Brockhaus Technologies AG

Hello, ladies and gentlemen, and welcome to the Brockhaus Technologies investor update call. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. Let me now hand over to Marco Brockhaus.

Yeah, thank you, and good afternoon, everyone. Welcome to Brockhaus Technologies earnings call for fiscal year 2022. Before we begin, I would like to point out that the slides we are presenting will afterwards be published in the Investors Relations section of our website www.brockholz-technologies.com. After our presentation, we will be open to the core questions from your site. To be fair to everyone, please limit yourself to one question plus one follow-up. Thank you very much in advance. our results, I encourage all listeners to review the legal notice on page 2 of our presentation, which explains the understanding of forward-looking statements. Additionally, please refer to note 6 of our annual report 2020-22 on page 85 for discussion on alternative performance measures, as well as reconciliations of non-GAAP figures, especially revenue before PPA, adjusted EBITDA, and adjusted EBIT. Please note that our EBITDA and EBIT adjustments only comprise share-based compensation, costs of the acquisition of subsidiaries, as well as accounting effects from purchase price allocations, PPA. For information on risk factors that could cause actual results to differ materially, From forward-looking statements, we kindly refer you to the section on risks and opportunities in the management report, 2022, page 59. Flipping over to page three and into the usual summary. I have to say we are very proud to say that the fiscal year 2022 was an absolute record year for Brockhaus Technologies. Brockhaus Technologies generated revenue before CPA of 145 million euros in 2020-22, which represents growth of 38% compared to last year. Adjusted EBITDA grew by 23% to 15 million euros. This corresponds to a continued high adjusted EBITDA margin of 34.4%. At the same time, adjusted EBIT increased by 21% to 47 million euros and free cash flow pre-tax grew over proportionally by 277% to 14 million euros. Before adjustments, revenue was 143 million euro with EBITDA of 47 million euro and an EBIT of 29 million euro. EBIT is however affected especially by PPA amortization which significantly distorts its meaningfulness. Despite the challenging market environment, this strong operational development and continued profitable growth across all our business segments led us to exceeding our forecast for the full year, which we had previously already raised during last year. Our operating development clearly shows the high resilience of our business model. Additionally, we successfully completed the first strategic sale within Brockhouse Technologies with the disposal of our former subsidiary Pallas. a global technology leader for optical particle measurement to Swedish Indutrade, for a valuation of 100 million euros. We hereby realized high value for Broca's technologies and passed our shareholders, as the proceeds received at closing already amounted to nearly 4x the cash we invested end of 2018. with potentially more proceeds to follow in 2023 and 2024. However, we clearly remain long-term oriented when acquiring businesses. This being said, due to our strong organic cash flow, as well as the proceeds resulting from the sale of Pala, we are looking at a very strong balance sheet with cash and cash equivalents of 79%. 71 million euros as per year end of 2022 and thus the net leverage of 0.7x our adjusted EBITDA. This equips us with significant non-diluted financing capacities for future acquisitions, a potential share, repurchase or something else, but more on this later in the presentation. With this brief summary, turning over to the next page and handing over to Harald, who heads our finance department. Thank you. Thank you very much, Marco, and welcome. Let us jump right into the quarterly revenue analysis on page four and some introductory comments on that. As you might recall from our update call on the palace exit end of November, there are some Yeah, rather special financial reporting rules that you have to apply when selling a subsidiary. I am talking about PI-Forex 5, which requires the income statement to be adjusted retrospectively. That means that all revenue and cost contributions of Pallas must be excluded from the respective line items of the P&L. And then they are shown as one total as income from discontinued operations. Since this has to be done for the comparative numbers of the prior year as well, you have a nice light-for-light presentation of the results. And also, PALAS is not a reportable segment anymore. And then that brings us on this page to our two remaining subsidiaries or segments, bike leasing and IJP that you see here. Starting at the top with bike leasing indicated by the green bar. As mentioned in previous sessions and in our annual report, the strong quarters in terms of revenue and earnings are Q2 and Q3. since these are the warmer periods of the year. This becomes quite visible in the quarterly development of 2022 when biotech using realized some 65% of revenue in Q2 and Q3. Proceeding to IHSE, as you can see, the company continued to outperform every last year's respective quarters. and also shows increasing top line development throughout the year. In the beginning of 2022, IHSE was still struggling with supply bottlenecks and COVID restrictions in the Chinese market. This has become much better in the later months, which led to increasing business volume. And in terms of 50 years, it's up to a revenue growth of 10.4%. Flipping to the next page for the regional sales grid, as you might know so far, bike leasing, again, green bars at the top, has been focusing on Germany only, with first steps of expansion into Austria, where bike leasing became market leader quite quickly. Therefore, all revenue here relates to the EMEA region. Proceeding to IPC, EMEA revenue was essentially stable at some 20 million euros. The great news, of course, is the strong rebound in the US, where the heavy COVID impact in 2021 top line jumped by 61% to more than 12 million euros. In contrast, APEC was still hampered by a pandemic countermeasures in China, of course. That resulted in a revenue decline in the APAC region by minus 26.6%. Flipping one page further to the T&L table, in the first two columns, we compared bike leasing last year performance on a pro forma 2021. As you might recall, we acquired the company end of November 2021. And therefore, our income statement for that year only includes the December income of bike leasing. Here, of course, the performer figures show the whole year's operating performance for 2021. And as you see, bike leasing concluded last year with a top line growth of more than 50% on a like-for-like basis. Gross profit margin was 62%, EBITDA margin 42.6%, and EBIT margin was 41%. Even though 2022 marked another record year for the company in all KPIs, profitability was down compared to the year before. There are two reasons for this. First, there was a non-recurring effect in fiscal 2021 from the derecognition of a large portfolio of lease receivables from the balance sheet, which led to a 7.1 million euros additional revenue. And as there are no respective costs associated with that circumstance, it resulted in 7.1 million euro operating income. That had a positive effect on bike easing margin, of course, in comparative periods of 2021. The second factor is that fiscal year 2022 was impacted by some one of expenses that negatively impacted profitability. Those costs amounted to 4.8 million euros and included consulting fees for the IFRS accounting and the implementation of related processes and software. Especially the optimization of data quality and interfaces between the various existing systems at the company were very costly. It should be, however, considered in this regard that we had actually two big integration projects on our plate simultaneously. First, bike leasing itself, of course, into Brockhaus Technologies, but also bike leasing itself made a major acquisition only months before that deal, when they bought their own leasing provider, which is a highly regulated and complex financial institution. Proceeding through the next two columns to the right, at ITSE, the growth profit margin was up by approximately 4%. This was mainly due to rather unfavorable customer and product mix effect back in 2021, which did not reoccur in the reporting period. In DTA margin, unfortunately did not quite live up to a level that we would be happy about. The main reasons for that are higher costs of trade fairs, direct sales, and marketing activities, which did not incur in 2021 because of the pandemic. Lastly, the standard function costs were somewhat lower, which was mainly due to lower expenses for the external providers of due diligence advisories. In conclusion and summing up from the consolidated group level, revenue was 145 million euros as stated before showing a substantial increase by 38%. Growth profit margin was at some 65% and adjusted EBTA margin 34.4% bringing the group to an adjusted EBTA of 50 million euros. The groups adjusted a bit of 46.8 million euros makes a margin of 32%. As per the end of last fiscal year, our group had more than 70 million euros in cash. Please bear in mind that this is after voluntary early repayment of acquisition loans by bike leasing in the amount of some 21 million euros. And on the level of the AG, the entire payback of the vendor note from that deal of 15 million euros. Pre-cash flow, by the way, was at 40 million euros before taxes. And that figure relates to the operating cash flows of our subsidiary only. So the sales proceeds of the palace divestment are not included in our definition of pre-cash flow, pre-tax.

On the next page, we put a summary of our financial leverage structure.

From left to right, the debt from loans amounted to some 90 million euros. Subtracting cash and equivalents, that leaves you with a net debt from loans of 20 million and adding 7.9 million euros from other financial liabilities as well as 9 million of Net debt from lease refinancing brings us to 37 million euros in total net debt. And if you compare that to last year's EBITDA, this corresponds to a leverage of 0.7 times. Since our target corridor reaches up to 2.5 times EBITDA, this is a very comfortable level in our view. A year ago, shortly after the acquisition of Bike Leasing, by the way, our leverage was indeed in that target range, so about 2.5 times. The substantial decrease of leverage ratio was mainly driven, of course, by the divestment of Pallas, but also substantially by the massive free cash flow of 40 million euros, as well as the growth in EBITDA. This concludes the financial update. I'm happy to answer your questions later on and would now hand over to Paul, who is our head of acquisitions.

Yeah, thank you, Harald, and also welcome everyone from my side. Let me now provide you with a quick deep dive on our continued two business segments over the next couple of pages, starting with bipartisan approach eight. As you might remember from our last three earnings calls, bike leasing, as typical for a private German mid-cap company, was only accounting according to German GAAP as mandatory for any private German company before we acquired it. Now, with a full fiscal year below our, so to say, roof, we can now finally provide you with comparable IFRS figures. As mentioned earlier by Harald, bike leasing grew their revenue before PPA to 109 million euros. What I would like to highlight, though, is that for a full like-for-like comparability, one would have to exclude the positive one-time effect resulting from the sale of losing receivables in the amount of roughly 7 million euros from the revenue base in 2021, which Harald, a couple of minutes ago, highlighted already. Doing so shows a real, so to say, like-for-like top-line development with a strong 67% growth that you can see on the right-hand side here. The most important non-financial KPI that drives Bike Living's top line, however, is the number of bicycles facilitated through their digital platform. Last year, that number of facilitated bicycles grew by 46% to around 118,000 after roughly 82,000 the year before. Those facilitated bicycles, on the other hand, are only a function of the customers that are onboarded to Bike Living's digital platform. Bike Living has now reached a customer base of around 45,000 corporate customers, really individual corporate customers, as per year end 22, up from around 32,000 the year before. Those corporates employ more than 2.5 million employees that does have access to our solutions. Keep in mind that when we signed the acquisition of Bike Living in June 21, this number of corporations on the platform stood at around 25,000. So we see a strong continued growth here. Lastly, cash and cash equivalent of bike leasing grew to nearly 24 million euros, despite bike leasing having already repaid 21 million euros of the loans we use as part of last year's acquisitions throughout the year. This highlights the strong cash generation of the company. Moving away from the more quantitative development, And let me give you also an update on what we are working on operationally with the team. As the core of Bike Living is its digital and highly automated platform, we are naturally prioritizing the further development of it internally. For this reason, we have hired a team of now seven developers at Bike Living in order to further internalize development work that has previously been done externally. Together with this team, as well as our long-standing development partners, The platform has been further expanded to now also allow for the onboarding of B2C brands, so direct-to-consumer brands, such as Canyon, Rose, or many other brands that are not being sold through the traditional bicycle retailers that we have on the platform. Additionally, even though the processes underlying the platform are already highly automized, there is always room for more automation and improvement, which the team is constantly working on. Last but not least, 5G has expanded its offices in Usla by a new sustainable headquarter, which you can see on the left-hand side of this page here. Now it will attract more tech talent, so coming back to the point of building up the software development team. We have also opened an office in Berlin. Now, moving over to page 10 to give you a similar update on IGSE, both quantitative and more operational. After two years of pandemic with wide-ranging travel and contact restrictions, ISSE and KVM Tech continued to expand the growth already shown in the first nine months to a plus of around 10% in full year 22. This was especially driven by the lifting of travel and contact restrictions in the Western Hemisphere, most notably the US. As you can see from the quarterly revenue development shown on the right-hand side of the page, Q1, Q2, Q3, and Q4 were the strongest quarters since outbreak of the COVID-19 pandemic early 2020. And Q4 was even significantly stronger than the last pre-COVID quarter that you can see here on the right-hand side. Adjusted EBITDA margin remained high at 23%, however, still significantly below the target pre-COVID level of 35%. This is mainly due to the broadly unchanged fixed cost basis paired with a below pre-COVID revenue level for the sake of not jeopardizing future growth potential, as well as the inclusion of the so far lower margin KVM tech. Lastly, while the year 2022 has been immensely challenging, especially with regards to the sourcing of, for example, FPGA chips, we can say that supply chains and many material prices have significantly normalized or improved again starting into the new year. Moving over to more operational topics that are happening or have been happening with IHSE, a key milestone for the future development has been reached, namely the completion of two of the highest security certifications there are, namely NIA for the US and North American markets, as well as EAL4+, for the European markets. Both certifications will allow IHSE to tackle a specific subset within the governmental markets, with specifically high security requirements, which have been relatively untouched so far. We know that, for example, one of IGSE's biggest competitors globally does roughly the same revenue as IGSE, but 90% of which within this specific market subset. So we expect significant business potential from it. In addition, the post-sales integration of KD MSEC has progressed very well. Apart from the more, let's say, administrative integration processes, the technology transfer into the product portfolio, which was the key rationale for the acquisition in 2021, has been completed. As a result of the combined technology effects, IGSE and KVM Tech are now offering hybrid solutions that enable customers to bridge between proprietary KVM networks of IGSE and the IP-based networks of KVM Tech. Lastly, as you could already see from the regional update Harald presented in the beginning, last year has been a tremendous success for IHSE USA. Following the basically complete lifting of travel and contact restrictions within the U.S. beginning of 22, business picked up quickly as expected across verticals. This led to IHSE USA achieving a record year 22 when excluding the non-recurring solitary projects thereof. So, after that deep dive into our two segments, let me now give you a brief update on our current M&A activities. But instead of giving you an update on our deal pipeline, as usual, which remains full of potentially interesting opportunities, such as, for example, two Netflix businesses, as well as one digital platform business at the moment, we thought about highlighting the current non-diluted financing capacity of broadcast technologies for such kind of deals. As you might remember from previous update calls, we acquire businesses with a combination of equity, so cash and or share, as well as debt. Regarding the latter, we tend to be on the very conservative side with respect to leverage ratios. We have always said that we feel comfortable around the, let's say, 2.5 times, maybe 3 times EBITDA range, while we are currently only standing at a 0.7 times adjusted EBITDA, as mentioned before by Harald already. If you now close this gap from currently 0.7 times to the mentioned 2.5 or 3 times EBITDA, this would yield to you the bar chart that you can see in the middle here and a financing capacity that is currently not being used of 88 to, let's say, 113 million euros for new acquisitions. To put that into perspective, part of the acquisition of bike leasing in November 21, we utilized around 90 million euros of cash they would be able to finance a similarly structured transaction, or ideally two smaller such transactions, without the need for further capital raises. This cash compounding motive has been the aim from day one, and following the sale of Palab as well as strong operational development of our remaining subsidiaries, we are happy to announce that we have reached that motive. With this, I'm handing back over to Marco for our outlook.

Thank you. Thank you, Paul. Yeah, flipping over to the last page of today's presentation, our forecast for fiscal year 2023. As we announced in our ad hoc release beginning of this week, we plan with revenue of between $165 to €175 million in fiscal year 2023. This corresponds to a growth corridor of between 16% and 23% compared to the €145 million of revenue in 2021. In order to avoid deviations between the group's key performance indicators and IFRS, Rockhouse Technologies will no longer adjust revenue for PPA effects in the future. We expect the adjusted EBITDA margin to remain at a high level of 35% for this year, corresponding to an adjusted EBITDA range of between €58 million at the lower end of our guidance and €61 million at the upper end. Please note that this forecast assumes that there will be no change in the scope of consolidation within Brockhaus Technologies. The reason for this approach is the difficulty in predicting the nature and scope of our future acquisitions. We do not believe that any estimates in this respect are sufficiently reliable. Fifth year 2022 was a record year for Brockhaus Technologies. With a strong operative development despite the generally challenging environment. We are thus convinced by the resilience of our business model and our ability to source, acquire and successfully develop technology and innovation champions within the German Mittelstand. Ladies and gentlemen, that concludes our presentation and we are now happy to answer your questions. For that, I would like to hand over to the operator. Thank you very much.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press 9 and the star key on your telephone keypad. In case you wish to withdraw your question, please press 9 and star again. Please press 9 and star to register for a question. And first up is Stefan Augustin from Barbrook Research. Over to you.

Thank you. Hello, gentlemen. Actually, if I may, I would ask two questions. The first one is on bike leasing and the working capital development. I came up with the idea that at the beginning of the year, you usually would ramp up working capital as you have a low amount of bike lease and that continues to grow during the year. And finally, during the end of the year, when we go back into the cold season, we will have a release of that respective working capital. This year I see, let's say, in the end of the year, more or less the same amount of working capital than after nine months. So is this still to come, or is it simply the fact that the business is growing so strongly that the underlying basis simply increased that much. There is no effect like that in Q4. And the other question would be if I look in the fourth quarter of IHSE, I see a very good increase in sales, but not that much operating leverage. and the question is what actually what kind of measures will be done and how long does it probably take to bring the dialogic element of the KVM tech acquisition to the normal HSE mergers?

Yes, thank you. This is Harald.

Let's tackle your first one first. As you are absolutely right, working capital increased at Byte Leasing. I just did the calculation when you were posing your question. It's some 60% before prior year. So also end of the year effect where you would have or would expect lower levels. And there's absolutely the tremendous growth of the company. So what you also have is the trapped cash from from the SPV, but that goes into a lot of detail. But you're absolutely right. I mean, the fact that PipeEating has still positive working capital relates to a sales growth and then a growth in the working capital too. But still, we're more than happy with both cash conversion and absolute cash flow levels of PipeEating. The second one is, does it answer question one? Yes, it does. So the second question was on IHSE margin development. So for one hand, of course, IHSE is at a total top line, not yet where it should be. So IHSE records revenue was, I think it was 40 or 41 million Euro. And that is a level that the company would absolutely support. So naturally, if you are not there in top line, you cannot be there in margin. And that applies to the last quarter too, of course. When do we expect the effects from KDM tag to diminish and ICSE to return to the, as we see, some 35% as a long-term sustainable margin. As you know, unfortunately, we do not guide by segment. But, of course, we expect revenue to go up for both segments that apply to IHSE as well for margin to further rise.

Okay. Thank you very much.

The next question comes from Lukas Frank from Tigris Capital. The floor is yours.

Yes, good afternoon, gentlemen. I'm a little bit struggling concerning your margin outlook. So can you give us an indication of the expected revenues you expect for 2023 in your both remaining segments? to get a better feeling on margin development.

As Jeff said, thank you for your question, but as Jeff pointed out, we refrain from guiding by segment.

Okay, so then I ask a little bit on the other way.

Do you see margin pressure from white leasing? Um... All here, hi.

Oh, I wouldn't say so. I mean, what we have guided is basically the same EBITDA guidance we put out last year. So now one could argue, I mean, with a growing top line, it shouldn't be a operating leverage that brings up margins as well. Absolutely right. But at the same time, like most of you have probably noticed, there is Even though we don't have COVID anymore, the market situation out there is probably still not the easiest, although bank turmoil, interest rate development, inflation, etc. So let me put it like this. We rather stay at the margin that we have seen in the last year and that we expect to hold over for this year. Harald also noticed in his part of his presentation, as you have probably heard, that there were some let's say, one-off costs at especially bike leasing in last year for integration processes, etc., which we did not. That's why they're one-off. We occur hopefully this year. So there is some room to maneuver, but given the situation out there, we rather stay on the conservative forecast.

Okay. Because if we assume that probably bike leasing will generate organically a higher revenue growth than IHSE and at the same time a higher margin, so that the margin improvement for group should be also much higher. Also, if you take into consideration that you had these one-off effects in 2022.

Yeah, you're absolutely right. I can follow you in that respect. But also some other topics. If you look into our annual report, you see that last year we've basically not spent a lot of cash for due diligence activities. And if you would expect the due diligence activities this year to pick up again, What we adjust in our numbers is the diligence cost for successful acquisitions, but not for not successful acquisitions, because that's cost of doing business. And if we would, let's say, say differently, it is easy to spend 1 to 3 million euros of the diligence cost if you have attractive businesses in front of you. And we are in a very comfortable position, balance-wise, to do new transactions. And we want to do them. So positive effects on the margin of bargaining, you also need to balance in probably a higher decision cost on holding level again. So that counteracts that a bit.

Yeah, okay. Do you see any changes in the environment on the market where you look at for... Do you see less participants in fighting for possible targets or how do you see the market environment? Are prices coming down or how do you see it?

Yeah, unfortunately not yet. The first people started asking for multiple effects in the private space, I don't know, beginning of last year, when the Russia-Ukraine situation started. But we haven't seen that until now. What we've seen is that quantity of deal flow remains unchanged. What has changed a bit is quality of deal flow last year. So there were less absolutely brilliant businesses in the markets. But those businesses that were in the market, including colors, for example, achieved very, very, very high multiples. So there was a scarcity of those absolutely top-notch businesses achieving higher multiples even than before. However, the remaining market of, let's say, also more mediocre deals that we anyway don't look at, there were a lot of those but also a lot of deals where we didn't hear of any announcements in the end, closing announcements. So I would assume that they haven't come to an end because there was simply no, let's say, equilibrium price between buy set and sell set for those type of assets. Starting into this year, again, deal flow remains unchanged. We have some very promising deals in front of us. that we will look at. Do we see prices coming down again? No, not yet. If we expect them to come down, let's say, quarter or so time, maybe pre-summer, maybe post-summer, we would hope so, actually. Why is that? Because we are not sellers in those markets. They are buyers. And with the financing capacity we have, we would actually see prices come down a bit, But I cannot, of course, not look into the crystal ball.

So if I ask how much or how high you see the probability for M&A this year, you say we don't have the crystal ball and M&A can happen or not.

Yes, that's the same language I always use. Because if you look at our, by now, very long track record, we are running at, I don't know, slightly above one transaction per year, 1.X something transactions per year. But this includes years where there were no deals. This includes years where there were two deals. We will do transactions whenever we are 100% convinced. But I cannot guarantee anyone if this will happen in three, six months, 12 months, or 18 months. But we are interested in doing transactions as natural for our business.

Yes.

Thanks. At the moment, there are no further questions. So if you have any additional questions, please press 9 and start.

We do not have any further questions. All right.

If there are no more questions, thank you all very much for attending today's earnings call of Brockhouse Technologies. I would like to use this stage and moment to thank our employees within the group for their outstanding work and performance, as well as our shareholders for their continued trust and support. Goodbye, everyone, and have a great day. Thank you very much.