Good afternoon, everyone, and welcome to the Mutares earnings call for the first half year of 2020. On our call today, Mutares CFO Mark Friedrich and Mutares CIO Johannes Laumann will present you the results and most relevant events of the first half of this year. After the presentation, they are happy to answer your questions. The presentation shown is available on their website. Before we start, I would like to remind you that this call and presentation contains forward-looking statements, including projections, which may not develop as we currently expect. I therefore kindly ask you to take note of the precautionary warning about forward-looking statements that is included in the materials on our website. Let me hand over to Johannes Laumann.
Hello. Good afternoon, everybody. We would like to follow the agenda, which you see projected, starting with a quick sum up of the business model and activities on the M&A side in the first half year, followed by a quick summary, then financials and outlook, which will be presented by Mark Friedrich, the CFO of the Mutares Group. Short overview of the business model, which most of you are aware of. A short reminder of our success driver. We target a return on invested capital between 7x and 10 x over the four phases, which consists of consulting income in the acquisition phase, realignment, optimization, and harvesting, which you will see later on, which is basically the life cycle of our investments. At the end of the day, the creation of shareholder value is driven by the 7x to 10 x ROIC, which we target for our company.
What do we do on a day-to-day basis to achieve that? This is what we call our value creation circle. We do take and evaluate risk by taking over companies in special situations. We request cash funding from the seller. In addition, depending on the transaction, if a platform add-on, we also contribute some equity from our side, either for certain financing needs for equity strengthen or in add-on acquisitions, also for purchase prices. Do the turnaround with our own people. We continuously have grown the consulting team. Last but not least, after the turnaround is done, we either go for a strategic and organized sales process, or we grow further inorganically through add-on acquisitions to finally then come to the 7x to 10 x return on invested capital, which is our main target.
To give you a little bit of track record on the 7x to 10x, which is our target, including the four phases. As we speak, the portfolio we have, and which is at least for 12 months in our portfolio, has already contributed 4.8x of return on invested capital, which is obviously mainly driven by consulting income and dividends paid out of the portfolio into the Mutares holding, plus the exit proceeds, which are outstanding for potential exits should then drive to the 7x to 10x. What you see is that we have already materialized almost a 5x cash on return on invested capital without an exit of the company.
Maybe let me stress out one more thing, which you see on the bottom of the slide, where it says we want to have an average holding period of three to five years. This is only a certain guidance, but this is of course different from portfolio to portfolio, very much depending on how do we want to develop the company and how do we see the best shareholder value creation over the life cycle. Short highlights of the first half year. We have acquired five new platforms, and in the following slide, I will show you our total portfolio in a minute and three add-on acquisitions. A quite intense first half year. I think we are holding the pace of last year and even overachieved that in the difficult times of COVID-19. This is an outstanding performance.
We already have realized three exits, so two very small ones. BEXity sold its Czech business, and we sold KLANN Packaging, and then we sold the restructured Balcke-Dürr part in Poland, which was sold to a strategic buyer here in Germany. Restructuring efforts, of course, were heavily impacted by COVID-19, but we made sure also as the board, we were involved very actively in safeguarding the stabilization of our businesses. We have achieved that. We have brought the whole portfolio through these COVID times. Beginning of the year, we have also successfully placed a EUR 50 million bond, especially for add-on acquisition and further portfolio development, where we do now evaluate further an additional EUR 30 million, which you have also seen maybe this morning in an ad hoc. The general annual meeting decided on a dividend of EUR 1.
The outlook for 2020 also looks very positive on this side, and we are still very strongly committed to our sustainable and successful dividend policy, and which will be also in 2020 our main target, and even maybe overachieve. A quick summary of the portfolio. You see Automotive & Mobility, Engineering & Technology, and Goods & Services. We also significantly grown there. Maybe a few highlights on this one, though. The SFC Group, which is still in the Automotive & M obility segment, has divested last Friday its acoustic business to refocus on plastics and materials, which is the core business and the main driver of the success.
Let me also point out Nexans, which is an acquisition of roughly a little bit more than EUR 200 million in sales, which is a perfect fit and also have synergies potentials with our Plati Group as well as with the Trefil Union Group. We will carefully bring those synergies together of these three companies. Last but not least, our latest acquisition here on the slide, you see NCC, the road operation and maintenance business, which we acquired, and which will be closed most probably by end of September, right at the right time when the winter starts and road operations and maintenance are needed. This is a business which we acquired from NCC, a little bit above EUR 100 million in sales, and it also strengthens our footprint and focus on the Nordic markets.
Overall, you see also in the numbers later on a quite robust portfolio, which went through the toughest time of COVID-19 and a robust portfolio with great exit potentials. As already said in the annual meeting and in several communications before, we do expect a heavy workload in the second half of the year on the buy side. We do see great opportunities. We are very selective on this one, but we see maybe the once in a lifetime chance of a outstanding growth also in the second half of the year, which we will work as a team very hard on to achieve that. So far on this one, let me hand over to Mark Friedrich for the financial part and the outlook. Thank you very much.
Thanks, Johannes. I'm starting with page 10 with the overview of the financials for the first half of the year. Normally, I say that our Group is impacted by the M&A activities. This is true again for the first half of the year, but this time the Group is highly impacted also from COVID-19. We see a significant increase in sales by approximately 40% due to the M&A activity. This time, namely the BEXity Group, PrimoTECS, and the Ruukki transaction that is part of the Donges Group now, which contributed quite positively to the increase. On the other hand, we saw, compared to the budgets that we had with the Group, quite a shortfall in sales in our existing portfolio due to COVID-19, especially in the months March, April, and May. The Group EBITDA is impacted by approximately EUR 66 million of bargain purchase income.
On the other hand, the adjusted EBITDA is highly affected by the negative impacts of COVID-19. We will come later to it, and I will explain a bit more about the phasing of these effects. Cash and cash equivalents increased due to the bond that we raised, and the equity of the Group decreased due to the increase in total assets, but also due to the loss in the first half of the year. Looking at the overall P&L of the G roup, you see here again the increase in sales and revenues by approximately 40%, which is quite significantly. All other figures also increased, and we end up with a net result of -EUR 30 million, impacted by, especially in COVID-19 and here between EBITDA and net income.
There is especially also the depreciation and amortization, and we had to account for an impairment of approximately EUR 20 million due to the impact of COVID-19. Looking at the balance sheet on the detailed slide for just EBITDA, before we come to the balance sheet. Here you see the bargain purchase income of approximately EUR 66 million in the first half of the year, slightly lower than last year. This is due to the adjustments that we already made in the acquisitions and in the accounting of bargain purchases of the transactions that we closed in the first half of the year. The second line is the restructuring and other non-recurring expense, which is only EUR 9 million in the first half of the year, because we were also not able to execute the restructuring measures that we actually had planned for, due to the COVID-19.
We would actually have expected more here and had planned for more, due to the number of acquisitions that we did. Especially abroad, we were unable to travel there to execute our plans. The restructuring and non-recurring expenses relate mainly to the STS and the Donges Group. The second or the last line is the deconsolidation effect. Here you see EUR 1.6 million, meaning that we have a gain of the deconsolidations in the first half of the year, which were by Balcke-Dürr Polska , KLANN Packaging, and the BEXity activities in Czech Republic, which led to a total gain of approximately EUR 1.6 million. To give you the adjusted EBITDA, we have subtracted it here.
To give you a bit more color about the adjusted EBITDA and the phasing, we see that the adjusted EBITDA was, and the EUR 16 million that you see here, were actually accumulated mainly in February, March, and April. The months May and June were actually both at already break even on adjusted EBITDA level across the Group, even including the new acquisitions that normally contribute negatively. Looking at the balance sheet, again, an increase of approximately 16% or EUR 140 million to almost EUR 1 billion. We are quite confident that we will cross the EUR 1 billion until third quarter financials due to the acquisitions of SFC and Nexive. You see here, especially that the financial liabilities increased from EUR 120 million to approximately EUR 200 million, and that's mainly due to the raise of the bond of EUR 50 million.
Coming to the segment financials, starting with the segment that was hit most by COVID-19, which is Automotive & M obility. Here we see or we saw across the entire portfolio companies, that COVID-19 led to a substantial shortfall in sales and almost a significant decrease of up to 35% in sales compared to budget level across the portfolio companies. On the other hand, we already see quite a steep increase again in sales in June and also in July, again, across the entire portfolio with the main increases, for example, here at KICO and PrimoTECS, which are on budget level or way above budget level in July.
The focus, like Johannes already mentioned, was obviously for all portfolio companies, but also mainly for the Automotive & M obility segment on securing the liquidity, and we were able to successfully implement certain measures and were able to sign subsidies from governance in France, in Germany, and in Italy. Looking at the Engineering & T echnology segment, we have a totally different picture here, with a segment that increased the adjusted EBITDA from -EUR 7 million to a slightly positive figure of approximately EUR 1 million. That is really, in this kind of environment, a really great success for the Group, and that success was mainly driven by the Donges Group and the Gemini Group.
Both were able to finalize and finish the restructuring, or for Donges it was the first phase of restructuring, at the end of 2019, that we see the positive contributions in the first half of the year. With Ruukki, the Donges Group was able to acquire a positively contributing asset to adjusted EBITDA, we are able to start the integration and the optimization of the Group in the second half of the year. Balcke-Dürr is one company in that segment that was a bit more affected by COVID-19 and was actually contributing negatively to adjusted EBITDA of approximately EUR 6 million. Coming to the last segment, the Goods & S ervices. Here again, we have a really positive surprise since pretty much all companies in the segment, except for TrefilUnion, contributed positively to the adjusted EBITDA.
Even a company like BEXity that we just acquired at the end of 2019 was able to contribute positively to the adjusted EBITDA. On the other hand, keeeper closed the transaction of keeeper Tableware and napkin business from Metsä in February and was starting the integration with the combination of the two. keeeper was really one of the highlights that we saw in the first half of the year, since the company was able to overachieve the budget sales level for the first half of the year as one of the only companies in the Group that, under these circumstances, were able to deliver even more compared to the budget level. In the end, we saw an adjusted EBITDA of only -EUR 1.5, with way higher revenues compared to the first half of 2019. Quite positive segment development here.
Coming to the life cycle status, which is unchanged compared to Q1. To give you a bit more color here and to explain a bit more what we actually would like to see here. The realignment phase is the phase where the portfolio companies enter our Group. These companies have to be negative in terms of adjusted EBITDA, and that's exactly what you see here with approximately minus EUR 13 million or an EBITDA ratio of approximately 7%, which is quite high. It shows that we are on the right track since we were able to add new portfolio companies to our G roup. The companies normally move on to the optimization phase after approximately 12 months, and this is also important that we see a good mix here. We have four companies in the realignment phase. We have four companies in the optimization phase.
The optimization phase should be actually a phase where the portfolio companies included in that phase have a total adjusted EBITDA of at least zero. This time you see here -EUR 7 million, and I already mentioned it, the main contributor negatively is the Balcke-Dürr Group. It's approximately EUR 6 million, whereas other companies like keeeper and Cenpa actually were contributing positively to the adjusted EBITDA. After 24 months, or after more than 24 months, the companies normally move on to the harvesting phase, and the harvesting phase is the final stage, like Johannes explained in the beginning.
This is the phase where we actually expect definitely a positive adjusted EBITDA, and this obviously, during these days in the first half of the year, not true for all companies, but in normal circumstances, it should be that the adjusted EBITDA is positive, so that we are able to sell the company for a positive price. This brings me to the outlook on page 17. We experienced quite a challenging environment due to COVID-19, and we believe that this will continue. Nobody actually knows what will happen in Q4 or Q1, but we have to prepare ourselves, and we will prepare ourselves for a situation that might change compared to the current situation.
on the other hand, we definitely have the expectation that we see even more M&A activity in the second half of the year compared to the first half of the year, which was already quite active, and that is one of the reasons why we want to or why we currently evaluate the increase of the bond of up to EUR 30 million. We had, in July, already two closings. First one was Nexive, so the Italian post business, and the other one was SFC, an acquisition in the Automotive segment from Cooper Standard. We already had one signing in July, which was SABO, a company in Germany where we expect closing end of this month.
Taking all these acquisitions in one part, we currently see that we are well on track on the targeted sales level that we set as a target for the full year 2020 of more than EUR 1.5 billion. Looking at a run rate of our current portfolio, we are close to or even above EUR 2 billion in sales already. We're quite confident that this figure will grow in the next couple of months. Last but not least, sustained dividend capacity and the attractive dividend policy is always the ultimate target for the Group. For this, we pretty much run our M&A activity, run our operations, so that in the end we are able to create shareholder value that we actually want and also to distribute to the shareholders.
We actually would like to see you again, and that's why we sent out and saved the date for the Capital Markets Day. We had the first one last year. We would like to do again a Capital Markets Day in 2020. We have invited you already. We are not sure yet if it will be a virtual meeting or not. We are definitely looking forward to meet you again in October. With this, we are through with our presentation and are happy to answer your questions.
Ladies and gentlemen, we will now begin our question-and-answer session. If you have a question for our speaker, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can now ask your question. If you find your question to prefer to turn to speak, you can dial zero two to cancel your question. If you are using speakerphone today, please lift the handset before making a selection. One moment, please, for the first question. The first question received is from Holger Steffen of SMC Research. Your line is now open, sir. Please go ahead.
Good afternoon all together. Thank you very much for your detailed presentation. At first, I have one question about the bond emission. You have announced a possible discussion about changes of your bond conditions. What are the topics of this discussion?
To be expected, we noticed that there are two things in the bond terms where we believe that a change makes sense. The first one is that we want to have a shift of the bucket that we have, where we are allowed to give commitments to the Group or to partners of the Group. we don't want to increase the overall exposure, so we shift from one to the other where we believe it makes sense to have it a bit more balanced. First thing, not negatively for the bondholders, we believe even positively.
Second thing is that we want to have a change in, also a positive change again for the bondholders, about the insolvencies, where we believe that we want to enhance our ring-fencing model, and therefore we ask for a change of one clause, where we believe that also again, makes sense for the bondholders, but obviously also for the shareholders.
Okay. Thank you very much. I may come to your figures. You give us a short overview about consolidation effects in the first half, and I try to derive the organic development. Is it correct that the revenue of the existing portfolio decreased organically by roughly 20% in the first half?
We will give an answer quite soon. We just check immediately. I see 20% as a good guess.
Okay. I come to another question, so long. First, I think you called the acquisition of Nexans an add-on acquisition to Plati. Now it is listed as a platform in your segment, Engineering & T echnology. You said something about synergies with Plati and with Trefil Union. Why do you change it? Have you any further information?
Well, it's not a really change because the synergy potential and that the two companies are contributing positively to each other is still there. basically, it's an extension of the value chain which Nexans provides for the Plati product, so we can offer our customers a higher and deeper value chain, and therefore also a better flexibility and customer service overall. Why is it shown as a platform investment? We are currently looking also to have it together structurally. However, in the beginning of a company acquired, we would like to keep it separate. Also, the fact that actually Nexans is 8x larger than Plati. The two companies will be fitted together very soon. For the moment, we keep it separate until closing, but shortly after closing, it is still the plan to put those two companies together.
Okay, great. About SABO, I missed some operative figures about this company. Could you tell us some?
It was stated by John Deere that they don't want to disclose those numbers. As SABO is in platform investment, you can guess about the profitability of the company and the purchase price. What we have to pay, though, it is a typical Mutares deal. A very strong brand. We are very happy with the very competitive process. This is a great platform to do a buy-and-build strategy for outdoor and garden with a very strong brand. I cannot disclose actual figures, because the transaction is not closed. Of course, after closing, when we own the company, we can speak about it. Before closing, I can't disclose the numbers. The only thing I can disclose is that it's a platform, and platform investments at Mutares are typically coming with a bargain purchase.
Okay, thank you. I will wait for revenue figures then.
Mr. Steffen, just to come back to your question regarding organic growth. It's a bit less than the 20%, leaving aside also the add-on acquisitions of Donges Group. We see across the portfolio - 18%.
Okay, thank you. That helps me very much. Maybe one another or further questions about your portfolio development. In your report, you mentioned the investigation of strategic alternatives for EUPEC. Can you give us a hint what these alternatives could be?
An add-on or an exit.
Okay, that's very. You think EUPEC was, I think, with the environment, a complicated business in the last 12 months. You've said that it's now improving in the second half. Where was the main source of this improvement, or where is the main source?
Well, as you know, EUPEC is a quite small company and it's a project business, so one project can really make the year or the financials of this company. EUPEC actually has booked a large order, which is in the Middle East, and this gives us the outlook that EUPEC will close the year with a positive operating profit. Company is very small. Main customers do sit in the Middle East, where the COVID impact on those projects, it's very minimal. Either COVID is not there, COVID is forbidden, or the projects are very long-lasting, and the impact is not shown yet. The positive outlook on EUPEC simply comes from the order book and long-lasting project, which you can predict quite okay-ish what will come in the next six to nine months.
Okay, fine. Maybe we may come to a much larger company. In connection with the acquisition of Ruukki, the competition authorities request Donges to sell a factory in Finland. What are the consequences for Ruukki and Donges regarding revenues and the market position in this country?
The factory roughly made EUR 10 million-EUR 15 million in sales, which we are obliged to sell. It's a Normek factory, and the competitive factory of Ruukki, which is much better invested, is 50 km away.
Okay. it's no problem.
We don't expect too much an influence on the business. we are in the process to sell that and meet the requirements of the merger control. we have time for that, another six months.
Okay. My last two questions. First, you've only reported to STS as a company whose existence is actually not sure. Is KICO now safe if the company will get federal credits?
Correct.
Okay. Trefil Union is not in danger? I saw you made impairments with an amount of EUR 11.8 million in the first half.
It's all so correct. The company is quite well-financed, has a lot of liquidity, but on the other end, we saw that the equity position is quite high, and that combined with the triggering event and the impairment testing, we came to the result of -11 as an impairment.
Okay. Thank you very much.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press zero one on your telephone keypad. As we receive no further questions, I hand back to Mr. Laumann.
All right. Thank you very much for the time and participation. We look forward to the second half of the year. I strongly believe, and we strongly believe it's gonna be a successful year. We will follow the path of what we have started in the first half year. This COVID was a big challenge in the first six months. However, it was also, in my view, an even greater opportunity for our business to accelerate growth, to accelerate the returns, to accelerate profits, and then at the end of the day, will lead to also a potential acceleration of value creation for our shareholders. Thank you very much for participating in the call, and stay safe, have a great summer, and take care. Bye-bye.
Thank you very much for participating in this call today. Have a nice day.