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

Good morning, and welcome on behalf of Mutares. Thanks for attending the call. This is the investor update following the report published in connection to the short attack last week. With us today is Mark Friedrich, CFO of Mutares; and Johannes Laumann, the CIO. Management will present. And afterwards, there will be a Q&A you may use the Q&A chat function on the top bar to enter questions. The schedule allows for up to 1 hour. Let's get started. And over to you, Johannes.

Thank you so much, Max, and a very warm welcome also from my side to our investor update call on this Friday. Together with Mark, I will present to you an update of the business, of the outlook. There will be quite a bit of repetition what we have said before and confirm. And at the end of the day, we also want to line out again the strategy, explain the strategy and then we open for questions at the end after that. So Mutares as a financial investor, and we have summarized it in 6 bullets, which you will find throughout the entire presentation here as well. We have started a successful growth strategy in 2022 under the wings of, we delivered what we promised. And this is still the case. So you see the same people operating, the same people acting. And we are on that growth path, on this growth success path since 2020 and the path will continue, and this is something we would like to present you today. So there are 6 main points, addressing also a bit the report of the short attack. I would like to highlight in the beginning, and then we go into details in the further slides. The first one, Mutares financials are independently audited, fully compliant and without irregularities, period. Second, we have started our growth strategy, which we have executed, which also means a strategy to expand our footprint, which also means a strategy to buy and build and make larger groups such we have did in the automotive spot, we have did in the engineering technology spot, which we have did with Terranor, for example, in the goods and service spot. So the growth strategy continued because we firmly believe that growth at the end of the day will bring value to us and to our investors. In order to execute that growth strategy, we had to do strategic investments. Strategic investments can be that we, first of all, have to pay purchase prices in a buy-and-build setup because we want to acquire certain markets. We want to acquire certain customer bases. We want to acquire a certain technology. We want to acquire maybe market density here. So -- and by doing this, this strategic investments were done through equity, through loans but also through consulting services, which we provided, where we let the cash in the company in order to give them the growth and strategic investment part. Portfolio is now diversified underlying assets of EUR 4.4 billion, nothing to add here. We have just executed also together with the colleagues from Pareto and Arctic financing structure where Mark will elaborate a little bit more on that, serving the derisking of the entire growth strategy. And last but not least, we have a strong previous track record on the access. Our communication is we want to grow a typical holding period of 3 to 5 years, and we have invested significantly into the growth. So taking that into account, I think in 2023, 2024, we've already proven significantly with the exits, for example, of SMP, with the exit of Frigoscandia, with the exit of Repartim. That the strategy pays back. And the investments we have done into this company pays back and the growth strategy at the end of the day will add significant value for our shareholders, for our stakeholders, and at the end of the day, also for here the entire team. We are very happy to go now with you into details. And before I hand over to Mark, I think the promise we gave to you and the promise we always give to you that we deliver what we tell. This is what our entire team here works day and night. I was up until 4:00 to negotiate a deal last night and my French team is on it right now as we speak, and we will conduct a deal very soon here. So we are working with that promise and stick with us, we will deliver. We have delivered. And that's the kick off now for the deep dive.

Thanks, Johannes. Looking at the agenda. So we have clustered our presentation today in the 4 topics that you see here, we want to address first. The half-year financial error that was published in comparison to the site financials, and we want to talk about strategy and value creation and the consequences out of this. Then I will dive into the financing strategy and explain what we had in mind when we issued the second bond. And Johannes will sum it up with our sell-side activities and the final slide and then we are at the Q&A stage. Starting with the financials of the half year that we published, and we need to apologize here. Because we prepared financials and signed financials that were in total correct, but we published financials that had the editorial error in it due to a mistake of the process that we did here because we send over to the designer that make the financials look nice, a preliminary draft of our financial statements and changed it afterwards due to the continued work on the financial statements. And the change was not entirely incorporated in the version that was already in preparation at the designer. And therefore, we published something that is not the one that we signed and what we show here is that we actually have the right balance sheet signed by the Board members. We also gave this to the analysts, showing that the signed financials were the right ones and that this was just a purely editorial error that we did here with the published version. But I want to point out that there are no [ irregularities ] at all in the financials, and this becomes even more important when I'm going to second page. We had and have an unqualified audit opinion in all our financial statements for the years until 2023. Mutares is a listed entity in the Prime Standard. And therefore, we have the pleasure to be under the highest standards of a big 4 audit firm, which is lot for us. It is possible. There are certain expert reviewers, independent reviews within Deloitte that even challenge the work that the auditor is doing on our auditing of the financial statements that we even don't know. They have nothing to do with us. They do not show up. There has no relation at all. That's why it's so important for a big firm like Deloitte, to have these kind of independent reviews of their work. In addition, after the Prime Standard uplisting that we accomplished in 2021, the BaFin, the German supervisory authority, executed an audit of the work done and our group financials of 2022 because this is something that is kind of standard after an uplisting in the Prime Standard that the BaFin checks quite detailed over months the group financial statements that we published and they closed it with no findings. Coming to the Mutares strategy and what we did. And Johannes mentioned right away at the beginning. We said all the time, have a growth strategy, quite an aggressive growth strategy with a lot of acquisitions in a very short period of time. And this -- with the target to reach a critical mass as a group and especially in the automotive and mobility segment, to be a partner for the consolidation which is ongoing. So that the OEMs came to us for some of their problems and asked us to take over. This strategy obviously required some cash deployment into the acquisitions but also into the portfolio. All with the target to reach a certain diversification and number of assets in the portfolio in order to be able to also generate exits in the future and also what we did in the past. So here, it was for us clearly something that we wanted to do. And we have reached now almost EUR 6 billion of group revenues. We have reached more than 30 -- or we've built up more than 30 portfolio groups and spent in 2023, on average, for acquisitions that we signed there, EUR 7 million. As purchase price or into the target as part of the negotiation with seller, part of the dowry, we gave numerous examples in the past where we did something like this, for example, Efacec, the state-owned company in Portugal, where the state gave approximately EUR 130 million into the company, and we had to give EUR 15 million. So all is in the average of EUR 7 million that you see here in '23. And this has already come down to approximately EUR 3 million in '24 on average for the acquisitions because we want to leverage on our position that we have reached now, the relevance that we have reached now in the niche that we are operating in and especially also in the automotive segment. You might have noticed that we only signed and announced 1 buy-side transaction in Q3, which was the takeover of Saneca as opposed to be closed by the end or the beginning of November. But nothing else. Yes, it was a summer break for sure. But we could have signed transactions, but we pushed back because we wanted to renegotiate the transactions in order to improve the deal for us. And this is ongoing and will be the way forward that we see that the initial investments on average will come down because we have reached already a relevant size and do not push for aggressive growth anymore. On the right side, you see that we started the geographical expansion with our opening of offices in China, India and the U.S. And for the opening of China, we invested for the office team ramp-up and so on, USD 2 million. And that's all for now and in the future, the team has made up an operations team in the country because we have numerous portfolio companies in China that are under the supervision and the guidance of the operations team there. So nobody needs to fly over from Europe. And this should be then support the self-financing of China. India is the next country here in Asia, where we believe it's a big opportunity for the Mutares in the future. It's one of the biggest economies in the world. And we have so far invested approximately [ EUR 0.5 million ] in the ramp-up, hiring people, finding an office and so on. And this will be most likely another [ EUR 0.5 million ] in the next couple of months. The U.S. is something that is founded and we have dedicated people to the country. We have found an office, not rented yet. And therefore, we actually have not invested anything from Mutares in the ramp-up of the office. This will come soon, most likely once we sign the contract, most likely at the end of the year. And then I assume for now an investment of around $1 million to $2 million in the beginning. I want to elaborate also on the point here at the bottom right, the strategic add-ons that we do in the automotive sector. So you have seen that we have build up 2 big automotive groups, Amaneos and FerrAl United where we also did a couple of add-ons. And we have currently in the situation that the OEMs consider us clearly as a partner, let's say come to us and say, "Please, we have here another distressed supplier that we are dependent on and we would like you to take it over to ensure the sustainability of -- sustainability and the supply chain for us in order to get this off our table." And we are willing to do this, but only in cooperation with the OEM. So we also ask for their support in order to enable these add-ons where these new platforms to be profitable from day 1. And we do not want to take over all the time the distressed suppliers. We also, at one point in time, want to just take over existing projects and platforms and transfer them into our footprint and facilities in order to improve and uplift our utilization of our existing facilities. And that's what exactly happens when I look at part of SFC or part of Amaneos, where exactly this happens, the OEMs come to us, say, "We have here something that we want to transfer to you and capacity builds up for us," and that makes the companies more profitable. Something that is mentioned in the report and where I want to also go into details here is that we invested in equity loans and receivables in the portfolio. We have paid up approximately EUR 600 million of assets on our balance sheet, where you see here the distribution. And loans means also that we structure sometimes an acquisition in an equity and loan structure, which is around 1% to 3%. And that's why you see the loans, even though that might be purchase price or an investment into the target as part of the acquisition. Looking at the receivables, where we have EUR 153 million at the end of June 2024. We have in here also consultancy services. And you see at the top that we say, we finance turnarounds with consulting services. It sounds strange, but it is like this. It happens when we are blocked by the SPA, so by the agreement with the seller that we are only allowed to get paid a certain amount of our services. With this, the seller wants to make sure that we pretty much also have an increased skin in the game, that we continue to do it even though we do not get paid all the time. The best example is the one that we also mentioned a couple of times in the past is Lapeyre. We have a limit of EUR 2 million cash payment per year until the end of '24, that can be deployed to consulting services from Mutares or any Mutares group member. And therefore, we have built up receivable against a company which works at the end of June, approximately EUR 10 million. It happens. But we have not impaired it because we believe that we get this paid in the course of '25 and latest with an exit. And we have other examples, especially in the automotive segment, where we have these kind of situations where we have situations where portfolio company cannot pay the consultancy fees, but we are still convinced that this is the right asset that the market is here that we can have the companies with our services and then we get paid later on. We have examples in the group. And I just want to show -- or mentioned here a couple of these examples were exactly the same. First one is keeeper where we had a maximum amount outstanding for consultancy service of more than EUR 3 million. And this has been reduced by the end of June to EUR 0.5 million because we continue to support, we changed management. The company is now at the profitability level than we expected, and it's going quite well so that they reduce the debt towards us. Another one is Guascor, an acquisition from Siemens Energy, where we also had a big team in there and sometimes it doesn't work out as planned. It can happen. But we still believe in the company and in the product in the market, changed -- the structure of our team, changed management, brought in somebody else from Spain and had a peak of EUR 4 million outstanding, and this has been reduced to EUR 2 million now at the end of June and further reduced in Q3. Last example, Gemini, the company in the U.K., in the refurbishment business of trains, where we had the peak of consultancy fees of EUR 4 million that had been reduced now to EUR 2 million. And so it could continue with this. And could also give examples, obviously, there are ones where we build it up, and we believe we will get paid in the future. And have actually based on the portfolio that you saw of approximately 30 portfolio groups against high profit, no or only little receivables. So they are quite sound and good. And we need to work, obviously, on the other ones because we are responsible as Mutares for these kind of assets, and we believe in these assets, the majority is clearly in the automotive segment. And we believe in this market and want to be part of consolidation. And therefore, it is like this, we believe that we get this paid at a later stage. One less figure here for the receivables, because it's something that we track. We are aware of this. We track the payment ratio in relation to the revenues of the Mutares Holding. And this ratio is approximately year-to-date '24, 80%. So out of EUR 10 million revenues, 80% are paid in cash to the holding. We obviously want to increase this to actually more than 100% because for the new acquisitions, we do not want to build up receivables, and we want to get paid the old receivables from the existing portfolio. So quarter-by-quarter, we want to increase this ratio to more than 100% throughout '25. Also something that we looked at the investments across the different segments, and we consider this as balanced, but you see that we had kind of focus on the automotive segment, where we also have the majority of revenues of the group. So therefore, it was not a surprise for us that the majority of investments is also in the Automotive and Mobility segment. But you see on the left that also the other segments actually provide for diversification here. And then we have other assets in Goods and Services, Engineering and Technology and Retail and Food that are closer to an exit than the automotive segment. There, we might need to work on it. But for the other ones, we have also made investments that provide for exits in the near future. And on the right, you see here that these assets are under -- are subject to the year-end audit procedures executed by Deloitte. And this was, as long as I'm here, always a key audit matter for Deloitte in the past. So it may be also in '24, a key audit matter that they look at the valuations of our balance sheet assets. And this brings me to the next point to the financing strategy along with the growth strategy. So we issued the new Board instrument 5 years maturity until September '29. We had actually a demand that was twice what we initially wanted. And nevertheless, we said that approximately EUR 125 million is enough. We do not want to take on more debt than what we actually consider as right and enough for our needs and have no plans to increase the total level of debt for the holding. We actually wanted to have this bond, obviously to execute on the opportunities that we foresee in the next 12 months until the end of '25. But we actually wanted to have a diversification in order to be in a position -- smooth growth between the bond that is outstanding until February '27 and the longer one until '29. So that we can, and Johannes will go into detail in a couple of minutes, we execute on our strategy, on our exit pipeline over the next couple of quarters, be in a strong position in 12 months from now in order to actually provide a reduction of debt, not an increase. No plans at all to increase debt at holding. This was the idea behind the second bond instruments for Mutares for the first time. And in addition, we also want to profit obviously from the lower risk premium and the reduced interest rate. And that's what we exactly achieved. For the new bond, it was -- the margin was 6.25 instead of 8.5 with the one that is until '27. So there was actually the strategy and Johannes will show also one thing that shows that it was not our growth was not only financed by debt, but instead also financed internally. Johannes?

Thank you so much, Mark. I will give you, last but not least, an insight on the sell-side activities of the past, but also, as already done in other investor calls, verbally, now on the slide also, a little bit looking into the future. When you look at our sell-side activities from 2021 to 2024, and we look at the entire period here. You see that we had 28 exits with exit proceeds close to EUR 400 million. And the majority of these exit proceeds besides dividend, we're going into the growth financing of the business and growth financing of the business of the Mutares business can mean that we pay a little purchase price for it, that means that we invest into the companies because we believe in the story, and we see a clear payback of it. either during holding period or at the end in the harvesting in the exit proceeds of this. So when you look at the exits of the last 12 months and we took September to September, you see here 8 exits. And let me take out 3 of them. Number one, you see Special Melted Products. I think you're all aware of this. SMP was something where we invested money in the acquisition. We had to pay a little purchase price for it, and we had to take over off-balance guarantees. I think turning around this company and making the profit we make selling it for more than EUR 160 million, 2 years later, you all agree with me that it was good to take the risk of an investment in this business that it pays back. Second, let me emphasize Plati. When we acquire companies, and you know we acquire companies in difficult situations. We acquire companies when results are unstable, results are most of the time loss-making. Management maybe has already changed or walked away. The product is maybe not good. The quality is not good. Customers are unhappy. So when we buy companies, there are always a little bit of uncertainties. And we have our plan, we have our operations team, which assess the plan in the due diligence. But one or the other might not work out like we have planned in the beginning. And Plati was one of them. And I think with Plati, because we didn't have the right focus at the end, it became small -- Accursia -- and Accursia took Plati back on track. They did the necessary things. They focus much more from their top management on the asset. And at the end of the day, Plati is a company running properly today. Actually, is one of the suppliers still of part of our automotive supplier base. They operate out of Poland and the Ukraine. And the company is today alive, successful and I think Accursia is not complaining of having the company. And last but not least, it's Frigoscandia. Frigoscandia, it's also where we have invested a purchase price, where we have taken on guarantees. But we didn't do it for any price. So in the first negotiation of Frigoscandia, we lost the deal. We lost a deal against the competitor of us because we were not willing to take that size of investment, which was asked. And they came back to us because we were seen as a more reliable partner and for a very -- for a significant discount of what the competitor ask, at the end, we got a deal. But selling it off for more than 30x cash in 2 years, I think we can agree this was a good investment we took on with Frigoscandia. It was also good that we stayed firm when we were asked to increase at that point in time. Let me give you also a little bit of an outlook. And obviously, I cannot disclose you the names of the companies as it would also have an impact on the process as such. However, as I said before, we started this growth journey in 2020. We have a holding period what we believe is the right to have of 3 to 5 years. Can be, maybe fixed if the market is not there. If we have bought a lot of add-ons and if we still want to consolidate the crew. But this is a little bit our focus. Starting 2020, 3 to 5 plus years holding period brings us to a very, very attractive pipeline on the exit side in 2020 -- until end of 2025 where we expect active proceeds in the range of at least EUR 200 million. And they are also spread over our 4 segments. So they are spread over engineering and technology, retail and food, goods and service. And yes, we even believe in these circumstances of the market. that we can have an exit until the end of '25 of an automotive asset we have in the portfolio. In summary, and then we are very happy to take your questions. Financials are duly audited. Our aggressive growth story is still there and is successful. We have a diversification in our financing setup. And last but not least, given the strategy we applied of growth, the exit pipeline where we proved already last year, in the last 12 months, and the outlooking exit pipeline looks very promising and proper. And with a great team we have, we work on that and we will deliver. We'll deliver what we promise. So thanks a lot for your attention here from Munich, a real city with proper people. And we are now very happy to take your questions, a few of them. And with that, I'll give back to the moderator.

Thank you, Johannes. Thank you, Mark. So we have received a few early questions already, which also have been answered already, which is good, I think. Continuing with a few which seems still open. One is a more, let's say, technical question on how the dowry works in relation to what Mutares invests. So basically, when you disclose the figure, whether this is a net amount or whether the investment is a gross amount with or without dowry?

Maybe I'll start with clarification because this has been also coming up to our attention that sometimes it's a bit of confusion. The legal entity, Mutares Holding, that is a listed one, has no gains from any acquisitions with the acquisition right away. Whenever we talk about badwill or dowry, we talk about the group financials. And the cash or liquidity that we talk about, that we ask for is always in the target. It doesn't flow into Mutares. There's no balance sheet hedge in cash positively with an acquisition. So we provide -- and let me take you the example, again, of Efacec, cash through the target, Efacec in this case. And when we talk about the dowry and the badwill, the badwill is the difference between the equity acquired and what we paid. The means that when I take again the example of Efacec, we have EUR 135 million to make it easy from seller that provides it, let's assume for now as equity in cash. And we provide $15 million in addition. That means that we sit on an equity dowry of EUR 135 million, which is the badwill because we pay EUR 15 million for EUR 150 million of the cash that we acquire. So to answer the question, you were asking gross or net. So when we talk about a badwill, it's normally a net number because we subtract from the equity that we acquire or we pay for it. I hope that answers the question, even though it's quite technical.

And there's a follow-on question on the what is called dowry pipeline regarding the acquisitions you are planning. How much volume do you expect for the dowry pipeline on the planned acquisitions to be completed by year-end?

Well, so first of all, as you can imagine, the dowry is a little bit linked the situation of the asset we acquire, okay? So the pure number of a dowry pipeline doesn't bring you a lot when you don't know how much cash training the companies are doing. What we certainly have in the pipeline and the acquisitions we do, also the one I have negotiated last night where we are close to sign is a dowry deal. So we will always have a badwill with the transaction, doesn't necessarily mean and the one from yesterday or one from tonight and the ones which we are ahead of us. All of them, to be clear, will have a Mutares Holding listed entity. Equity and cash contribution into the company because that's the skin in the game that sellers ask from us. And the dowry is a little bit of a rule of thumb. The dowry is times 8 to 10 of this. And then we have to work. So we look, for example, on the company, which -- where we have last week negotiated and made, I think, a big step forward. The company doing roughly EUR 400 million in sales, losing 10%. And there, we will have a relation of 1 to 10. So 10% of the dowry we get is the skin in the game, we, as Mutares have to give into the deal. I hope this answers the question. So overall, if you look at the 5 transactions, 5 transactions, we took roughly the 5 transactions we look in, it's up roughly a little bit larger than EUR 1 billion in sales. We talk about EUR 20 million of equity from our side. So if you take times 10, you come up with EUR 200 million of dowry pipeline.

Max, Let me add you one thing because I think it fits quite well here. I mentioned in my presentation that we, in the growth phase, had to accept limitations in the way we get our -- overpaid because without the work of our team, the company has no future. And that's why we actually -- I have the perception that it's necessary. And this is transparently negotiated as part of the restructuring expenses with the seller. And the transactions that we also included in the press release where we said we want to sign 4, 5 until the end of the year and need to spend approximately up to EUR 20 million for this. We have, in these acquisitions, no or limitations, which are really duly planned along with the ops team. So that we actually do not foresee any buildup in receivables for these new acquisitions. And this is, I think, quite important looking forward that we clearly have also seen that the receivables have grown with the growth of the group. How is the time clearly to consolidate this and to reduce it and it starts with the acquisitions. And that's why it's so important that we really use the opportunity and the size of the group to negotiate a deal, which is sound from the very first day. And that's exactly why it might take a bit longer and why it all sums up now in Q4. But then it is like this.

Thank you, Mark. Then there's a 2-part question going back to the receivables. The first part is maybe you could mention again the 80% you talked about. And the example you gave with the EUR 10 million in revenues. That's the first part. And the second part is whether you could give an idea on the concentration breakdown of the receivables, i.e., if you looked at the top 5 companies, for instance, how much would they account for of the total?

Starting with the first question, and maybe also explain this in greater detail. So when we provide continued consulting services, this results in revenue and receivables. As soon as -- and I take here the example that I took in the presentation keeeper, where we actually have paid up receivables that was revenue, that was not paid, but the team has done the job and keeeper is fully on track and pretty much is only under supervision of just 1 person and it's not building up big receivables anymore. It's rather the supervision of the group that we support it here and there, but these are not significant amounts. So the company is actually not providing substantial revenues anymore on a running basis but is able to reduce the old receivables that we have paid up in the past, EUR 2 million; as of today, 0. I said in the presentation, I said until June 24, it was EUR 0.5 million, and they reduced the rest throughout Q3. And then we have the other situation where the team is still working on the project, so we still build up receivables and we have revenues. And I said that the payment ratio, so the amount of inflows in cash on holding level for receivables towards the portfolio, it's 80% year-to-date, year-to-date august in this case. And we make this relationship all the time. Nevertheless, we know that it's a bit -- it's not sharp, right? Because I have maybe inflows that are not relating to this revenue in orders, like with keeeper. They pay all receivables. But nevertheless, the total needs to work out. That's why I say year-to-date, a total, '24, needs to work out. In total holding period that needs to work out. And for the future, like I said, I want to see this number above 100%. That needs to be the case for one point in time because all receivables are paid that are not contributing any revenue and the revenue that is currently running on agency services is paid by, for example, the new acquisitions where we then are from day 1 in the money and do not build up receivables. And I hope that answers the question and give some clarity about this indicator that I talked about in the presentation -- exactly. So Johannes has just said to me the second question, top 5 receivables that we have from a group company perspective. So I said that against approximately half of the portfolio campus, we have no or only little receivables. It means against half of it, we have substantial partnering, substantial receivables. And the majority is against the automotive segment. I have not the number on hand right now. I would assume that taking out Lapeyre and so on to these other big shots here. I would assume that something around 70% is against the automotive segment. And this is due to the size simply that we've reached. And we believe in the size that we have reached with these portfolio group. So FerrAl United, more than EUR 1 billion; Amaneos, more than EUR 1 billion in revenues. So these are relevant companies we expect them to reduce the outstanding balances over the next couple of quarters -- I hope that answers the question with top 5 out of my mind, I would say that 3 or 4 in the top 5 are automotive.

Thank you very much. There are 2 further questions regarding the automotive sector. The first one is a more general one, asking regarding the actual crisis in the European automotive sector, how this may influence the results of the automotive business at Mutares? That is the first one. And the second one then relates to the press release you did regarding Steyr Motors in the sense how invested Mutares will stay in that going forward?

And then I start with the second question because that's an easy question. The clear answer is we don't know because we need to hit the market within the next couple of weeks, and then we will see how the demand is. We, as a team, believe that the time is now. That's why we have prepared the process for now, in the course of October. And we will see how much demand is out there for an asset like this under the current circumstances. And then we will see how much remains with us after the initial listing. Second question was regarding automotive segment...