MBB SE

XETRA:MBB

Earnings Call Analysis

MBB Forecasts Revenue Growth Amid Challenges

Facing challenges, MBB saw a revenue rise by 8% to EUR 691 million while coping with a significant EBITDA margin reduction from 11% to 7%. Despite this, the situation appears temporary, influenced by ongoing projects at Aumann and Vorwerk. The positive revenue outlook suggests easy attainment of the EUR 850-900 million target for 2023, albeit with EBITDA expectations at the lower end of the 8-10% forecast. Strategic actions such as the Lacom acquisition and boosting shareholdings in subsidiary stocks reflect optimistic M&A activity leveraged by strong cash reserves and rising interest rates that favor cash acquisitions.

MBB's Strong Family Business Approach with a Long-Term Focus

MBB's foundational identity as a family business resonates with the companies it seeks to acquire, which fosters an environment built on shared values and long-term growth strategies. The attention to transparency and capital market engagement distinguishes MBB in the German Mittelstand, conducive to fostering investor trust and stability. MBB's strategic acquisition focus is not just expansionary but driven by value creation over time, further buttressed by its alignment with significant sustainability trends such as the energy transition and e-mobility, both pivotal areas in the current fiscal year.

Positive Highlights Amid Mixed Results

The third quarter showcased some stellar performances, with Vorwerk's order intake crossing the EUR 1 billion mark and revenue growth of 33% at Aumann, translating into an impressive EUR 200 million in just nine months. The acquisition of Lacom by Aumann underscores MBB's commitment to e-mobility and energy solutions, as Lacom's technologies complement Aumann's existing electric vehicle (EV) battery and fuel cell production capabilities, positioning Aumann to capitalize on the expansive EV and renewable energy market.

Sectoral Performance Varied, With Prospects for Growth

Vorwerk exemplified strength with an order backlog of over EUR 1 billion, ensuring sustained growth through 2026 due to the critical A-Nord electricity line project in Germany. Despite this, third-quarter profitability faced headwinds from legacy projects, but with a strategic provision of more than EUR 7 million to cushion future impacts, the company anticipates a revival of profitability with upcoming, more favorably contrived contracts. DTS, the IT security specialist, saw a robust third quarter and forecasts a strong year-end. On the cusp of a noteworthy turnaround, Delignit's revenue growth slowed but was primed for expansion through a EUR 8 million capital increase. Conversely, consumer goods firms Hanke Tissue and CT Formpolster struggled with lower demand, yet expectations are set for a recovery in the subsequent quarters.

Cautious Optimism for Revenue Targets Amid Profitability Concerns

Overall, MBB achieved an 8% revenue increase to EUR 691 million during the first nine months, even as EBITDA margins decreased from 11% to 7%. The lower profitability is considered a transitory phase, attributed to ongoing project completions and upcoming improvements in Aumann's project profitability. For 2023, MBB anticipates meeting the higher end of its EUR 850 million to EUR 900 million revenue forecast but expects EBITDA to hover at the lower end of the 8%-10% projection due to persistent margin pressures. Nonetheless, the anticipated fourth-quarter improvements should bolster margins, albeit not substantially.

Strong Financial Position and Strategic Investments Set the Stage for Growth

MBB standings remain robust with over EUR 450 million in cash reserves and a net cash position of EUR 322 million. This liquidity, even after shareholder distributions and share buybacks, has allowed MBB to increase its stakes in publicly traded subsidiaries Vorwerk and Aumann. The acquisition of Lacom, albeit small, showcases MBB's capacity to identify and integrate value-accretive assets at attractive valuations. The evolving market dynamics, particularly the rising interest rates, favor MBB's predominantly cash-based acquisition strategy over leveraged buyouts, potentially strengthening MBB's competitive edge in the M&A landscape. Moreover, MBB's transparent valuation components, comprising strong cash reserves and investments exceeding its current market capitalization, underscore the firm's attractive and extraordinary valuation relative to historical data, suggesting a favorable position for future developments.

Earnings Call Transcript 2023-Q3

[Operator]

Mr. Mang will speak in a moment and guide us through the presentation and the results. [Operator Instructions]. And so with this, we are looking forward to the presentation, and I hand over to you, Mr. 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 Q3 figures to you today.

Before we jump into the figures, let's start, as always, with a very quick recap on what makes MBB special. First of all, we are a family business. And that means we share the DNA with the companies that we are looking for acquiring. Second of all, we have hands of the capital markets. That's why, by the way, this afternoon, we already have the Aumann management presenting their Q3 figures at 2:00 and Vorwerk presenting their figures at 3:00 And now last but not least, you see the MBB figures. I think this setup is quite unique in the German middle-eastern that you have a group of companies that is so transparent and so open to the capital markets.

Third of all, we have a long-term focus. That means that when we buy new companies, we really want to buy them in order to develop them for the long term. And fourth of all, we benefit from sustainability trends, trends like the energy transition or trends like e-mobility. And these trends were also quite important in the current fiscal year.

And as always, I would like to start with a few positive highlights. Of course, they were not only positive highlights. There were also figures that we wanted to be higher, but we have some very impressive statistics here. As you see Vorwerk was able to grow its order intake in the first 9 months to over EUR 1 billion. This is really quite an achievement and we are very proud of this approval we got here from the market for energy transition solutions.

In the middle, you see the revenue growth of Aumann, which was at 33%. Aumann grew the revenues to EUR 200 million just in the first 9 months of the year. That is also something that we believe is quite a remarkable achievement. And Aumann was also able to do an acquisition a few weeks ago, the acquisition of Lacom, why do we think that the company Lacom is a good fit for Aumann. Well, Aumann provides laminating and coating technologies. That's by the way, where the name Lacom is coming from, laminating and coating machines that are needed to produce battery cells and fuel cells. So the market here is quite clearly e-mobility solutions and upstream processes from what Aumann is already doing in these two markets.

So in the field of battery system, Aumann is already producing machines that automotive OEMs used to produce their battery packs on and their battery modules. And now together with Lacom, Aumann will also be able to produce machines that are used to manufacture the electrodes.

On the fuel cell side, Lacom is really quite important addition to the Aumann technology portfolio because it rounds it up completely. Now, Aumann offers basically the entire value chain from the coating to the stacking and final assembly of a fuel cell. And what that looks like can be best seen in a very simplified picture here of the major production steps that are needed to produce a fuel cell and on the right side, the battery cell. And if you look on the left side, Aumann has been offering stacking and final assembly automation solutions, and now with Lacom is also capable of offering machines for the production of the single components that are needed for a fuel cell. And by the way, also for electrolyzers. That's basically the same technology.

On the right-hand side, you see a simplified version of the battery cell manufacturing value chain. And here, you see that Aumann has always offering modules and pack assembly. But now with Lacom is able to broaden the addressable market by also offering machines that are needed to manufacture electrodes.

Why is that interesting? Well, at the moment, we have quite a few of battery plants that are going to be built in Europe. And despite of all the bad press that Germany gets at the moment, the by far, largest number of battery production plants is actually going to be built in Germany, both in terms of the number, but also in terms of the capacity, which is here visible as gigabyte hours. So this is quite an interesting market, and Lacom will hopefully provide Aumann the capabilities that are necessary to get a foot in this very interesting developing market, and that's why we are very happy about this acquisition.

So far, Lacom is a relatively small company. And of course, we have bigger companies in our portfolio, and that's where I want to turn to next. And of course, the biggest numbers are really have to get used to, even pronouncing the billion, Vorwerk which has not only order intake of more than EUR 1 billion, but also has an order backlog now of more than EUR 1 billion. And the majority of this order backlog is for one very interesting project, a project that has EUR 600 million for Vorwerk and it will be completed until 2026. So it spreads more or less over a 3-year period, and it's the so-called A-Nord electricity line, a very important project for the German energy transition because it will deliver renewable energy from the north of Germany to the south. There will be further projects very similar to that. A-Nord is actually the smallest of the ones that are currently being planned.

The structure of the project is also quite interesting because Aumann will realize the A-Nord electricity line in a very special construct that basically assures that the potential effects from material or personal price increases are contained. We are talking about kind of a cost plus set up here, which we believe is a very interesting setup to Vorwerk.

Nevertheless, in the third quarter, the profitability was still impacted by a couple of older projects. These are projects that have been negotiated 1 or 2 years ago, and they are very heavily impacted by some of the price increases that we currently see on the material and personnel cost side. And Vorwerk's in the process of, let's say, cleaning these projects up a little bit and within this process, Vorwerk also built up a precautionary provision of more than EUR 7 million in Q3 in order to avoid any negative further impact in the coming months. So we really want to get done with these older projects, and I think the chances that they are going to be completed in the next few months are very high.

And then Vorwerk really focus on the new contracts, which are on much more attractive terms and are much safer in terms of the protection against price increases.

Overall, Vorwerk had revenue of EUR 275 million in the first 9 months, which corresponds to a growth of 6% and the EBITDA margin in the first 9 months has been 7%. If you look at the EUR 7 million in this provision, and you said it in relation to revenues in the first 9 months you see that the margin could have actually looked much better, but we really wanted to be on the safe side here to avoid any future negative effects.

On the right side, you see our company, DTS, an IT security specialist in our portfolio. And after a rather weak start into the year 2023, DTS finally had quite a strong third quarter actually. And this high momentum is expected to continue in Q4 as well. So we expect DTS actually to have a very strong second half of the year. Of course, it will be quite a challenge to catch up with the previous year, which set an unusually high benchmark. And since the start of this year was also a bit weaker. We are still below the previous year, but I think all the momentum is really showing in the right direction.

And on top of that, DTS has introduced a couple of new IT security software products to the market, and these are really gaining market traction this year. So we expect also a positive margin effect through that in the coming year. Looking at the figures of Aumann. We've talked about Lacom already. We've talked about the order intake and the revenue growth, Aumann is currently looking at an order backlog of EUR 309 million and combined with a stronger profitability, the company has decided to raise its forecast for the current year 2023, they previously expected EUR 250 million in revenues. They now raised this target to EUR 280 million in revenues, and they expect to actually reach the upper end of their forecast EBITDA margin. So that's a very positive development. And you see on the bottom again, EUR 200 million in revenue in the first 9 months, that's really cool and 7% EBITDA margin that will probably increase further over the next month, and we are quite excited of what is still to come for Aumann.

On the right side, you see Delignit and Delignit had a very strong first half of 2023, and that strength was mainly driven by a rebound of the light commercial vehicle market and also the carrefour market. Both markets were impacted last year due to the supply chain bottlenecks. Now these bottlenecks were released in the first half of 2023. So the growth was really exceptional for the company. You still see below that in the first 9 months, they had revenue growth of 29% to EUR 68 million. But in the third quarter, we saw a bit of a normalization. So the growth has slowed down back to, I would say, a bit more moderate levels, and that also has to do with the large backlogs that we have in certain parts of the automotive industry at the beginning of the year, and these backlogs are now melting a little bit. So we will definitely see a slowdown in the second half.

Nevertheless, Delignit has prepared for their next expansion steps and therefore, they had a capital increase in the first half of the year, the capital increase amounted to EUR 8 million. And we believe that this will be a great base for Delignit to tackle new markets and also to grow in their existing markets.

Last but not least, our two companies in the consumer goods segment, Hanke Tissue and CT Formpolster. Both companies have a pretty difficult year 2023. And the third quarter was actually not very good for neither of them. Hanke Tissue experienced a decrease in revenues that was mainly driven by price effects, and CT Formpolster was impacted by the weak market demand in the mattress and furniture industry. So the third quarter was definitely not great for the 2 companies. We expect, however, the fourth quarter to become much better. And then for next year, I think the outlook is already much more like what we've seen in previous years, namely good profitability and strong growth. But this year, it's a bit difficult in this segment that the 2 companies operate in.

If we look at the overview of our segments, you see that in the Service & Infrastructure segment, we have this decrease in profitability from EUR 56 million in EBITDA last year to EUR 31 million this year. On the other hand, in the technological application segment, you see an increase by EUR 10 million. And so to some extent, the 2 effects compensate each other. But then you have the Consumer Goods segment, which is only breakeven this year in the first 9 months. So overall, the negative effect of the service and infrastructure and consumer goods segment, outweigh the very positive development in the technological application segment. And that leads to the aggregate figures that we see on this slide.

The MBB Group was able to grow its revenues by 8% overall to EUR 691 million in the first 9 months, but EBITDA has gone down quite significantly. And with it, the EBITDA margin from 11% to 7%. As I've mentioned before, we believe that this is a temporary effect. We think that both Q4, but then especially next year, will be considerably better when Aumann is able to deliver the profitability level that their projects are pointing at the moment. And also Vorwerk will have completed these legacy projects that are currently really burdening their overall profitability. So we think that this low EBITDA margin is only of temporary nature.

What do we expect for the full year 2023. Well, on the revenue side, we think that our forecast of EUR 850 million to EUR 900 million will be easily reached. You can see that by the line indicating the 9-month result, also the increase in the forecast of Aumann will definitely help here. But on the EBITDA side, we expect to probably end up on the lower end of the forecast range of 8% to 10% EBITDA. We do expect in margin improvement in the fourth quarter, but this will probably not raised us significantly above the 8% EBITDA margin mark.

Let's take a look at our balance sheet. As always, we have a very strong equity position. We have more than EUR 450 million in cash in the group, which corresponds to EUR 392 million in net cash in the group. And out of that, EUR 321 million is net cash in the holding MBB SE. And this is, of course, after all the distributions we did to our shareholders this year, we paid a dividend. We also bought back EUR 7 million of our owned shares. And more importantly, in the last month, we were also able to increase our shareholdings in both Friedrich Vorwerk and Aumann because we believe that the prices of both the Friedrich Vorwerk and Aumann stocks were very interesting. I think they still are, but therefore, we decided to increase our shareholdings by 4 percentage point each more or less.

But of course, we have the aim of investing the cash on our balance sheet into new companies. And I think the acquisition of Lacom is a small acquisition, but it nevertheless shows that valuations are becoming a bit more interesting. I think it might be tipping of the toe into the M&A market again. We have a strong M&A pipeline at the moment. And I think Lacom is proof that we are still able to find very interesting, very complementary companies at attractive valuations. And the position of MBB is only improving with the rising interest rates because the rising interest rates create a more level planning field for companies like MBB that purchased new companies, mostly with cash and companies like private equity firms that use a lot of leverage. And getting this leverage is not so easy anymore and it has become quite expensive. So we see really our relative position in the market improving further and further. And that's why we believe, and I would be very happy to also do further acquisitions in the coming months.

Last but not least, let's have a look at some of the parts valuation of MBB. You know that I always like to show the parts of our group that are quite transparent in value. First of all, the cash in the holding, which is EUR 321 million at the moment. Then the sum of our parts in the publicly listed companies, Vorwerk, Aumann, and Delignit which is at EUR 230 million. And we are already above our current market capitalization without taking into account DTS and Hanke, CT Formpolster. And I think this shows that our company is still at quite an attractive and extraordinary valuation at the moment also historically. And that's why I think MBB is in a very interesting position with lots of positive developments that we are expecting for the coming quarters. And at the same time, still quite attractive valuation levels. And with that, I would like to conclude and are happy to receive your questions.

[Operator]

Thank you very much, Mr. Mang for your presentation and the results. [Operator Instructions]. So he has a couple of questions to DTS. Let's start with the first one.

Can you give some more color on the 3 months performance of DTS, particularly on the EBITDA margin compared to the previous year's quarter.

[Constantin Mang, executive]

Yes. So as I mentioned, the quarters have become better step by step for DTS, start into the year was not exceptionally good. That has to do both with the market sentiment, but also with the benchmark that the previous year set against this benchmark and the first quarter was not so great. It has improved then in the second quarter. And in the third quarter, we have really seen growth again.

The question a few might will also points into the direction of margins. And it is true that the margin is a bit lower than what we have seen last year. So we have around 14%, a bit over 14% actually in the first 3 quarters of 2023. And last year, we saw something in the direction of 16%. Nevertheless, this is nothing. I'm very concerned by, it's more a matter of the composition of revenues and also the fact that DTS was expecting a higher growth in 2023 than what we have actually seen in the first 2 quarters. And so the operating leverage was not as strong as it has been last year. And DTS has adjusted and slowed down a little bit its growth in the first two quarters, especially head count growth and is, I think, now heading again for a margin that is more comparable to what we have seen last year.

But nevertheless, I think 14%, 15%, this is something that we should be expecting and the long-term trend is definitely pointing upwards.

[Operator]

All right. Thank you for answering. And there's a follow-up question for DTS. Relating to DTS IT, how much percent of current revenue consist of software.

[Constantin Mang, executive]

Yes, we don't disclose this revenue breakup in that detail. I think -- first of all, we have to distinguish between software that is produced by DTS and software that is produced by other vendors, and that is implemented by DTS. And the most interesting part is obviously the software that DTS develops itself. But then we are talking in terms of revenue, only about a small million euro number.

Nevertheless, in terms of profitability, it delivers quite a contribution. And so especially if you look at ISL, the company that we have acquired a few years ago, which produces software in the area of network access control, it has actually shown quite a good margin also this year and contributed significantly to the EBITDA and EBIT of the company. But in terms of revenues, this is a relatively small figure. And then we have software that DTS implements third-party software, for example, Palo Alto software, often this software has done -- then served to the client from DTS infrastructure, so in the DTS cloud, so to say. And here, we see lower margins compared to the software that DTS produces itself, but still very interesting margins. And here, we are talking also in terms of revenue, about a higher digit, but as I said at the beginning, we don't really disclose the detailed breakup, yes.

[Operator]

All right. And then there is an additional question. How does the DTS IT order book looks also compared to recent periods.

[Constantin Mang, executive]

Yes. I think the order book at the moment, especially for the fourth quarter looks pretty good. DTS generally doesn't have an order book like Vorwerk or Aumann that covers several years. This is more sort of an outlook to the next maybe 6 months, 3 to 6 months, that's mostly kind of the visibility that DTS has.

And when I look at the next 3 to 6 months, and the order book looks pretty good. Also, the sales pipeline looks pretty good. I think it is actually stronger than last year. The slightly weaker start into the year 2023 was already starting to get visible at the end of 2022. So I think that everything is pointing in the right direction. The order book is good. The sales pipeline is good. I really believe that we have some nice quarters of growth ahead.

[Operator]

All right. And then we just have Mr. Beringer in the queue, Mr. [ Beringer ] you can unmute yourself now to ask your question.

Okay. Unfortunately, it's not working. So with this, we will just move on with a question from a chat because Mr. [ Beringer ] has written a question in the chat box as well. So what are your decisions to improve the results of Delignit and Tissue products in quarter 4 this year, next year and in long term.

[Constantin Mang, executive]

Yes. So I'm not sure if the question refers to Hanke Tissue and CT Formpolster. Usually, these two companies are like put together in the same sentence. But I can also say a sentence about Delignit in a second. For Hanke and CT Formpolster, it is, I think, important to understand why the year 2023 was not so good. And the reasons lie mainly in the energy and material price volatility. CT Formpolster has not as much exposure to energy prices. But CT Formpolster is exposed to the demand in the furniture industry because many people buy mattresses when they buy a new bed. And this year, the focus of consumers was not in furnishing their flat or the house, but in traveling and there were just other priorities for many consumers. So the whole furniture industry was not doing so well.

We believe that for both companies, the market will turn more favorable. Already in Q4, we are seeing that both revenues and profitability are picking up again. And that's something we expect to continue for next year as well.

But the weakness, if you want, of these 2 companies will remain that they are exposed to these price volatility and we have to manage it as well as we can. This year was challenging. But we have done everything we could and the management team. So Hanke and CD Formpolster, have done anything they could to make sure that the next year is becoming better. And so far, it is looking good.

[Operator]

Then we just have another follow-up question for DTS software. So DTS software is just successful. What are the next steps, what are the probability for the success?

[Constantin Mang, executive]

Well, the probability for success, I think, is pretty high. And I think it's high because DTS has done many years of work that prepared DTS for the position that they are at right now, right? And with that, I mean, the development of own software products, for example, but also on services like a large security operations center that DTS has built up both in Germany, but also increased because increase it is easier to get security specialists.

So all these things have been cooking up over the last 5 years, I would say. And we have seen last year, I think for the first time, when DTS was able to also surpass the EUR 100 million in revenue mark that this development is paying off. And now this year, the demand in the market was not as high as we would have liked it to be, some companies postponed their investment decisions into new IT security infrastructure. But nevertheless, I think that the long-term demand for IT security is only going to increase. And then the good positioning of the company in this market for IT security should lead to success. And therefore, I'm quite optimistic for the future of the company.

[Operator]

Great. And then there is another question. So are you getting closer to doing a stand-alone acquisition? And what does the M&A market looks like?

[Constantin Mang, executive]

Yes. We are not -- just before signing anything. Otherwise, I would have told you, but the sentiment is getting better. The sentiment is clearly getting better. The number of opportunities that we are seeing in the market is getting higher. And I think, to be honest, right now, we have the strongest pipeline of M&A transactions that we've had for the last years, not only because there are a lot of interesting transactions, but the transactions that we are seeing are currently being more reasonably valued than they were in the years before. And what we're also seeing is that some of the transactions that we saw last year, for example, that in the end didn't come to a signing are coming back now because after a year, some of the business owners realize that the world is not going back to 2019, any time soon, right, where interest rates were zero, and we had a different economic environment also here in Germany, but also in Europe more generally. The time is not going back, it's going forward.

And the key reasons why people want to sell their company. First and foremost, the age of the business owner and the executive team of the company. They are not going the way. And therefore, many of the companies that we've had conversations with in the last 2 years. But in the end, they weren't successful because of diverging price. So basically, the sellers wanting a much higher price than what we were able or willing to pay. This is a great opportunity. And we think that we will see more of these companies now coming back on the table, but at more attractive valuations. And therefore, we are optimistic that Lacom was only a small, but first step back into the transaction world and maybe we see a stand-alone transaction in the coming months.

[Operator]

Then we have another question. How do Friedrich Vorwerk wants to process the order, how to get manpower also with acquisitions.

[Constantin Mang, executive]

Yes. I think manpower is really key for Friedrich Vorwerk. It has become a bit better. And I think Friedrich Vorwerk has improved its position a little bit in the market as an employer, but there's still a long way to go. And we have to really focus a lot of our energy on securing enough talent, enough engineering manpower in order to have Friedrich Vorwerk grow in the coming years.

And we also have to be more creative probably in the way we use external manpower and also continue to look for M&A targets that could provide additional capacity. But when we talk about M&A, I think we are more talking about kind of [indiscernible], so not an acquisition like Friedrich Vorwerk did a few years ago with Bohlen & Doyen, which was quite a sizable one, but more smaller acquisitions that are really focused on getting talent on board and securing the manpower and the capacity for the large projects that we are going to see in light of the energy transition.

[Operator]

Thank you so much. So we just have one question left. [Operator Instructions]. So by now the last question would be, can you provide some more details as to what equities you own within the liquid securities portfolio. We perhaps publish a top 5 or top 10 in the annual report.

[Constantin Mang, executive]

Yes, we typically don't do that. We don't disclose the individual positions, but the equities we invest in basically have the purpose of providing at least a bit of return on the EUR 320 million of cash that we have in the holding. And we are not trying to do something crazy there. We invest in blue chip companies, you would expect a lot of the names, if you look at the S&P 500, some of these top positions, you will also find in our portfolio simply because we are trying to benefit from broad market movements, but we don't want to publish really single positions here because our focus is on using the liquidity for further M&A transactions, and the investment into stocks is more of, yes, temporary aim that we are having while our cash position is so high, and we want to, of course, have some return on it.

[Operator]

All right. So in the meantime, we have received no further questions. We therefore come to the end of today's earnings call. Thank you, everyone, for joining and listening and your questions. And a big thank you also to you, Mr. Mang for the presentation and the time you took to answer all these questions. Should further questions arise at a later time, please feel free to contact Investor Relations or us. And with this, on behalf of MBB and Montega, stay safe and healthy due to autumn season and have a lovely remaining week. So see you next time and bye-bye.

[Constantin Mang, executive]

Thank you very much.