Deutsche Beteiligungs AG

XETRA:DBAN

Earnings Call Transcript 2019-Q3

[Operator]

Good day and welcome to the Deutsche Beteiligungs AG publication of the 9-month financial report 2018/2019 analyst conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to your CFO, Susanne Zeidler. Please go ahead.

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

Thank you for the kind introduction. Good morning, ladies and gentlemen. Also from my side, I would like to welcome to our conference call on the quarterly statement at 30 June 2019. I start with slide -- I'm here together with Felix Klein, our Officer Public Relations and Investor Relations, and we will, hopefully, together will be able to answer any questions you might have after my presentation. I will start with Slide #3. At this point, we've talked about the limited comparability of results on several occasions. Due to exposed adjustments, comparable figures for the previous year contained in this quarterly statement continue to diverse from the original data reported 1 year ago. Looking at the current reporting date, there remain only 2 issues we need to cover. The measurement of irrecoverable interest receivables from portfolio companies and the amount of income from advising fund. We've applied for amended accounting method for recognizing current interest for the first time as of June 30, 2018. This means that there is no number and issue in this context. Slide #4. 5 messages describe the first 9 months of the current financial year. We were able to announce the successful exit of two portfolio companies, which were Infiana and Novopress after the end of the third quarter. The development of some of our portfolio companies is increasingly burdened by growing evidence of economic slowdown. In fact, the trade dispute triggered by politicians. Next, the diversification of our portfolio is paying off. Companies from other sectors in which we have increasingly been investing for some time now have delivered gratifying contributions during the period under review. Also, we generated consolidated net income of EUR 12.6 million in the first 9 months of the financial year. However, since the performance clearly so short of our expectations, especially in the third quarter and given that we cannot exclude further short-term headwinds at the beginning of July, we already lowered our guidance for the current financial year. On Slide #5. As usual, we summarized the most important financial indicators of DBAG Group in the 4 segments. I will explain these in more detail as we go along. I continue with Slide #6. I was already able to report on most of the transactions of the first 9 months representing the half year figures, which is why I will now focus on a brief overview of the third quarter. In this context, I will go into detail on the key transactions of the most recent past in a moment, the Cloudflight investment made during the third quarter as well as the 2 successful exits of Infiana and Novopress right after the reporting date. We've talked about the investment in a radiology group, which changed its name to blikk, meanwhile several times at this event. In June, we were able to close this transaction. As you know, the group already agreed and completed 2 acquisitions during the first half of the current financial year, the additional funds provided by the DBAG Fund VII as well as DBAG as co-investors.With these transactions, just the Cloudflight investment, the DBAG Fund VII portfolio has grown to include 7 investments in the current financial year. 65% of the main funds investment commitments have now been called. In addition to new portfolio companies, our existing investments were also very active in terms of acquisition. During the third quarter, 2 companies from the DBAG Fund VI portfolio duagon and Telio strengthened their respective market position through acquisitions. Moreover, BTV multimedia part of the DBAG ECF portfolio executed 3 add-on acquisitions. Add-on acquisitions are important element in the strategic development of the portfolio companies. They helped accelerate the development projecture of these enterprises. We were able to sign 2 exits shortly after the reporting date. In those cases, we agreed sales price exceeded the carrying amount of investment as of 31st March. This effect has already been reflected in the valuation of the 2 portfolio companies as of 30 June. These 2 enterprises contributed an aggregate amount of EUR 13.7 million to gross result of valuation during the period under the review. The Infiana MVO took place in December 2014 with DBAG co-investing EUR 4.5 million alongside DBAG Fund VI. We were successful in sustainably strengthening the company's position through organic growth, following capital expansion, broadening the product range as well as focusing its business activities following the sales of subsidiaries. This made the company attractive to Pamplona Capital Management, a financial investor with a clearly defined strategic background. DBAG [was thus] able to more than double its original capital investment after a holding period of just over 4.5 years. I continue with Slide #8. DBAG Fund I then managed by DBAG acquired a minority shareholding in Novopress back in 1990. In 2015, this investment led with commitment by DBAG ECF was a co-investment by DBAG. Novopress has successfully established its tariff on the North American and Asian market over the past full year. Taking into account distributions received, DBAG realized a low double-digit multiple on the amount invested in 2015 at EUR 2.3 million. However, this was rather small in comparison to DBAG other investments. The significance of this multiplier is limited, however, since Novopress was part of the portfolio acquired. In our view, what is just as important as the multiplier is the fact that we were able to successfully service minority shareholding successful not only for us, but also from the company's point of view. Slide #9. This brings me to gross result of valuation and disposal. As in the previous year, 14 portfolio companies made a positive contribution to the total figure of EUR 22.1 million. Besides the 2 investments sold as outlined before, this includes company targeting the telecommunication sector with a focus on high-speed Internet. In the previous year, 8 portfolio companies made a negative value contribution. In the current year, this was the case for 10 portfolio companies. This was driven by reasons which are specific to each enterprise. For instance, 2 portfolio companies experienced the market decline in demand for wind power plant with another company's suffering from unexpectedly high commodity prices. Moreover, the impact of an increasingly evident economic slowdown and/or the trade dispute is becoming visible. And finally, some companies are affected by decline in production volumes in the automotive industry with customers curtailing or even canceling orders already placed or placing smaller new orders. Slide #10. Notwithstanding the macroeconomic burden that took off, we can see that the diversification of our investment universe is paying off. The number and value of enterprises from other sectors, where we have been seeking to grow our exposure for some years now, is continuously rising. As already mentioned, especially companies in the telecom sector with a focus on high-speed Internet, has made a gratifying contribution to gross result of valuation. Slide #11. Cloudflight, the most recent addition to our portfolio also belongs to these other sector. The transaction has brought together software specialist Catalyst with Crisp Research, an IT research and consultancy firms specialized in cloud computing, thereby creating a provider of digital and cloud services with a truly special profile. Cloudflight is looking to support small and medium enterprises, corporate groups and public sector clients for the implementation and acceleration of our digital transformation. For instance, with processing large amounts of data, an area whose importance is constantly rising. DBAG will co-invest around EUR 8 million from its own funds alongside its Fund VII in this NVO, which means that around 13.5% of the shares in the future Cloudflight holdings will be attributable to DBAG on a look-through basis. Slide #12. The changes reported on the previous slide triggered significant changes in portfolio value. As always, additions and disposals include not only new investments and exits, but also further investments and disinvestments, for example, some capital increases of the release of amounts retained for investments sold in previous year. On 30 June, additions also comprise a rich finance facility of EUR 5 million, which we provided to DNS net in the third quarter to support the company's continued strong growth. There's one special feature of this transaction. Since DBAG ECF commitments have been called nearly entirely, we have initially provided these funds directly via our DBAG without involving the fund and will now be contacting the fund investors directly to invite them to participate in this financing. Our portfolio value is usually expressed as a gross value, also including noncontrolling interest, for example, largely cloud interest. Our asset liabilities of the group's own investment entity subsidiaries shown under the other heading comprise loans extended to new investments and liquidity of some EUR 5 million. Slide #13. As you are aware, we use this slide to explain the various factors, which contributed to gross result of valuation and disposals, the value of contribution from operating performance of portfolio companies totaled EUR 6.1 million after EUR 13.3 million in the previous year. As you know, this figure includes both changes in earnings as well as changes in debt. The latter has increased also in the course of certain strategic investments made by some companies in order to build the foundation for future growth. Changes in multiples accounted for a contribution of EUR 13.6 million, including the unrealized EUR 13.7 million disposals gains for Infiana and Novopress. This means that when adjusted for these disposals, capital market effects were almost completely neutral for the 9-month period. This demonstrates once again that for DBAG, the informational value of a single quarterly result is comparatively low. Afterwards, you know in some cases massive declines in valuation multiples resulting in higher negative contributions to earners at the beginning of the financial year. Overall, capital market valuation levels as at 30 June brought back to the levels of 30 September 2018. Continue on Slide 14. Net asset value as at the reporting date of 30 June was lower than at the end of the previous financial year at EUR 245 million, it was more or less in line with the level at the end of the first half of the financial year. This is mainly due to lower financial resources. As explained already, we have made significant investments. The decline in financial resources is also matched by a corresponding increase in financial assets. The dividend distribution of just under EUR 22 million at February on this year has also impacted this item. Slide #15. Earnings before tax in the private equity investment segment amounted to EUR 11 million after the first 9 months of 2018/'19 compared to EUR 23.5 million for the same period in the previous financial year. This decline was due to significantly lower net gains or losses from investment activity. I've already spoken about the reason. The negative balance of other income components increased slightly due to increased customer costs view among other things to more employees on the payroll and higher other operating expenses, which could not be fully offset by higher net interest income. Slide #16. The Fund Investment Services segment moved to 9-month period with earnings before tax in the amount of EUR 1.6 million. The previous year's result was EUR 4.2 million. Lower fee income from fund management and advisory services reflected lower fees received from DBAG Fund VI, DBAG Fund V and DBAG ECF, as expected. The negative balance of other income expense items was up by EUR 1.4 million year-on-year, mainly caused by a EUR 2.6 million increase in personnel expenses due to higher variable remuneration for DBAG staff due to successful disclosures and new investments. The absence of nonrecurring negative effect of EUR 900,000 in the same period of the previous year has the opposite effect. I come to the last slide. We informed you on the 10th of July that we expect consolidated net income for the third quarter to be considerably lower than the results for the same quarter of the previous financial year. The reason for this was that the impact of the slowdown in macroeconomic momentum, as mentioned earlier, has increasingly been affecting earnings forecast as well as debt levels of some of our portfolio companies, which is impossible for us to rule out further headwinds in the short term. We, therefore, also cutback our forecast for the 2018/'19 financial year in the July disclosure. Given that our portfolio companies have not yet fully completed their projections for the current financial year, formulating a new complete forecast for the current financial year is difficult. But in order to at least provide you with a proof for your work, we have communicated that we expect consolidated net income to, at least, be positive. The condition for achieving this forecast is unchanged. We will meet valuation marketers at the end of September 2019, which are vastly comparable to the situation at the end of June 2019. With this I come to an end of my presentation. I thank you for your attention and would be happy to answer any questions you might have now.

[Operator]

[Operator Instructions] We'll take our first question today from Stefan Scharff from SRC Research.

[Stefan Scharff, MD & Managing Partner]

Stefan here from SRC. You reported at Slide 9 about some negative value contributions to your portfolio, and it's about EUR 33 million, and it's about its 10 portfolio companies, the previous year 8. Can you say a little bit more about the split here? Is it more or less equally split across these 10 companies or, let's say, it's 3 or 4 very heavily impaired and the others just slightly?

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

Okay. We look for the figures in detail, but just a second, in order to give you those more below. No, there is -- I have -- it is not an equal split, as you may imagine. This would be very astonishing, because if you only have a look at the size of the portfolio companies, which you'll find -- where you find a split of the sales volumes on the last page of this quarterly statement, you find that we have companies with revenues of some EUR 40 million and companies with revenues of EUR 800 million. And you may believe that if we have some issues in a small company that will, in fact, be in absolute terms be lower than in a company with nearly EUR 1 billion of sales. So of course, there is no split that each of the 10 companies contribute the same amount of the negative effect.

[Stefan Scharff, MD & Managing Partner]

Still 1 industry more affected, the automotive suppliers or the telcos or IT companies? Or can you say a little bit more here?

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

As I tried to point out during my presentation that the telecom companies are not included in the negative contributions. The new business model in which we invested during the past few years contributed very positively to the 9-month earnings and our results. No, the small fee -- the negative contributions, we've got mainly from the industry -- from the companies being busy in the industries, I mentioned before, like companies with exposure to the wind craft industry, to the automotive industry. In some cases, it's the ordinary events in terms of significantly increasing product prices, raw material prices, which we believe, are linked to a special situation in this industry. But I would like to ask you not to ask for the single names of the respective companies because we don't want to bring them into trouble. They have customers, they have clients, they have -- we don't want to link any negative message to name of a respective company for this reason.

[Stefan Scharff, MD & Managing Partner]

Okay. I see. I see. Another question is about the fund revenues and also the pretax profit here. The pretax profit after the first 3 quarters was at EUR 1.6 million in this business unit. And if I remember right, it was a bit higher at EUR 1.8 million at the half year results, and we would expect them to be slightly rising or being flattish, but they are slightly negative. Can you give us your view here? And what you expect for the final quarter and for the next year?

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

Yes. Yes, sure. Thank you for this question. There are 2 effects. One is that we have reduced management fee income, especially after disposals of companies. And the other thing is, we already mentioned increase in valuable compensation, we took into account in this quarter, the variable compensation for new investments and for the 2 disposals. Even though they have been signed shortly after the reporting days, the work has been done in the quarter before. And therefore, we already took into account the variable compensation for this. We already -- we described this compensation model for the investment managers in our annual report for many years now. And their compensation depends significantly on new investments and disposals. And therefore, we see this burden in records or in the third quarter.

[Stefan Scharff, MD & Managing Partner]

Okay. And one question about the Fund VII. It's now called by about, let's say, 65% or 66%. But the top-up fund is just placed or called by 1/3, 35% or something. What happens if the Fund VII is fully pledged, then you still have the opportunity to place the remaining part of the top-up if this is -- if this would be a good idea or you have some good investment ideas here?

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

Very good question, Stefan. But the thing is that top-up fund is closely linked to the main fund. So it can only be used for larger investments for which the main fund is too small. So if, for example, as you mentioned, the main fund will be fully invested, which will be the case at capital called, let's say, 80% of the capital called. Because we always want to leave some room for add-on acquisitions in the Fund VII portfolio and for further call of management fee. And if at this point of time, the top-up fund is only called at a significantly lower ratio, this will mean that those funds close and will no longer be used for new investments.

[Stefan Scharff, MD & Managing Partner]

That means [ it happens ] that you don't use it, okay. That you don't use it fully.

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

We won't use it fully if this is the case. This is what known from the very beginning because we can't use the top-up fund in order to call capital for larger investment, which is too small -- too large, for example, for ECF because top-up Fund VII is part of DBAG Fund VII. As I told, Fund VII is the combination of main fund and a top-up fund.

[Stefan Scharff, MD & Managing Partner]

Okay, I see. I see. The VII Fund could be placed perhaps until end of 2020, I would say, or I could guess. So are there any plans or the schedule would be a normal schedule -- schedule could be, let's see how the world economic development goes. But normal scenario could be to set up the VIII Fund in 21. Is this right?

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

This would mean that we would have 2 years' time to make the last investment for which there is still room in DBAG Fund VII, wouldn't this be a little bit too late?

[Stefan Scharff, MD & Managing Partner]

Too late?

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

'20 through '21, 2 years' time to make 1 investment, the last investment. And I understood your question in a way that you assume that DBAG Fund VIII might start in 2021.

[Stefan Scharff, MD & Managing Partner]

Yes. And let's say, mid or end of 2020, yes.

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

2020. Yes, this sounds better '21, but...

[Stefan Scharff, MD & Managing Partner]

Let's say, end of 2020. It's not easy to make a good timing there, but...

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

If we -- if Fund VII is invested by 65%. And if you assume that we will have to have a new fund in place when it is invested by some 80%, 15% of the fund volume may need 1 or 2 further investments. So we have sometimes curious of some months with no investment at all, but sometimes we make 2 investments within 4 weeks' time, for example. So this is hard to predict, but I hope that we will be able to make 1 or 2 investments during the next 2 months instead of the next 1.5 year. But, as always, this is quite difficult to predict. You understand what I mean.

[Operator]

Thank you. [Operator Instructions] And so there appears we have no further questions at this time. I'd like to turn the conference back over to you for any additional or closing remarks.

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

So thank you very much for the attention and for your good question, Stefan. And I hope that all the other questions, which have not been asked now are already answered by my presentation. Thank you very much, and I wish you all a nice day. Bye-bye.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.