Mutares SE & Co. KGaA

Good afternoon everyone and welcome to the Mutaris earnings call for the first half year of 2020. On our call today, Mutaris CFO Marc Friedrich and Mutaris 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 summary of the business model and activities on the M&A side in the first half year, followed by a quick summary, then financials and outlooks, which will be presented by Mike Fittig, the CFO of the Metaris 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 seven and ten times over the four 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 10 times ROIC, which we target for our companies. 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 risk 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. do 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 unorganically through an online position to finally then come to the seven to ten times return on invested capital, which is our main target. To give you a little bit of track record on this 7 to 10 times, which is our target, including the four phases, as we speak, the portfolio we have, and which is at least for 12 months in our portfolio, has already contributed 4.8 times of return on invested capital, which is Obviously, mainly driven by consulting income and dividends paid out of the portfolio into the inventory holding, plus the exit proceeds which are outstanding for potential exits should then rise to the 7 to 10 times. So, what you see is that we have already materialized almost a 5 times 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 three to five years. This is only a certain guidance. 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 five new platforms and in the following slide I will show you our total portfolio in a minute. And three add-on exhibitions. 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 three exits, the two very small ones. Vexity sold its check business and we sold some packaging and then we sold the restructure of Valkyrie Park 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 this COVID time. Beginning of the year, we have also successfully placed a 50 million euro bond, especially for add-on acquisition and further portfolio development, where we do now evaluate further an additional 30 million, which you have also seen maybe this morning in another talk. The general annual meeting decided on a dividend of 1 euro. The outlook for 2020 also looks very positive on this side, and we are still very strongly committed to our sustainable and successful dividend policy, which will be also in 2020 our main target, and even maybe overachieving. So a quick summary of the portfolio. You see automotive, mobility, engineering, technology, and goods and services. We also significantly grown there. Maybe a few highlights on this one. So the SPS group, which is doing the automotive and mobility segment, has divested 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 Nexos, which is an acquisition of roughly a little bit more than $200 million of sales, which is a perfect fit and also has synergies potential with our Platy group, as well as with the Cessibonyo group. So we will carefully bring those synergies together of these three 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 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 an outstanding close-off 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 Mike Friedrich for the financial part and the output. Thank you very much.

Thanks, Roger. So, I'm starting with a 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 activities. This is true again for the first half of the year, but this time the group is highly impacted also from COVID-19. We've seen a significant increase in sales by approximately 40% due to the M&A activity. This time, mainly the back city group, Primogex, and the Rupi Transaction, that is part of the Dongle Group now, which contributed quite positively to the increase. But on the other hand, we saw, compared to the budget that we had in the group, quite a shortfall in sales in our existing portfolios due to COVID-19, especially in the month of March, April, and May. The group EVTA income is impacted by approximately 66 million of bargain purchase income. On the other hand, the adjusted EVTA is highly affected by the negative impact 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 10 million. The impact by, especially in COVID-19 and here between EBITDA and that income, there is especially also the depreciations and amortizations and we had to account for an impairment of approximately 20 million due to the impact of COVID-19. Looking at the balance sheet, a detailed slide for just EVTA before we come to the balance sheet. So here you see the buying purchase income of approximately 66 million in the first half of the year, slightly lower than last year. So this is due to the adjustment that we already made. in the acquisitions and in the accounting of buying and purchases of the transactions that we closed in the first half of the year. The second line is the restructuring and other non-recurring expense, which is only 9 million in the first half of the year, because we were often not able to execute the restructuring 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 non-recurring expenses relate mainly to the STS and the donors group. The second, or the last line of the deconvigilation effect is the 1.6 million, meaning that we have a gain of the deconvigilation in the first half of the year, which were by the Duro Polska, Client Packaging, and the Back City activities in Czech Republic, which led to a total gain of approximately 1.6 million. And to give you the adjusted VDA, we have subtracted it. To give you a bit more color about the adjusted EBITDA and the phasing, we see that the adjusted EBITDA was, and the 60 million that you see here, were actually accumulated mainly in February, March, and April. And the month May and June were actually both at already great easing on adjusted EBITDA levels across the group, even including the new acquisitions that normally contribute negatively. Looking at the balance sheet, again, an increase of approximately 16% or $104 million to almost a billion, so we are quite confident that we will cross the billion until the quarter financials due to the acquisitions of FST and Exhibit. And you see here, especially that the financial liabilities increased from $120 million through approximately $200 million, and that's mainly due to the raise of the bond of $50 million. Coming to the segment financials and starting with the segment that was hit most by COVID-19, which is automotive and 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 deep increase again in sales in June and also in July, again across the entire portfolio, with the main increases, for example, here at Tyco and Primatex, which are on budget level or way above budget level in July. The focus, like Johannes already mentioned, was obviously for all portfolio companies, also mainly for the automotive and mobility segment, on securing the equity, and we were able to successfully implement certain measures, and were able to sign subsidies from governments in France, in Germany, and in the city. Looking at the engineering and technology segment, we have a totally different picture here, with a segment that's increased the adjustability A from minus 7 million to a slightly positive figure of approximately 1 million. And there's really, in this kind of environment, really great success for the group, and that success was mainly driven by the Dungas group and the Gemini group. Both were able to finalize and finish the restructuring was the first phase of researching at the end of 2019, so that we see the positive contributions in the first half of the year. And with RUKI, the DONGES group was able to acquire a positively contributing effort to address the TBTA, and we are able to start the integration and reorganization of the group in the second half of the year. By computer, one company in that segment that was a bit more affected by COVID-19 and was actually contributing negatively to the GDPR of approximately 6 million. Coming to the last segment, the goods and services, and here again we have a really positive surprise since pretty much All companies in this segment, except for Truffaut Mignon, contributed positively to the adjusted EBITDA. Even a company like Baxity, that we just acquired at the end of 2019, was able to contribute positively to the adjusted EBITDA. On the other hand, Keepa closed transactions of Keepa Tableware, the lab from Netzeb in February, and was starting the integration with a combination of the two. And FIFA 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 levels. In the end, we saw an adjusted EBITDA of only minus 1.5 with way higher revenues compared to the first part of 2019. So quite positive segment development here. Coming to the lifecycle 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. 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. That's exactly what you see here with approximately minus 30 million when EBITDA ratio or 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 because we see a good mix here. We have four companies in the realignment phase, we have four companies in the optimization phase, and the optimization phase should be actually a phase where the companies, the four companies included in the phase, have a total adjusted EBITDA of at least zero. This time you see here, minus 7 million, and I already mentioned that the main contributor, negatively, is the by-consumer group, approximately 6 million, whereas other companies, like Kieper and so on, actually were contributing positively to the adjustment. 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 the phase where we actually expect definitely a positive adjusted EVPA, and this obviously is due in these days, in the first half of the year. Not true for all companies, but in normal circumstances, it should be that the adjusted EVGA is positive, so that we are able to tell the company it was a positive trial. Back to the outlook on page 17. We experienced quite a challenging environment 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 expectation 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 excellent, and that is one of the reasons why we want to or why we currently evaluate the increase of the bonds of up to $10 million. We had, in July, already two closings. The first one was for the Italian post business, and the other one was an acquisition in the automotive segment from Cooper Standard, and we already had one signing in July, which was . company in Germany where we expect closing end of this month. Taking all these acquisitions in one thought, we currently see that we are well on track on the targeted sales level that we set as a target for the full year 2020 of more than 1.5 billion. And looking at a run rate of our current portfolio, we are close to or even above 2 billion in sales already, and we're quite confident that this figure will grow in the next couple of months. But for the least, the same dividend capacity and the attractive dividend policies are kind of the ultimate targets 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 wanted also to distribute to the shareholders. We actually would like to see you again, and that's why we stand out and take the date for the Capital Market Day. We had the first one last year. We would like to do again a Capital Market Day in 2020. We have invited 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.

Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once the name has been announced, you can ask a question. If you find your questions answered before it's time to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the hand up before making your selection. One moment, please, for the first question. The first question received is from Holger Steffen of S&C Research. Your line is now open, sir. Please go ahead.

Good afternoon altogether. Thank you very much for your detailed presentation. At first, I have one question about the bond emission. You have announced a possible discussion about changes of your bond conditions. What are the topics of this discussion?

We like to be expected. We noticed that there are two things in the long term where we believe that a change makes sense. And the first one is that we want to have a shift of the bucket that we have where we are allowed to give commitments to the group or to the 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 a bit more balance. So it's first thing, not negatively for the bond, but we believe even positively. Second thing is that we want to ensure the change in And also, a positive change again for the bondholders about the insolvencies, where we believe that we want to enhance our ring-sensing model and therefore we ask for a change of one cloth, where we believe that also, again, makes sense for the bondholders, but obviously also for the shareholders.

Okay, thank you very much. I may come to your figures. You give us a short overview about consolidation effects in the first half, and I try to derive the organic 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 just check immediately if the 20% is a good guess.

Okay, then I come to another question. So long. First, I think you call the acquisition of Nexon an add-on acquisition to Platy. Now it is listed as a platform in your segment Engineering and Technology, and you said something about synergies with PLATI and with CETIL Union. Why do you change it? Have you any further information?

Well, it's not a real change, because the synergy potential and that the two companies are contributing positively to each other is still there. So basically, it's an extension of the value chain, which NexNorth provides for the FlatB product, so we can offer our customer a higher and deeper value chain, and therefore also a better flexibility in customer service overall. Why is it a platform, shown as a platform investment? We are currently looking also to have it together, to have it together structurally. However, in the beginning of company acquired, we would like to keep it separate. Also, the fact that Actually, Nexos is eight times larger than Platy. So the two 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 two companies together.

Okay, great. And about Zabo, I missed some operative 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 Zabo is a platform investment, you can... you can guess about the profitability of the company and the purchase price. What we have to say is that it is a typical Mataras 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 that Mutaris are typically coming with a bargain purchase.

Okay, thank you. I will wait for revenue figures then.

Let's come back to your question regarding organic growth. It's a bit less than 20%, leaving aside also the head-on acquisitions of Dongus Group. We see across the portfolio minus 18%.

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

An add-on or an exit.

Okay, that's very, very, you think, I think with the environment complicated business in the last 12 months, You said that it's now improving in the second half. Why or where was the main source of this improvement or where is the main source?

Well, as you know, UPEC is a quite small company and it's a project business, so one project can really make the the year or the financials of this company. So UPAC actually has booked a large order, which is in the Middle East, and this gives us the outlook that UPAC will close the year with a positive operating profit. The company is very small. Main customers do sit in the Middle East. where the COVID impact on those projects is 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 the positive outlook on EUPEC simply comes from the order book and the long-lasting project, which you can predict quite okayish what will come in the next six to nine months.

Okay, fine. Maybe we may come to a much larger company. In connection with the acquisition of Ruki, the competition authorities request Donglis to sell a factory in Finland. What are the consequences for Ruki and Donglis regarding revenues and the market position in this country?

The factory roughly made 10 to 15 million in sales, which we are obliged to sell. It's a normal factory, and the competitive factory of Ruki, which is much better invested, is 50 kilometers away. Okay. We don't expect too much 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 in another six months.

Okay. So my last two questions. First, you've only reported SDS as a company. Both existence is actually not sure. Is Calco now safe if the company will get federal credits?

Correct.

Okay. And Trifi Union is not in danger? I saw you made impairments with an amount of 11.8 million euros in the first half.

It's all correct. The company is... 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 the triggering event and the impairment testing, we came to the result of minus 11 as an incumbent.

Okay, thank you very much.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press 01 on your telephone keypad. As there are 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. 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 six months. However, it was also, in my view, an even greater opportunity for our business to accelerate growth, to accelerate 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.