we have a very -- or we have some companies that only contribute negatively, and it's mainly the Balcke-Dürr Group, which in the business model has a very weak first quarter or the time all the years. And on the other hand, we saw some very good development in the Donges Group, especially in the Northern part but also at Lacroix + Kress and the French entities, La Rochette, Japy and especially also Clecim. Last segment, Goods & Services, also a segment with the biggest increase in terms of revenues due to the M&A activity, but also with a high negative adjusted EBITDA here in the first quarter, and that is mainly attributable to a Lapeyre Group, which contributes minus EUR 10 million to adjusted EBITDA. On the other hand, we had a very busy start into the year at Terranor and also at SABO in 2021 and see some good developments in the restructuring at Ganter, also at Frigoscandia and Repartim. And coming now to the final slide for me, the life cycle that we changed compared to the Q4 that we presented 4 weeks ago. And as in the last years, we want to keep that stable throughout the year 2022. And therefore, we pretty much also want to kind of signal with the allocation here, what we have in mind with the portfolio companies in the next 12 months. And when you look at the very top, so I start this time with the harvesting phase, where we lifted quite a lot of companies that I mentioned already during the segment explanations. And here, it's namely SABO, Terranor, and La Rochette, Clecim and Japy and Royal de Boer, that altogether -- together with Donges Group contribute positively in Q1 with more than EUR 6 million of adjusted EBITDA and where we obviously expect some kind of divestment in the next 12 months. The optimization phase is now also quite crowded. And when I look at the adjusted EBITDA, something to be improved throughout the year 2022, where we have in Q1 minus EUR 30 million. That is pretty much coming from Balcke-Dürr, also from Keeeper but part of it also from the KICO and ISH Group. But on the other hand, we also have here some promising portfolio companies in the market, namely the Frigoscandia, Ganter, but also Lacroix + Kress, Repartim. The realignment phase is the first phase of our business model, and this is a phase that most likely will, throughout the year, become more negative since we want to add more portfolio companies into that space. And we see here a very broad range Asteri or newly -- let's say, the newly acquired portfolio companies and that -- where we have a lot of work to do still, and namely in the big ones, LMS and Lapeyre. And with this, we come to the final outlook as presented by Johannes.

Thanks, Mark. Let me take you on the outlook of Q2. And that's going to be pretty exciting. So if you look at the buy side, we currently look at 88 projects, EUR 11 billion. We have roughly EUR 1 billion under negotiations sitting at the table. So as we speak, most broadly or roughly 50% of the entire M&A and legal workforce here in the holding sit somewhere and try to bring home transactions. And we have already signed EUR 1.1 billion, and we do expect 12 signings at least this year. On the buy side, we have done 3 already. I'm absolutely sure that we will have 3 in quarter 2 that we have a lot to talk in the next weeks and until the end of June, which then makes the closure of quarter 2. So we will be on track in quarter 2, having the 6 acquisitions. The ones to come in quarter 2, they are big. When it comes to the exit side, and Mark mentioned it. Predominantly, we have 26 companies, 3 of them are signed and not closed, 4 of them are in life exit process. Life exit processes in different stages. So one stage is quite advanced, where we will have most probably something to tell already in quarter 2. And then the other 3 are more towards the end of quarter 3, beginning of quarter 4. But I'm very confident that we also not only can transact on the buy side but can also transact on the sell side. We have a very, very strong position here on most of the cases. So I'm very, very confident that, again, we don't show nice pictures and nice slides, we start working and we will deliver. And last but not least, when it comes to the outlook, guidance '22, '23, I'm fully confident that also with the increase of our footprint and we have decided to move more towards the [ Balcke ] office, than the [ Washow ] office. We have decided to make an intense study in America where to hit the ground there. I'm very, very confident that we will hit our 2022 targets and that we will achieve our 2023 targets, which were set in the middle of 2020. And just to recall, in the middle of 2020, we set a target in '23 to become from EUR 1 billion to EUR 5 billion, from EUR 20 million profit to the range of EUR 90 million to EUR 110 million. That's what we set in the mid of 2020, which was just after the Brexit, which was before the second wave of COVID, which was before of the chip crisis, which was before of the war, which happened in Ukraine right now. So by that, you can see not only that we have a very, very robust model when it comes to what we do at Mutares, but you can also see that we do and fight our utmost to deliver what we promise. Thank you very much for listening and attending Q1 earnings call. I hope we see you all at the 17th of May for our annual meeting. And stay safe and stay strong, and we promise we will deliver. See you soon. Thank you very much.

[Operator Instructions] The first question is coming from Tom Mills at Jefferies.

You sound very confident on outlook, which is reassuring. It sounds like the acquisition pipeline is particularly exciting at the moment and kind of somewhat front-end loaded. I'm just wondering, you've spoken about sort of EUR 1 billion issue of kind of contracted deals at this point. Are you -- with some of those deals, are you seeing that you're wanting to kind of renegotiate the terms a little bit, given what's going on in the background just kind of interested in how those dynamics are working? And also, are you seeing any kind of changing competitive dynamics around other potential acquirers of these assets? That'd be very helpful.

Thanks, Tom, for the question. When it comes to the first one, renegotiate terms, we are, of course, actively looking into the transaction -- we have done the 3 transactions on -- which was -- that sum that up, it was Balcke-Dürr which was the add-on for Frigoscandia, basically delivering fish from the north of Norway to the mid of Norway, we pick it up and deliver it further, not so much impact, no ground for reconsidering anything. The second one, which was from ATI. It's exactly the opposite. We don't want to renegotiate here anything because the business is predominantly in the oil and gas environment, more towards Middle East and America, which is quite -- which is not bad at the moment. So that was a bit the upside here. And also green from Vallourec, we don't -- I mean we bought it, we commit to something. We stand to our words. We stick to our transaction we have made. We have made that with entrepreneurial risk but also with entrepreneurial chances and opportunities. And this is our business model, and this is what we do. And when it comes to the competitive dynamic, what we see is that processes are getting a bit slower because we see that some of our competitors are a little bit more passive now in doing transactions. And they're afraid of doing transactions to say it maybe in other words. And -- well, Tom, we have met before. I'm not a type of a person who is afraid. So I think we need to calculate the risk. And then we take the opportunity, and we take the chance of making transactions in this environment. So this is how we define it and how we see it and how I believe this is the success price of Mutares.

The next question is coming from Stefan Augustin at Warburg Research.

Just 2 short ones. The first one is could you give us a little bit color on the possible impact from exits on the net income and the holding in Q1? And the second is the comments on Lapeyre on -- in Q1 results. Sounded a bit to me that this has become a little bit more negative, but it could be misleading because Lapeyre is simply big, so it has a large influence on the lot side. Could you comment a little bit on the sequential development from the Q4 goal to Q1? And how that looked out in Lapeyre? That would be from my side.

Maybe to answer also short, the impact on access is 0 in Q1. And to answer the Lapeyre part, there is a lot of one-off items in this Q1 figures, which is mainly resulting to tax and down payment of energy costs, which will harmonize throughout the year. To give you a flavor, Lapeyre was in Q1 when it comes to the profitability, EUR 700,000 behind budget. When you consider that Lapeyre, we made EUR 750 million of turnover a year, I would consider they are on budget.

All right. Then I would have a follow-up question in that one slide where you showed the holding income. The first line is -- I mean, we have the consulting revenues and then we have the consulting revenues plus the equity distribution. And at the line were the same, my conclusion was that the difference to the net income in the holding needed to come from exits as there were no equity distributions in it. So that was the whole reason behind the question.

There were a couple of influence factors in the lines between, but the most negative one, and it was a positive one in 2022 was the exercise of share options in Q1 2021, which contributed approximately EUR 4 million negative, these are payroll expenses that we had. And we haven't had that kind of influence in 2022. And on the other hand, we are pretty much a gross margin just from consulting of approximately 50%, and that contributes substantially positive if we increase consulting revenues into -- directly into the net result because we have not extended the space you need, for example. And on the other hand, we just had some minor positive impacts from the portfolio, but nothing that was shown as an exit in the lines.

[Operator Instructions] At the moment, there are no further questions. For closing remarks, I'll hand back to the speakers.

Thank you very much. We take that as a compliment. There were only a few questions. Yes, thanks again. I think most of you, we will see virtually on the 17th of the Annual Shareholder Meeting. And looking forward to this, there's more news than up there, and we are strong. We are not afraid, and we are on track, and we will deliver. Thank you very much. Enjoy your afternoon. Bye-bye.

Bye.