Deutsche Beteiligungs AG

XETRA:DBAN

Earnings Call Transcript 2020-Q1

[Thomas Franke]

Good morning, everybody. This is Deutsche Beteiligungs AG in Frankfurt am Main.I will now hand over to Susanne Zeidler, the CFO of Deutsche Beteiligungs AG. She will lead you through the presentation you received this -- earlier this morning.

[Susanne Zeidler, CFO & Member of the Management Board]

Yes. Good morning, ladies and gentlemen, also from my side. I hope the stormy weather didn't cause too much trouble to you.With this, I would like to enter into online presentation; and start with Slide #3, the first 3 months at a glance. This chart covers the most important messages from the first quarter of 2019/'20. We'll refer to our net assets of the Private Equity Investments, our investment activities, our portfolio valuation, the result from investment -- Fund Investment Services as well as our outlook.The following chart, #4, can be regarded as a friendly reminder of the fact that we enhanced our target system last year. The system of objectives has been further developed, and our approach here is to consider all stakeholders as possible. Financial objectives increase in the value of portfolio companies we'll manage because value of portfolio companies does not equally reflect the value of the business segment. Therefore, it is now increasing the net asset value of the Private Equity Investments, which also includes financial instruments and financial resources, for example. Another important change is the emphasis on the importance of employees for DBAG's success by the new objective which is retain experienced and motivated employees. The new target system and the corresponding key performance indicators have been in place since the beginning of the new financial year. By the way, central objective is unchanged, but the measurement will be different. I would like to refer, for any detailed explanation, to our annual report we published in December.Looking again at our new set of key performance indicators on behalf of Chart #5. The net asset value of the Private Equity Investments and the result from the Fund Investment Services but also the consolidated net income are within the corridor of the budget published in December 2019.Now let's have a look at our net asset value in more detail. I come to Slide #6. It mainly consists of the gross portfolio value and short-term loans to investment entity subsidiaries for the prefinancing of acquisitions as well as the financial resources. It is reduced by carried interest entitlements resulting from private equity investments made by members of the investment team in the DBAG funds. The net asset value does not change as a result of investments and disposals. These merely produce a shift between the portfolio value and the financial resources. It changes primarily as a result of changes in the portfolio value. It is reduced by the distribution of the dividend, the costs associated with the stock exchange and some other costs. The higher the proportion of invested funds, the greater the change in both positive and negative territory, and vice versa. The greater the share of the net asset value that is attributable to financial resources, the more stable the value is.As at the reporting date, the net asset value was only slightly below the value at the end of the previous financial year and came out at EUR 465.1 million.At this point, I would like you to have a look at the next slide. Now as described above, the higher the amount of invested funds, the greater the opportunity, which basically means that investments are the foundation of our future growth. Looking at our cash flow from investment activities, we can see that it came in at minus EUR 43.8 million. Reason is cash outflows for investments clearly exceeded portfolio repayments following disposals. As a result, the investment degree further increased. The invested-to-noninvested funds ratio increased to 24x compared to 5.8x as at the balance sheet date.Our investments made in the first quarter of 2019/'20, mainly relate to investments into the portfolio via the Cartonplast and STG Group acquisitions. I refer to the report on these new investments in the fourth quarter. Both of them have been negotiated in the fourth quarter of the previous financial year but were closed during the reporting period. Furthermore, there were also follow-up investments at company level, including blikk, the radiology group; and STG Group, reflecting our buy-and-build strategy. Disposals in the first quarter of 2019/'20 refer to the inexio exit, which was agreed on in the fourth quarter of the previous financial year and finalized in the reporting period. Therefore, the company's valuation is no longer included in the portfolio value. However, the proceeds are still with the investment entity subsidiary and therefore not reflected yet in the group's liquidity.Let's have a look at the next chart, #8, where I would like to explain the change in portfolio value during the first quarter of 2019/'20. It has fall in gross terms by EUR 15.7 million due to the fact that disposals exceeded additions from new investments. In light of the net cash outflow from investment activities, this might be astonishing, and it is. The main reason is that inexio is included in the disposals, as the transaction was closed during the reporting period. However, as already mentioned, the proceeds are still embedded in the acquisition vehicle. Distribution to DBAG is still to come. As such, the acquisition vehicle, the value of which is determined predominantly by cash, is included in other, which is the second column on -- from the right on Chart #8. And this amount is part of the financial assets but no longer part of the portfolio value.The change in value of investments is altogether negligible. By the way, during the past 7 years I am responsible for finance with DBAG, I never saw a change in value of nearly 0 in 1 quarter. DBAG's portfolio consisted of 28 equity investments on 31st December 2019, 23 management buyouts and 5 investments with the purpose of financing growth. The value of the portfolio compounds to 1.2x the original costs.Now let's have a look at the next slide, #9. Here you can see the variation of the result of valuation and disposal. As you can see, the effect of it on net asset value of our Private Equity Investments is more or less neutral. And if you compare the figure here with the figure in the previous slide, you will see a slight difference. On the previous slide, we report only the result of valuation, whereas we show here the result of investment valuation and disposal.All in all, the value contribution made by the operating performance of the portfolio companies, changes in earnings and debt came to minus EUR 6.4 million compared with EUR 21.1 million in the previous year. In the quarter under review, a number of our companies made a subdued start to the new year, particularly in the industrial sector. This shows just how much pressure the uncertain overall political framework, for example, resulting from Brexit but also from the ongoing global trade conflicts and structural changes in the automotive industry is putting on this -- on industrial sector. This scenario means that in some cases strategies will have to be adapted to reflect the current economic environment in order to implement growth plans at a later date. On the other hand, the change in multiples, which includes the earnings contribution from changes in the valuation multiples of listed peer group companies, which we use to assess our portfolio companies, showed a beneficial development. After this figure has been well in red in the previous year at minus EUR 47.8 million, we can report a positive effect of EUR 5.1 million overall for the quarter under review. Although most stock valuations were higher, there were also considerably downward valuation adjustments in some cases.We come to Slide #10. The positive changes in value during the first 3 months are attributable to 12 active portfolio companies, in the previous year 8. 12 companies, in the previous year 14, reported measurement losses. The measurement of 1 company is unchanged. 3 investments, previous year 6, are carried at their transaction price because they have been held for less than 12 months. These account for 11% of the portfolio value. While the change in multiples in our portfolio has a positive effect overall, lower multiples were reported, particularly for the portfolio companies in the broadband telecommunications sector, offsetting the effects of ongoing good operating performance. At another company, 2 marked improvements in operating performance were almost completely overshadowed by the negative change in multiples.All in all, our portfolio companies have been feeling the effects of the recession in the German industrial sector, especially affecting those related to the automotive sector. This delays the expected increases in value resulting from the implementation of the strategy agreed on. At this point, I can say again that the diversification into our focus sector has helped to reduce risk and thus paid off.The following slide, #11, shows the split of our portfolio companies by our core and focus sectors. Today, portfolio companies from our core sectors make up 50% of our portfolio value. Broadband telecommunication makes up about 22%. The other focus sector as well as other sectors make about -- make up about 24%. It is precisely in periods like these that additional opportunities can arise for our portfolio companies, opportunities that we can help to identify and explore in our role as a highly experienced adviser. As a result, we will continue to successfully develop our diversified portfolio in the future both in our new focus sectors, which are often dominated by digital business models; and in our core sectors, which includes industries that have traditionally been mainstays of the German economy.On behalf of Chart #12, I would like now to show you the result of the Fund Investment Services segment. Here we saw improved earnings before taxes from EUR 1.5 million in the previous year to EUR 1.7 million in the quarter under review. Income from fund services fell slightly year-on-year. Lower fees generated from DBAG Fund VI and DBAG Fund V, a development that was to be expected especially after the disposals, were offset by increasing fees from DBAG Fund VII top-up fund in line with the investment progress made. The segment information also takes internal income from the Private Equity Investments segment in the amount of EUR 300,000 into account.Net other income/expenses were down by EUR 400,000 year-on-year, which is caused by a multitude of items. No single item is worth to be mentioned explicitly.The next and last slide shows you our detailed outlook for the full financial year 2019/'20 we published in December. Against the background of the business performance to date and the economic environment and considering the sectors relevant to the business and its typical fluctuations, we confirm our subdued full year forecast for the 2019/'20 financial year.