MBB SE

XETRA:MBB

Earnings Call Transcript 2023-Q2

[Operator]

This meeting is being recorded.

Dr. Constantin Mang will speak in a moment. We are looking forward to the presentation. And with this, I hand over to Dr. Constantin Mang.

[Constantin Mang, executive]

Thank you, and good afternoon from Berlin. My name is Constantin Mang, I'm CEO of MBB and I'm looking forward to presenting our first half year results to you today. Let's start with a very quick recap on what makes MBB special.

MBB offers long-term succession solutions, the sustainable Mittelstand companies. And the way we do this is pretty unique because, first of all, we are a family business. And that means that we share the same DNA with the businesses that we want to acquire. Secondly, we are fans of the capital markets. That's why we are here today, and that's why three of our subsidiaries are also appreciated. Thirdly, we have a long-term focus. When we buy a new company, we don't have the intention to sell it, but we want to develop it and flourish for the long term. And fourth, we are sustainable, not because we are hippies, but we believe that there are lots of interesting opportunities in the transition towards a more sustainable economy.

Before we dive deeper into each of our subsidiaries, I'd like to present my three favorite growth figures from the first half of 2022. This time, we are looking at the order intake of Friedrich Vorwerk that grew by 26% to EUR 318 million. That's a new record for the company. And despite all the downs, I think this proves that the market position of Friedrich Vorwerk is actually stronger than ever.

The second figure I want to show you here is the 29% revenue growth of Aumann. That is as well a record for the company. And it again shows that Aumann's position in the market for e-mobility is strong and growing. And the third figure I want to present to you is the revenue growth of Delignit. Delignit is definitely the growth champion in the MBB group at the moment. Their revenues grew by 50% in the first half year to EUR 48 million.

And now let's take a look at the stories behind these figures. And let's start with Friedrich Vorwerk. As mentioned, the record order intake and that record order intake also led to a record order backlog of EUR 467 million, and that's driven by the energy transition in the end. And one particular driver here are the large power lines, the large electricity projects that are needed to bring sustainable energy, especially wind energy from the north of Germany to the South. And this order backlog does not include the large power line A-Nord, which Vorwerk, expects to be awarded to in coming weeks. And the volume of A-North is expected to exceed the volume of EUR 1.1 billion, of which Vorwerk will probably get something around 40%.

The profitability of Friedrich Vorwerk has been temporarily impacted, and that's due to the pressures on both the material and personnel costs on the one hand, and on the other hand, on the margins in large LNG projects that the company is actually doing at the moment. We've been talking about the LNG project in [Wilhelmshaven] last time, which led to a softer profitability at the end of last year and also at the beginning of this year, in the last weeks, it turned out that also the second large LNG project in Germany, the one in [indiscernible] and a little bit under time pressure, both these LNG projects have been planned and need to be executed under enormous time pressure. And therefore, this impact also the margins of Friedrich Vorwerk at the moment.

The good news is that both projects should be completed by the end of the year. And then the focus of the company can really turn to the electricity project, which we believe are much more comfortable in terms of timing, but also margins.

When we look at the revenue figures, we saw that Friedrich Vorwerk grew by 16% to EUR 166 million in the first half of 2023, and it had an EBITDA margin of 8%, which is below what we had originally expected for the reasons that I just mentioned.

Let's turn to DTS here on the right side. You know that DTS is in IT security specialists and the revenues of DTS in the first half of 2023 were slightly lower than in the previous year. That has also to do with a high benchmark that the previous year set, the previous year and especially the first half of the previous year was extraordinarily strong. But nevertheless, the company has seen much higher order momentum in the last week. So we expect the coming months to be stronger. And therefore, DTS also returning on its growth path. The good news is that the EBITDA margin of the company has been very stable and comfortable at a margin of 50%. And I think that shows that the company is really able to earn good money even though we saw the softer start into the year.

We see a lot of market traction for new software products and security services that DTS introduced this year to the market. And so we, therefore, believe that starting next year when these products will have a stronger impact on the [P&L] DTS. We will see quite a positive development here of both revenues and also margins of the company.

Let's turn to Aumann. I mentioned at the beginning on the first page, the strong order intake of Aumann and that also led to a very strong order backlog, in fact, for the first time in the company's history, we talked about an order backlog that succeeds the EUR 300 million benchmark, and that is quite an achievement for the company. And I think proof of the demand for Aumann's technologies that are needed to automate the production of components for electric cars, such as batteries and electric motors.

We also saw that the EBITDA margin improved by 3.2 percentage points in the first half year. And that basically underlines the steady increase in profitability that we expect for Aumann to continue going forward. Right now we are at 7% EBITDA margin, but we don't think that, that's the end of the story. In fact, the growth momentum of the company is pretty strong, and we believe that there's also some room for further margin improvements. The excellent market position of the company is actually paired with also a high net cash position and the 57% equity ratio. And that allows both for the organic growth that we are seeing at the moment with 29% growth rate in the first half year, but also potentially for M&A opportunities. And we do see quite a few potential bolt-on acquisitions for Aumann at the moment. And this might definitely be one way to strengthen the market position of Aumann further.

Turning on the right side to Delignit. We saw Delignit really at its best in the first half of 2023, and the strong revenue growth of 50% was driven by the quite resilient light commercial vehicle, but also carbon markets. Despite the challenging automotive environment, these two sub-markets have proven to be strong and resilient and Delignit being an important supplier to the sub-market benefited from that as well. We also see the effect on profitability. Basically, Delignit was able to more than double its EBITDA and that is due to the higher utilization. However, the high utilization also means that the Delignit needs to think ahead, how to continue its growth story. And for that, we are very happy that Delignit was able to successfully completed a capital increase a few weeks ago with gross proceeds of EUR 8 million. And we think that this is a very strong basis to complete the next growth steps that will allow Delignit to continue on its growth path.

Finally, let's take a look at our Consumer Goods segment with Hanke Tissue and the CT Formpolster mattress producer in our group. And both companies were able to grow in the first half, but a lot of this growth is also driven by inflation. Demand is not particularly strong, neither for tissue products nor for mattresses at the moment. And for the mattress industry, in particular, we are expecting a softer summer months because at the moment, consumers don't seem to buy a lot of new mattresses. They seem to focus more on other types of consumer spending, such as travel, for example, home improvement, new furniture, new mattresses. It's not so much in focus right now. So we expect the demand to be lower in the coming weeks. And also profitability of both companies, I must say, has been not at the level that we would have liked to see it, and that's mainly due to the high volatility of the energy and the material prices.

We think that especially Hanke Tissue will recover in the second half, but the material price and energy price situation make it quite challenging for these companies to generate the profits that they have generated in the past.

Let's take a look on how the segments developed in aggregate. So you have the service and infrastructure segment, which consists of Vorwerk, and DTS. We have a technological application segment, which consists of Aumann and Delignit and we have the consumer goods segment, which consists of Hanke Tissue and CT Formpolster. And what you see on this page is basically all the three segments accrue in the first half, and that's very good news. But what you also see is that the EBITDA of the service infrastructure segment is much lower this year compared to last year.

On the other hand, you see the strong improvement in the EBITDA in the technology application segment. And these two effects basically almost balance each other out. But then we have the Consumer Goods segment, which is also weaker in terms of profitability this year, and this in aggregate, leaves to a slightly decline in the EBITDA.

If we look at how the margins developed from the first quarter to the second quarter, we see that both the service and infrastructure segment and also the technological application segment were improving its margin from the first to the second quarter. However, this improvement hasn't been as strong as what we had expected, especially in the Service & Infrastructure segment, we thought this improvement could be even stronger. And then we have the Consumer Goods segment, which is basically also not improving in the way we would have liked to see. Nevertheless, for the Consumer Goods segment, we really think that in the second half, we do see a recovery here.

When we take all of these numbers together, we end up with our group figures. And overall, the MBB Group grew by 13% in the first half of 2023. And we have an EBITDA that was lower by 16% in which EUR 32 million in the first year of 2023 compared to EUR 38 million in the year previously, which means that the EBITDA margin of the group basically declined from 10% to 7.5%. And if we look further and what that means for the complete year, our revenue forecast of EUR 850 million to EUR 900 million seems very well reachable. We are almost half of the lower bound already and expecting a stronger second half of the year. So very -- think that we are quite comfortable.

On the EBITDA margin side, we had a previous forecast of 9% to 11%, which we slightly lowered now to 8% to 10% in order to reflect the softer profitability in the Service & Infrastructure segment mainly, and we believe that this forecast can very well be reached, but it is a bit less than what we expected at the beginning of the year.

Taking a look at our balance sheet. You see that MBB still has a lot of cash. We have EUR 446 million of cash in the MBB group, out of which EUR 373 million is net cash. And out of that, around EUR 332 million are attributable to the holding MBB SE. And this is basically funds that we want to invest into new businesses in the long term. But of course, we also want to let our shareholders participate from it, and that's why we paid a dividend of EUR 1 per share this year, which amounts to EUR 5.7 million in total. And due to what we believe is a very attractive valuation of MBB at the moment, we also decided to do a share buyback in the first half of 2023, we bought back shares for an aggregate amount of EUR 7 million. But of course, the goal is to also buy new companies and find new members for the MBB Group. And we think that the conditions for that are actually improving. On the left-hand side on this page, you basically see how the EBITDA multiples develop on the stock market for German small caps and you see that the valuations have come down.

Typically, there's a time lag between public and the private markets, and that's exactly what we've been seeing. So we haven't seen the reduction in multiples last year, but it is now coming through step by step. And we believe that as MBB, we are ideally positioned to benefit from this more interesting valuation environment that we are in right now. Due to the rising interest rates, the borrowing costs are also increasing, and that creates challenges for private equity firms and other companies that use a lot of leverage to buy new companies.

And MBB, on the other hand, is buying new companies mostly with equity-based financing, which means we are not as much affected and in fact, it creates a more level playing field now for MBB and investors that use [ LBO ] structures. And overall, we think that our competitive position is becoming stronger and the opportunities are becoming more interesting. So we believe the time for new acquisitions is becoming more and more interesting with every interest rate stuff that the central banks basically take in the direction they've been heading now for a while.

To conclude this presentation, I'd like to show you what the valuation of MBB can basically benchmark with at the moment. You see that our shares in the publicly traded companies, Friedrich Vorwerk, Aumann, and Delignit is currently worth EUR 205 million -- around about EUR 205 million. On top of that, we can take the cash in holding MBB SE and then you're already beyond our current market capitalization without taking into account the private companies like DTS that definitely also have a substantial value. So we believe that the current valuation of MBB is quite attractive. As I said before, that's why we also purchased quite some of our own stock in the first half year.

And now I'm looking forward to your questions, and I thank you for your attention onto us.

[Operator]

Thank you very much for your presentation. [Operator Instructions] I received one question from [ Christian Arete]. The total shareholder return is very poor purchase are not taking place. Why is there, for example, no special dividend of EUR 10 per share. Shareholders should be rewarded for waiting, share buybacks don't help either as the free float decreases.

[Constantin Mang, executive]

I would actually disagree that share buybacks don't help. We believe that at the current valuation levels of the MBB stock, share buybacks are actually the smart way to return capital to our shareholders. Nevertheless, I mentioned that we paid out the dividend, and that's something we have been doing since our IPO and it's something that we want to continue doing. But we believe that the current stock price levels, buybacks are the more interesting tool basically to return.

And by the way, there is also an increasing, let's say, yes, return for waiting until we acquired the next company because the interest rate on the capital of course, that we have on our balance sheet is also rising, and therefore, it becomes, in my opinion, a bit less painful at the moment, if you want to wait until we make the next big acquisition.

[Operator]

I received three3 questions from [ Rob Rogen. ] How is the stance of the company against a large buyback of shares of MBB as the valuation seems to be depressed?

[Constantin Mang, executive]

Sorry, could you repeat after?

[Operator]

How is the stance of the company against a large buyback of shares of MBB as the valuation seems to be depressed?

[Constantin Mang, executive]

We don't have a stance against buybacks. It's kind of -- it seems to be the opposite question of the previous question. We don't have a stance against buybacks, right? the opposite. We think that at the current valuations and rock calls it's depressed. I don't like to be depressed, so I call it attractive, but basically, I think at these valuations, it makes a lot of sense to do buybacks. That's why we are doing them, and that's why we want to continue doing them.

[Operator]

And the second question, secondly, the M&A activity of MBB has been low the last years for good reasons, as you explained. Is this picking up? And does MBB have some targets regarding M&A for this year and upcoming years.

[Constantin Mang, executive]

Yes, of course. And I mean I think you have to distinguish between M&A activity and basically having targets that we conducted diligence on and making an acquisition. So our M&A activity has actually not been that low by the measures that I look at, we are seeing interesting companies, and I think we are seeing more interesting companies this year than we saw last year, for example. So the activity is actually pretty good.

At the same time, we haven't made an acquisition. But to be honest, I don't measure the success of our M&A activity owned by making acquisitions because making a bad acquisition can be much worse than having a little bit of patience and waiting for the fat pitch, the good acquisition that creates extraordinary shareholder returns. So I don't think we have a bad M&A track record and not a bad M&A activity. And I'm actually quite content that we didn't make any mistakes so far. In terms of momentum, I think -- the momentum in the M&A pipeline is pretty strong at the moment and stronger than it has been last year, especially because prices are simply more interesting than what they've seen before.

[Operator]

Regarding M&A strategy, we will take a follow-up question from Mr. [ Bruniga. ] In which segments do you intend to buy a new M&A? Do you have concrete projects?

[Constantin Mang, executive]

Yes, we do have concrete projects. So we are looking at lots of leads. It's not that we are not buying because we are sitting on our hands. We are looking at lots of companies in different sectors, I mentioned them out [ intro slide ] that we like sustainable companies because we think they have an underlying growth trend, which will last not only for a few years, but for a long time because our transition towards more sustainable economy might be actually one of the largest transitions that we have seen at least in Germany.

And you can think of it politically what you want, but it definitely creates a lot of economic opportunity. So that's something that we like. But we are also looking at wide range of industries. It is important for us that we see some underlying growth trends. We are not looking at companies that don't have any hope to double in the next few years. Basically, we are looking at companies that benefit from a growth trend simply because then it's easier to increase the value of the company, and these can be found in different industries. And that's why we also not limit ourselves to a small set of industries.

[Operator]

And we see in the meantime of questions via audio. Please go ahead, [indiscernible].

[Unknown Analyst]

Hello, Dr. Mang. I have a question on Delignit and it's -- the question is why I'm still puzzled by it did not take part in the capital increase of Delignit that happened to a share price that had a huge discount to the share prices prevailing ahead of the capital increase. So did you sell your rights? Or did you just not use them?

[Constantin Mang, executive]

No, we didn't sell any rights. And to be honest, we have -- I'm not sure how well it works in English, but two hearts in our chest, right? So on the one hand, the valuation of Delignit is also very attractive, as you mentioned and the valuation that we conducted a capital increase was definitely a valuation where we would have been interested in buying Delignit stock.

On the other hand, we really didn't want to limit the free float of Delignit any further. On the contrary, I think that the Delignit stock in the last year suffered a little bit by having such a low free float market cap. And in order to give the company a chance of having a proper capital market presence, we believe that it is important to get a substantial free float and to choose also investors that are committed to the company for the long term. And that's why we also created this let's say, interesting price point here to attract new investors to increase the market presence to increase the free flow market cap of Delignit.

[Unknown Analyst]

If I may comment on that maybe it was misunderstood by some market participants in MBB not having trust in the Delignit at such a low price?

[Constantin Mang, executive]

To be honest, I didn't see that in the interest for the capital increase. So actually, the demand was pretty high and we have very interesting new investors that now also became investors of Delignit. So I don't think that we basically created any damage here, quite the opposite. I think our goal to increase the shareholders in Delignit with really interesting new participants was achieved.

[Operator]

And we received a question regarding Vorwerk. You have increased your position in Vorwerk. Is this something you will continue to do on these levels? And what message do you intend concretely to improve the results of Vorwerk?

[Constantin Mang, executive]

Yes. So we have increased the shareholding a little bit and valuations of Vorwerk, which is so attractive that we could not do it. And the question that whether we're going to continue that also depends, of course, a little bit on the stock price. But if it continues to be as attractive as it is today, I think the chances are not too bad that we might increase a little bit our shareholding further. And of course, we are supporting the management of Vorwerk in several ways to improve the results again. And the main problem here is really resolving the capacity bottlenecks. So we had capacity bottlenecks, which need to be resolved in order to grow the company further in a more sustainable and profitable way.

On the other hand, we have these material and personnel cost issues and also the impacts from the LNG projects that I manage -- that I mentioned before. And these are things that we can also support the management in, but I think the management has a lot of attention on these issues right now. And these are also things that will grow out of the P&L over the next months. So I think the remaining key issue here where we might be able to help a little bit is resolving the capacity bottlenecks.

[Operator]

And we've got another question from Mr. [ Bruniga]. What do you intend to make sector consumer goods profitable?

[Constantin Mang, executive]

Yes, that's a very good question. I think a lot of what we've been seeing in the consumer goods segment over the last month was basically exogenous. The price stocks in the energy markets, also in the raw material markets, these are things that were exogenous to these companies, and they are very difficult to anticipate and to be honest, also we, as MBB have only limited power to mitigate these effects. And that's really sort of the main reason for the lower profitability. And again, to a large extent, we believe that we will automatically grow out of these now that we have a little bit of a more stable energy price situation. This will become easier to manage. But of course, we do our best to also support the companies here in order to improve profitability. Both companies have programs running that aim at cost reductions as well as managing these volatile prices, and we are there to help them. But some of these exceptions shocks cannot completely be absorbed by better management.

[Operator]

I received the question from [ Rupesh Prem].

[Unknown Analyst]

Just one question concerning the M&A pipe. You have now already mentioned that multiples are slowly coming down and that your focus is mainly on sustainable companies. But what is about the pipeline in general? Are there any changes? So maybe in terms of that the size of the companies has changed that you are looking on or concerning the industries that you're looking on or in terms of profitability or -- any deeper insight from this perspective would be helpful.

[Constantin Mang, executive]

Yes. So we see an increase in the M&A opportunities. We saw that already -- Yes, I would say starting in February or so this year. And this is also something that not only we perceive, I think it's also a bit of a general industry trend -- so in terms of quantity, I would say the number of opportunities rises. In terms of quality, what we are seeing now in the last few months, more than the previous year, for example, and are really companies that are struggling with their balance sheet that are struggling now with higher interest rates to refinance themselves, companies that had these kind of subsidized debt during COVID and now need to start repaying it, if you want, yes, balance sheet restructuring cases.

And even though we are not interested in companies that meet restructuring in a business sense. These balance sheet restructuring cases can be quite interesting because sometimes there are companies that are relatively healthy, but are -- simply have too much leverage that now becomes more and more expensive and more difficult to refinance. So that's something if I want to point at one qualitative trend in our M&A pipeline. That's something we increasingly see. Despite that, I don't think there's a strong trend towards certain industries. It is -- and in the end, always a pretty colorful mix of companies that we are looking at.

And we have also not changed our, let's say, target sizes and sweet spots over the last 2 years. So that has not really changed a lot.

[Unknown Analyst]

And on the seller side, do you see some more pressure that the sellers are more, let's call it, forced to bring a deal over the line or -- do you see still some hesitation?

[Constantin Mang, executive]

No, exactly. I mean that's what I was trying to imply that we see quite a few companies that are now forced to sell for different reasons. Sometimes, it is also kind of cop-out situations where a business needs to sell one part of its business to refinance the other ones. So that's something that we increasingly see and it can be interesting. We need to take a close look at these cases because as I said, we don't mind balance sheet restructuring, not at all, but we don't want to really go into business restructuring, a company that has a problem with its products, its markets and so on. And I think for these kind of cases, we are not the best investor to be honest. But balance sheet restructuring can be interesting for us.

[Operator]

In the meantime, we have received no further questions. We, therefore, come to an end of today's earnings call. A big thank you also to Mr. Mang for your presentation and the time you took to answer the questions. Should further question arise at a later time, please feel free to contact Dr. Mang or us. Thanks for listening, and I wish you all a lovely week. Goodbye.

[Constantin Mang, executive]

Thank you very much. Bye.