MBB SE

XETRA:MBB

Earnings Call Transcript 2023-Q1

[Constantin Mang, executive]

My name is Constantin Mang, I'm CEO of MBB and I'm looking forward to presenting our Q1 figures to you today. Let's start with a quick recap on what makes MBB special.As you know, we offer long-term succession solutions to sustainable Mittelstand companies, and we do so differently than most private equity and financial investors because we are a family business ourselves. That means we share a DNA with the businesses that we want to acquire. Secondly, we are fans of the capital markets. And therefore, not only MBB itself is a stock-listed company, but also 3 of our subsidiaries, namely Friedrich Vorwerk, Aumann and Delignit. Thirdly, we have a long-term focus, meaning we don't acquire companies in order to sell them again after a few years, but we really want to develop them in the long term. And finally, we have a focus on sustainability and our companies benefit from trends such as the energy transition and e-mobility, for example.Before we dive into the details of the first quarter, let me highlight 3 of my favorite figures from this quarter. And that is, number one, the order intake of Friedrich Vorwerk in the first quarter, which is EUR207 million, which corresponds to a 67% increase over the last year's quarter. The second figure comes from our secret growth champion in the MBB group this quarter, which is the revenue growth of Delignit amounting to 68% in the first quarter. And the third figure comes from Aumann was able to grow its revenue by 24% in the first quarter, which is also a very remarkable achievement.But let's look into the details, and let's start with our Service & Infrastructure segment, where we combine Friedrich Vorwerk and DTS. As I mentioned before, Friedrich Vorwerk had a strong order intake, and most of this order intake actually comes from electricity orders. And this is exactly the shift that the management of Friedrich Vorwerk has expected, namely that we see a strong growth coming from the energy transition towards electrification. Besides that, Friedrich Vorwerk was also able to attract a new order in the hydrogen business for -- and electrolyze, including all the balance of plants. And this shows that the company is also well positioned in this area of growth.In total, Friedrich Vorwerk was able to increase its revenues by 25% to EUR73 million in the first quarter, but the EBITDA margin was significantly lower than in the previous year. And we had 8% EBITDA margin, which is also slightly below -- or which is actually significantly below the forecast for the full year. However, taking into account that the first quarter is usually the weakest for Friedrich Vorwerk, the management of the company is still very confident that it will be able to reach its full year forecast.The reason for the lower margins in the first quarter are mostly related to follow-up work that had to be done for certain projects that were finished on the high time pressure in the fourth quarter. And this follow-up work is usually associated with a low margin. So -- this is nothing really extraordinary, but unfortunately, it all fell into this first quarter, which led to this lower EBITDA margin.Looking on the right side with DTS, we see lower revenues that came in at EUR20 million in the first quarter. However, it is important to keep in mind that last year's first quarter was unusually strong with a couple of extraordinary effects. So the year-to-year comparison is not very favorable here for DTS. The health of the company, I think, is still very strong, which is also visible in the EBITDA margin, which came in at 16%. So we have a very solid profitability. We also have a strong order book -- it's just that revenues were slightly or were significantly below the previous year's quarter. However, we expect a rebound over the remaining year and hence, also a growth for DTS in the full year.Turning to our Technological Application segment, where we look at Aumann and Delignit. we have Aumann with a very strong order backlog of EUR277 million. That corresponds to a 90% -- a 29% growth year-over-year, and it's mostly driven by orders in the e-mobility field, battery-driven orders, but also automation solutions for other renewable industries, such as the solar industry, for example, are bolstering this order intake and also bolstering the revenue growth, which came in at 24% in the first quarter. And this is especially good news as also the EBITDA margin was able to recover further. We are now at an EBITDA margin of 6% and there, therefore, well in line with our expectations for the step-wise EBITDA margin recovery.At the moment, I think that the momentum in the market for Aumann is still very strong. And therefore, the company comes into a position where it can cherrypick again, which orders they accept and which they don't because the utilization for this year is already very high. And basically, Aumann is close to being fully booked. And therefore, each additional order that Aumann takes in for 2023 comes also with a very attractive margin. When we look at Delignit, I was mentioning at the beginning that Delignit is the secret growth champion. Here again, we see EUR24 million revenues in the first quarter corresponding to a growth of 68%. So what did Delignit do differently this year? To be honest, they didn't do much differently, but the customers who had significant supply bottlenecks the next last year are finally able to meet the demand. And therefore, the Delignit can basically show what it is able to do and what it had expected to also show before, but the first half of 2022 was a bit difficult due to all the supply bottlenecks. If you are looking at the last 12 months, we are already talking of revenues that exceed EUR85 million, and that really shows how strong the growth path is that Delignit is currently on. This also affects profitability in a positive way, of course, because due to the higher utilization, also the EBITDA margin is able to expand.Let's take a look at our Consumer Goods segment, where we have Hanke Tissue and CT Formpolster, and you see that both companies grew revenues: Hanke by 26% and CT Formpolster by 36%. However, much of this growth is actually driven by inflation effects, by price effects. The actual demand is relatively moderate. And especially in the case of CT Formpolster, we expect the demand for mattresses to be a bit lower during the summer months. And nevertheless, the growth will probably remain driven by the price effects, but this means that the profitability will remain challenging in the Consumer Goods segment for the coming months?When we look at the 3 aggregated segments here, you see that actually all 3 of them were able to grow revenues, the Service & Infrastructure segment by 10%, the Technological Application segment by 21% and the Consumer Goods segment by 30%. However, you also see that on the one hand, the Service & Infrastructure segment came in at a much lower EBITDA, while the Technological Application segment came in at a higher EBITDA. And the higher EBITDA of Technological Application segment was actually able to compensate at least partly for the lower EBITDA in the Service & Infrastructure segment and the Consumer Goods segment is, as in the previous year at a very low profitability and remain constant in that sense.For the whole group, this means that revenues were able to grow by 17% and reached EUR201 million in the first quarter, and EBITDA went down slightly by 7%, which also means that the EBITDA margin came down a little bit and is not quite at the level where we wanted to be over the full year. If you take a look at our forecast, you see that we expected revenues of EUR850 million to EUR900 million in the full year 2023. I think after this first quarter, we are well on track. As I mentioned on the slide before, the first quarter is stronger in terms of revenue. But then you also see that on the EBITDA side, we are expecting an EBITDA margin from 9% to 11% for the full year. And at the moment, we are slightly below that. However, we believe that the coming quarters will have higher profitability. And therefore, we also confirm this forecast even though it looks a little bit more ambitious at the moment on the EBITDA side, especially compared to the revenue side.Let's take a look at our balance sheet. You know that MBB has a very strong equity ratio, which came in at 70% at the end of the first quarter. Our net cash position reached EUR384 million in the whole group. And out of these EUR384 million, EUR332 million are actually on the holding level MBB SE. And of course, we want to use this cash to, first of all, let our shareholders participate in our success. We propose a dividend of EUR1 per share. And as you know, every year, we pay an increasing base dividend, which has been at EUR0.99 last year and this year will be EUR1. And on top of that, in certain years with extraordinary successes, we also paid a double dividend. Yes, there's no extraordinary effect this year, we will propose to stick with a base dividend of EUR1, amounting to a dividend of EUR5.7 million in total.We also have a share buyback program, which so far had acquired shares in a value of EUR7 million. So as you see, combining these 2, we are returning EUR12 million to our shareholders this year.We also want to use our cash to acquire new businesses. That's the core of our business model. And currently, we see interesting market conditions in the M&A sector. Of course, we still have economic uncertainty. We have the volatility in commodity prices on the one hand. On the other hand, recession worries and inflation worries. We also have increasing financing costs, which are both good and bad for us. But it is clear that it becomes more difficult for companies that acquire businesses with a lot of leverage to continue doing so, because the leverage has just become much more expensive than it was last year. And thirdly, we have a rebound in the general deal activity. We feel that also many transactions that have been postponed last year coming back now. And maybe now we are talking about more realistic pricing levels. You remember, I told you last year that it was a bit difficult to meet with sellers of companies because the expectations of the sellers were so fundamentally different from our readiness to pay since the sellers were not quite reflecting the new interest rates into their price considerations. And I think we are now coming into a time period where this is more and more reflected in the expectations of business sellers.Looking at our positioning in the M&A market, I believe that we will continue to see the succession pressure in the German small and medium-sized market, simply due to structural demographic reasons. And I think as MBB, we are ideally positioned to benefit from that. We are also more competitive compared to private equity investors because at the moment, as financing becomes more expensive and also more difficult to obtain our position as a mostly equity finance acquirer in the market is gaining in relative strength. And as I mentioned before, I think we slowly see that also the valuation expectations in the M&A market are coming down. And if we combine our good positioning with now maybe revised expectations in terms of valuation levels, I think we should see lots of interesting opportunities for us in order to successfully acquire new members for our MBB Group.Last but not least, let's take a look at our sum of the parts valuation at the moment. As you know, you can derive basically a valuation of MBB by looking at the shares in our stock listed subsidiaries, Friedrich Vorwerk, Aumann, Delignit. These combined shares are currently at around EUR243 million. And if you add then the holding cash, which is currently at EUR332 million, you end up at higher value than our current market capitalization, a significantly higher value, and that doesn't take into account all our private companies. Therefore, we still believe that our valuation at the moment is unusually attractive. And hence, we also think that purchasing shares, as we have done in the first 4 months of this year is a good idea in order to benefit from this mispricing at the moment.Thank you very much. I'm now at the end of my presentation, and I'm looking forward to your questions.

[Operator]

[Operator Instructions] You received the first question via chat. You announced to make a substantial investment in the production of regenerative energy, which measures and what level of CapEx are planned?

[Constantin Mang, executive]

I announced a substantial investment. To be honest, I'm not quite sure which announcement you are referring to. Could you maybe reread the question, because to be honest, I don't...

[Operator]

Yes. You can also read it in the chat that substantial investment in the production of regenerative energy are made, and which measures and what level of CapEx are planned?

[Constantin Mang, executive]

Maybe this is a misunderstanding. And what is meant here is the investments into energy infrastructure, which we see in the markets in which Friedrich Vorwerk is actually operating. But what we were referring to was more the investments of especially German electricity providers. And these investments are basically potential market opportunities for Friedrich Vorwerk is currently growing at a high pace and also attracting a lot of order intake. I think that is probably what we've been referring to here. So we are not talking about CapEx of MBB itself.

[Operator]

Should there be still anything unclear regarding this topic, kindly we request to place a follow-up question on that topic. In the meantime, we continue with the questions from [ K DV ] [Operator Instructions] With regards to the time, I suggest that we continue with the question from the chat. And in the meantime, just have a look at the microphone settings, and we will get back to your questions.It's now from [ Jans Birman ]. The question, Friedrich Vorwerk is trading significantly below its IPO price. Is there any attention to buy back shares of Friedrich Vorwerk from MBB side?

[Constantin Mang, executive]

Yes, you're absolutely right. Friedrich Vorwerk unfortunately trading significantly below its IPO price. And therefore, we are carefully looking at whether it makes sense for MBB to buy back shares. I mentioned during the presentation that we bought back a lot of MBB shares in the first 4 months of the year. That seemed to be the most obvious buyback that we could make. But also Friedrich Vorwerk is a potential candidate where we can generally imagine to increase our shareholders. We haven't done so in the first quarter.

[Operator]

All right. And could you please give us some color on the order intake at DTS giving us indication in terms of book-to-bill and order intake growth by year-on-year in Q1?

[Constantin Mang, executive]

We don't really publish order intake or the backlog figures of DTS. But what I can tell you is that the order backlog has definitely increased since the beginning of the year. So that sounds a bit counterintuitive. How come the order backlog has actually increased, while the revenue was not very strong. Basically, 2 things or a few things happened in the first quarter. One of them is that some of the orders at hand were not realized in the first quarter for different reasons. But these orders are not vanished. They are still on the books and will become revenue later in the year. But for several reasons, they couldn't become revenue in the first quarter. And then also the order intake was actually not bad. So we are not talking about any, I would say, structural issues in the company. I think market demand is pretty healthy. IT security is still a topic that is very hot at the moment. Many companies realize that they need to invest in it. So I would say the first quarter is a bit special, both in the comparison to the previous year, but also in what exactly became revenue and what stayed on the order book, we expect the next quarters to be significantly stronger.

[Operator]

The next question, a buyback of EUR12 million was announced. So far EUR7 million have been executed. Will the additional EUR5 million of the mandate be brought back at a later date? And have you placed the final date when the program should end?

[Constantin Mang, executive]

Yes. So this is mostly related to technical issues or details in the buyback program. The buyback program has ended. And the reason why we put an ending date on it is that it is a bit easier if it's not running while the Annual General Meeting is taking place because then you don't have to change the dividend proposals and so on during the period when the invitation is already published. So a very technical reason why we wanted to have it ended right before we published the invitation for the Annual General Meeting. And the reason why less than EUR12 million was bought back in that time horizon is also a technical issue because when we buy back shares, we want to make sure, and we have to make sure that we are not influencing the share price too much on any given day. And therefore, the kind of orders that the bank is able to place in the name of MBB are very limited in how far they can deviate from the last closing price and so on. And that means that it is difficult to exactly predict the amount of shares you can buy back in a given period, simply because you need to avoid that you basically influence the share price too much. And therefore, we bought back less than the EUR12 million that were announced. So both pretty, I would say, boring explanations why it happened. But nevertheless, I think, EUR7 million is also a good number, and it might well be that we have another share buyback later in the year.

[Operator]

You received another question regarding DTS. Could you please give us some more insights on the growth of the software part of the business in Q1?

[Constantin Mang, executive]

Yes. The software part is developing very well, especially because of a few new products were also launched under the DTS brand. And we have basically several brands, one which is coming from the ESL acquisition we did a few years ago. But we also published more and more products under the DTS brand itself. And the sales pipeline for these products is pretty good. The order intake is also pretty good. And we also see an increase in software sales. However, I think that the next quarters will show higher growth figures also in the software part compared to the first quarter.

[Operator]

[Operator Instructions] Regarding M&A, could you please provide some more details? Are you close to doing a deal or only in preliminary discussions?

[Constantin Mang, executive]

Our ideal deal pipeline has projects that are in kind of all stages. So we seldomly have only opportunities that are in very preliminary discussions and ideally also don't have only transactions that are very advanced already because of the binary nature that these discussions have, right? They either are successful or they are not. And what you don't want is that with one successful or non-successful negotiation, you basically empty your complete pipeline. So yes, we do have transactions at the moment that are in more preliminary discussions. And we also have more advanced discussions. However, I don't expect any of these more advanced discussions to come to a signing within the next, let's say, 6 weeks. So we are not immediately in front of making any definite agreements, but the pipeline is very healthy, also comparing to historical figures comparing to last year figures. It's a very healthy pipeline that we are looking at.

[Operator]

Could you please share with us some details of your current M&A strategy though, for example, with regards to your focus sector add-on acquisitions or if you would like or if you plan to enter new markets?

[Constantin Mang, executive]

Yes, of course. So we see a lot of potential both in stand-alone and add-on acquisitions. Let me maybe start with these add-on or bolt-on acquisitions for our portfolio companies. We believe that there are a few industries, for example, the automation industry that Aumann operates in that are very interesting for acquisitions at the moment. And the reason for that is that the industry is showing a rather large momentum at the moment after 2, 3 more difficult years. So the rebound in profitability that I was talking about before that we see at Aumann at the moment is also something that we expect to see with other companies in the automation industry. And therefore, I think that this is an industry where it definitely takes -- makes sense to look at potential acquisitions at the moment. But the same is true for DTS in the IT security field, I think DTS is an excellent platform. They had revenues of more than EUR100 million last year. And this platform can be strengthened by further acquisitions. What we don't want to do is buying basically basic resellers of software and hardware that don't add anything to the platform DTS. But I think there are also lots of interesting companies that might add value to the platform and at the same time, can benefit from the platform that DTS has. So I think these 2 areas, automation industry, on the one hand, IT security on the other hand, are especially interesting when we look at bolt-on acquisition opportunities.On the stand-alone side, we are much more open. We look at all kinds of companies. I think that at the moment, there are quite a few interesting companies in growing industries that are struggling with the current financing environment. Of course, during the last 2, 3 years, it was rather easy to get financing as a company. And at the moment, it is becoming more and more difficult. So I think we might see more opportunities in this structural area where we are not necessarily or we don't look at restructurings or companies with operational problems, but there might be companies that are structurally well positioned but have difficulties with the balance sheet. And this might become a more interesting area this year and companies that might fit sort of this description are may be especially interesting at the moment.

[Operator]

One of the investors is stating that your current portfolio of businesses have rather low margins and high top line growth. Would you expect to buy businesses with higher levels of margins?

[Constantin Mang, executive]

Well, first of all, I'm not sure if I agree with the general statement at the beginning. Yes, we have companies like Friedrich Vorwerk that are showing lower profitability than a year ago. Nevertheless, we believe that some of these effects are temporal in nature and not structural. And we believe that with the EBITDA margin forecast of 9% to 11%, we don't have a generally low profitability portfolio. But nevertheless, I do understand, of course, what you are hinting at. And we -- when we look at new companies, we like double-digit profitability in EBITDA. That's for sure. As I said before, we are not looking at restructuring cases. Nevertheless, we are also -- when a company is profitable, the profitability has also been -- has also to be in a good relation with the growth perspectives on the one hand. So we don't want companies that only have high profitability today, but no growth potential. And of course, also the valuation of the company plays a role here. So there are different financial figures that we are looking at. Of course, profitability is very important for us, but it has also to be in a good balance with other figures.

[Operator]

Could you please elaborate a little bit more on the long-term investment strategy?

[Constantin Mang, executive]

Well, the long-term investment strategy in terms of M&A, I think I tried to describe already a little bit. So maybe let's talk more about the organic investments that we see in our portfolio. We believe many of our subsidiaries currently have interesting growth opportunities. As you saw, many of our subsidiaries have very high double-digit growth at the moment. And of course, we see an opportunity in this growth -- and whenever there is a chance to invest in order to bolster that growth and in order to get a good return, then we want to strengthen our portfolio companies through investments. And this is something that is typically benchmarked also within our whole group. So the returns that potential investments, organic investments offer are not looked at on a case-by-case basis. But our benchmark with all kinds of investments that we can potentially do within our group. But there are interesting opportunities for us and for our companies basically to invest in further revenue and cash flow growth.

[Operator]

And what is the return on capital that you are looking for?

[Constantin Mang, executive]

Well, we don't set a clear return on capital goal. And the reason is that we don't have, as I said at the beginning, fixed holding periods. And if you look at the return that we managed to realize over the last decades, this return was often also very much impacted by certain events like IPOs of our subsidiaries, and these events are nothing -- not something that we want to plan or want to, yes, have in a certain time frame, which makes it a bit difficult to set specific benchmarks in that regard. So I wouldn't feel comfortable now giving a specific number here because this is not necessarily what we have in mind when we invest in new businesses.

[Operator]

Could you please confirm if it appears correct that the current inflation rate seems to be far too high and not the very best way to increase total shareholder value?

[Constantin Mang, executive]

Could you please repeat the question? I'm sorry, I didn't...

[Operator]

Yes. if you could confirm if it appears correct that the current inflation rate seems to be far too high and not the best way to increase total shareholder value?

[Constantin Mang, executive]

Well, I think our goal is to provide and to create shareholder value in all kinds of economic regimes, right? Of course, in some regimes, it's harder than in others to create shareholder value. But as a group, our goal should be to increase the value for our shareholders, both in high and in low inflation regimes. So of course, it is nice to have easy or a growing market environment than a market environment which is more difficult. But I don't think it's impossible to create shareholder value in more difficult economic environments.

[Operator]

All right. Mr. Birman, if there's still something you would like to follow up on, kindly we request you to raise your hand and you're doing so. So please go ahead if there's a follow-up question.

[Unknown Analyst]

Mr. Mang my name is Jans Birman. I'm a private shareholder. So my question with regard to the shareholder value was a little bit different. So as we all know, it's not so easy to employ EUR300 million in cash on the balance sheet. So I would be interested in your long-term strategy. Is your mid- and long-term strategy really to employ the total capital, so to find investments over the next year for the entire amount? Or do you have a portion in mind, which should be used for further buybacks or for dividend payments? Do we have a split in mind?

[Constantin Mang, executive]

Well, okay, I see where you're getting at now. But of course, this is a question that is very much depending on the environment we are in. At the moment, as I mentioned during the presentation, we feel that, of course, it makes sense to return some of our cash to our shareholders through dividends and buybacks. This might change a year from now. So the opportunities that we have need to be, I think, benchmarked constantly. And we -- I'm not sure if it would be the best strategy to have a fixed rate of cash that we want to return no matter what other opportunities are or a fixed rate that we want to invest into stock repurchases no matter what the price of our stock is. So I think we need a little bit of flexibility in this allocation questions in order to react to the market environment to opportunity cost to interest rates and to be fair also on our own share price.

[Unknown Analyst]

Yes. But do you agree that it will be ambitious also having a look at the history of the company to invest EUR100 million or EUR200 million of fresh equity? From my perspective, this -- if you really want to do this, this would need to change the investment strategy to look for larger equity tickets. And I think you will not do it, yes, because...

[Constantin Mang, executive]

First of all, I completely agree that it is ambitious, and I find nothing wrong with that, to be honest. I would be a bit disappointed if we have a non-ambitious goal. Of course, in the last years, we have not invested capital at a pace that would -- now allow me to forecast that these EUR300 million are going to be invested in 2 years' time or something, right? Nevertheless, we are not -- I would say, we are not changing our investment strategy, and we are, I think, as sensitive as we've always been when we look at new opportunities. However, I think there are times when it makes sense to be a bit more careful. And in hindsight, I'm very glad that we didn't make a major acquisition last year because the prices on the M&A market have not gone up since then. And maybe there are times when it makes sense to also be a bit more ambitious and also look at larger potential acquisitions. So I don't know whether it is the right approach to look at the last 2 years and to forecast it into the future and then see at which rate we will be able to invest the money that we want to invest.

[Unknown Analyst]

Yes. Fully agree. But this might have changed a little bit, and this was my question is you have 7% of inflation, the cash on the balance sheet is worth less 7% 1 year later, if you are not able to invest it. So it might have changed your approach to distribute more money if there is not the opportunity to invest such a high portion. But I think I got your point and I fully understand it.

[Operator]

With regards to the time we come to the final question, Mr. Mang, if you could please provide a short update on the alterations in the liquid securities portfolio with regards to bonds, equities, et cetera?

[Constantin Mang, executive]

Well, so as you saw, we have not increased our holdings in our bonds and government bonds from the end of last year to the end of the first quarter. So this is a figure that remained relatively constant and at a bit shy of EUR80 million. And the duration of these government bonds is relatively short term, so we are talking about less than a year mostly.

[Operator]

All right. Thank you very much. As we are coming now to the end of this earnings call, thank you very much to all participants for your interest and your questions. And of course, to you, Mr. Mang, for taking the time having the presentation and answering all the questions. I hand over to you for some final remarks.

[Constantin Mang, executive]

Thank you very much. As we are running a bit over time, I want to keep my final remarks short. And I'm very happy that many of our companies were able to grow in a not so easy environment in the first quarter. The profitability will have to come back and rebound over the next month, but I'm optimistic that this is exactly what we are going to see. And therefore, I'm looking forward to the coming months that will probably also, as we've addressed in the last 20 minutes, offer a few more M&A opportunities. And therefore, I think it's potentially exciting months ahead. And I'm looking forward talking to you after the second quarter.