AURELIUS Equity Opportunities SE & Co. (OTC:AULRF) Q3 2019 Earnings Conference Call October 29, 2019 9:00 AM ET
Steffen Schiefer – Group Chief Financial Officer
Matthias Täubl – Member of the Executive Board
Conference Call Participants
Alina Köhler – H&A
Christoph Blieffert – Commerzbank
Yes. Hello everybody and a warm welcome to all of you to our today’s Nine Month Earnings Call. I’m here with my colleague Matthias Täubl. Let me give you a short overview of AURELIUS highlights in the first nine months of 2019. First of all with AURELIUS, we closed our largest exit in AURELIUS history with an enterprise value of EUR 330 million in the last quarter and an earnings impact of more than EUR 100 million. Two more successful exits are already signed and will be closed in the next quarter, which is the sale of Scandinavian Cosmetics and Office Depot CEE business. Matthias will give you some further insights to our deal activities in a few minutes.
Also on the acquisition side, we were very active, we acquired Rivus Fleet Solutions, the former British Telecom Fleet Solutions already closed in September, 2019, though which is [indiscernible] for the Q3 figures, MPRO/YouBuild with closing in early October and Armstrong Ceiling Solutions which we bought from Knauf, which will be closed in early quarter – first quarter of 2020.
The total consolidated group revenues amounted to EUR 2.7 billion. Annualized revenues on a 12-month basis are at EUR 3.4 billion. EBITDA of the combined Group quintupled to EUR 187 million due to our successful transaction activities.
For further information to our deal activities, I hand now over to Matthias.
Thank you, Steffen; Matthias Täubl, also a very warm welcome from my side to the today’s call. I will give you some more color on our recent development in our portfolio, where one of the major events for sure was the sale of Solidus back in June, 2019, which has been sold for EUR 330 million EV to Centerbridge Partners, the typical AURELIUS case with a re-concept, which we did deployed it as companies, so re-concepts as for costs down, revenue up, not really sophisticated, not rocket science, but finally that is what restructuring and turnaround is about.
It started with the carve out from Smurfit Kappa previous parent of Solidus rebranding, restructuring including a EUR 20 million reduction of the fixed costs and all the other sites. It put an – put in place a quite an extensive program for growing the business. Again, that’s in addition, supported and accelerated the organic growth by three add on acquisitions which we have done. So in total the EBITDA of this business has been got troubled from 12.5 million back in 2015 to run rate of approximately 50 million and to-date was the disposal.
On the acquisition side, we have been quite busy in the last couple of weeks and months as well. Rivus, as Steffen mentioned already former BT Fleet Solutions is the UK’s largest commercial fleet management business headquartered in Solihull, which is next to the Birmingham 950 employees, 65 garages nationwide in the UK. And they are offering end-to-end service solutions for 80,000 cars all over the UK. So for example, like registration, repair, MOT, which is to enroll test of safety and roadwork in it, and recently have also started to implement some used overseas led for example, accident management, vehicle funding and then invoice management.
What is the special situation here? Why do we think this is a good fit for AURELIUS, BT as previous owner is focusing on connectivity and services with further investments in fixed and mobile networks, therefore enrolled different programs such as full fibre and 5G. But at the same time, the fleets did and it will also form a very important part in BT’s service offering and service recognition in the future as well. Therefore, it was important for them, even BT Fleet was not core anymore that it will find a reliable partner for the upcoming years as well and somebody who is able to cover the complex divestment brokers without any interruption for the business.
Given the track record of AURELIUS as a carve-out specialist with currently more than 90 specialists in all the different areas, who will support carve-out and improvement. This is why BT and AURELIUS did come to an agreement here.
What we will do? Where do we see the opportunity of this company? First of all, it’s about in the upcoming months and weeks, we will mainly focus on the carve-out from BT, making sure that this child can run on its own feet. Rebranding needs to be completed, it has been started already as you can see. And in parallel, we will put that in quite extensive improvement and restructuring plan in place, for example, it’s about increasing the productivity, for example, so which means the sold hours per person per day where we do see, what would we have seen already do out the due diligence when we do the benchmark with some of the main competitors that there is some room for improvement left.
Another example is optimization of the garage footprint, increased use of mobile technicians and of course also the digitalization of all the processes. This altogether, I’m quite optimistic, should also leads to a situation where we can significantly improve the pricing and this should then built the basis for organics growth of this business. So mainly focusing on blue-chip customers in the UK, besides the fleet of BT we are managing already. And so, we will also invest from a growth perspective in heavy goods vehicles, accident management, vehicle funding, invoice management to really offer a comprehensive end-to-end solution for the blue chip customers out there.
This has been proven already that AURELIUS in general is capable to do so, just recently announced that AURELIUS has won in the last couple of weeks, two main new contracts already with Kier Group, is a total contracted value of GBP 39 million and Highways England with a total contracted value of 4 million, which will contribute positively to the coverage of the cost in the near future here as well.
We are talking today about a company of 220 million revenue insights approximately with positive EBITDA, but comparing and benchmarking it with other players out here by far not where it could be from an EBITDA percentage perspective. Once we have implemented what I’ve just outlined and also maybe will support the growth of the business by inorganic and bolted-on acquisitions, we do feel quite comfortable that we can bring this in both markets average percentage from an EBITDA perspective.
The same applies for another company, we have acquired is MPRO and YouBuild, it’s a building materials merchant group in Belgium, which is selling heavy construction and construction products in general to construction companies in Belgium, but also to [indiscernible] which was quite an important group in the customer landscape. They are headquartered in Brussels, 240 employees, roundabout 16 branches mainly whereby YouBuild is focused on West Flanders and MPRO on the Wallonian on the French speaking part of Belgium.
What is the special situation here? Again, grasping the Irish-based conglomerate decided a couple of months ago that they will focus on the core markets in the UK and in the Netherlands. They have started some 10 years ago in Belgium as a joint venture then they have taken over their remaining shares as well and finally they ended up with two different brands MPRO and YouBuild, two entities, not fully integrated and they were thinking about, okay, shall we now focus more in our core markets whether they’re doing quite well with UK and Netherlands or shall we really – or shall we also in parallel take care of the Belgium market as well and starting integrating these two different entities.
They decided no, it’s not correct any longer they will focus on their core markets. And this is why again, they were looking for a reliable partner for the carve-out process and a good home for this two companies. What we will do to this company? Again, carve-out I think is something which should be done in the upcoming months. This is something where we have used it where our colleagues from the functional experts have proven in the past, it is something which we can fulfill without any interruption for the business within a couple of months by.
Optimization, we do see a lot of different ones, main one I’ve chose to outline already is of course the integration of the back office and the IT landscape to drive the synergies between the two different companies and entities, which also gives them the possibility as a proper platform and solid basis to do the stock optimization, currently in discussions already with different buying groups and to optimize the much and one of the bigger leavers will be – we will start to implement and private label products program in the near future as well. Category management, so everything you can think about if it comes to materials merchant group.
Also from a growth perspective, we have defined some measures here already. For example we will implement new services like dual hiring, a focus on special products such as timber, for example in different branches. And also we will expand the geographical footprint. So already in this year 2019, we will open two additional hubs and satellites and next year, we have contracted for additional satellites already, which would give the company a much more comprehensive footprint.
Again, we are talking about $100 million in size, revenue wise, as of today, profitability by far below market average. And I think I feel comfortable, again thinking about all the different leavers we have in place here that we can bring it to an above markets average EBITDA margin in the near future.
Different company, similar industry on page number 8, Armstrong Ceiling Solutions which we acquired from Knauf just recently, which is a manufacturer of suspended ceiling tiles and grids for commercial buildings, like for example, for the top managed stadium just recently opened in London, it’s located in [indiscernible], which is next to Newcastle. We are talking here about roughly 230 employees and also in addition, besides the production facilities in the UK, they have sales capabilities across 11 European markets.
The special situation here or why did Knauf choose to sell it and sell it to AURELIUS? Knauf did acquire a global Armstrong Ceiling business some two and a half years ago and after reaching out to the European commission asking for the merger clearance, the feedback is it took some while until the feedback was that the European Commission will deny it, its request. And so therefore, it was quite important for Knauf to find a quick solution for this European business and a reliable transaction partner, again, as this was very interwoven with the remaining bits and pieces and parts of this business which will stay with Knauf that’s the carve-out growth is standing in a proper way and in a professional way, so that it will not lead to any disruptions either from the European business but also for the remaining global business as well.
I think what we have seen and discussed with the management, what we have seen throughout the due diligence is that there are some opportunities around this goal to improve this business further. For example, we have seen some opportunities there, when it comes to how we buy the raw materials, for example the allocation of Merck between the two production facilities, but also from a growth perspective, better engagement with the three main distribution channels, one is the project works, like for example, top three stadium I’ve mentioned before. Second one is distributors and the third one are their construction firms, we feel comfortable that we based on a better engagement with this three channels will drive the top line to north as well.
And in addition, there is an quite substantial and large installed base already, which leads to a recurring revenue stream for Armstrong, and I think this is something where we can build on. Same situation again, all the three deals I mentioned so far, which we have acquired all positive EBITDA territory, but all – not where it could be, so we think all the three deals will contribute in a positive way in the upcoming months and years when they belong to AURELIUS to do in a positive way to our numbers, which Steffen will talk about in a minute.
On the exit site, we have been successful here in the last couple of months here as well. Office Depot Europe, so the CEE business has been sold to PBS Group, a strategic buyer headquartered in Austria with an existing footprint already in the Czech Republic and the Slovakian Republic, that they will be able to take it to the next stage and then to the next level.
As you all know and as we have outlined in the past already, Office Depot is composed of three main business units. We have the writing business, which is servicing the SLV customers through online and catalog channels. We have the contract business as the second pillar, which is focusing on larger businesses and the dedicated sales force. And the third pillar is the retail outlets.
All of them are in a slightly different stage when it comes to transformation. For all of them what we are doing is to transition to or trying to do a transition to full online service model, we are focusing on high margin categories and also expand high value services such as for example, managed.com services for the different business units. The same as has been done to the TE business here as well as the delivery was quite developed from our point of view, slightly ahead of the other business units. And this is why it was the right moment for us to sell it and to pass it on to somebody where we have found with PPS acquired reliable partner for the future of this business as well.
Another exit which has been achieved in October of this year last month was the sale of Scandinavian Cosmetics business, which we have acquired back in 2015 from the Swiss Valora. It was a division which was consisting of an FMCG activity, so to take Conaxess Trade and to cosmetics business. So Scandinavian Cosmetics again it was a business which was not core activity anymore for a big multinational company, Valora. It had complex, legal and organizational structure due to the combination of the two different businesses.
So FMCG businesses has not necessarily to do a lot with the cosmetics business and so what we have done is to after the carve out from Valora is a separation of just two different pillars and established for Scandinavian Cosmetics and pan-Nordic structure that’s implemented an eCommerce transformation, category expansion, geographical expansion has also entered the Danish market and have also launched a performance improvement program. All this together to lead to a significant improvement in the bottom line EBITDA wise and that program will be solved from an AURELIUS Group perspective to a positive earnings impact of round about $15 million to $20 million in the fourth quarter once the team has been closed.
If you have a more generic look on our portfolio where we are as of today, the very famous chart on the bottom line on the X axis you can see to date off when a company has been acquired by AURELIUS on the Y axis, you can see where it is currently in the stage of maturity, so from improvement, to optimization and growth.
What we can see is a very well balanced portfolio by stage of developments and from a geographical point of view by industry, by size. So therefore we do feel quite comfortable that these companies will contribute very positively. In the upcoming months and years we will see some further exits also. It looks quite good at the moment, likely the pipeline that we will see further companies arriving in the near future.
By nature of the companies outlined here we will move from the right hand side to the left hand side as they belong to – as long as they do belong to AURELIUS and normally what we have seen in the past is they will move from the bottom to the top from the improvement phase to the optimization and growth phase. And I think that’s the important message here that we can see that all of the companies moving up once they belong to AURELIUS over the years.
And so therefore I would like to hand over to Steffen again who will lead through the numbers in more detail.
Yes thank you Matthias for the detailed information about our deal activities. I will give now a short overview on our financials and at the end a short outlook for the upcoming month.
I am on chart 12 now. The total Group revenues of AURELIUS are slightly below last year level and amount to EUR 2.7 billion. The annualized Group revenues from continued operations increased by 1% to EUR 3.4 million.
So let me give you a few explanations to our EBITDA and three sources of value creation, for the first part of our EBITDA is the operating EBITDA of our Group companies which shows the result of the ongoing operations. Operating EBITDA for the first nine months 2019 amount EUR 135 million after EUR 80 million in the first nine months of 2018. The EBITDA development was influenced by good operational performance, but also from the first time application of IFRS 16, the new IFRS standard for lease accounting, which is mandatory since this year.
The second profit contributor in the bargain purchase, which is an interim part of the AURELIUS size. So bargain purchase income is being achieved when AURELIUS acquires portfolio companies with the purchase price below the book value of the acquired equity. Bargain purchase amount to EUR 15.4 million after EUR 12.8 million last year and is related to the first time consolidation of Rivus Fleet in Q3.
The bargain purchase is a contribution, so that they are willing to make toward future restructuring expenses in order to get rid of a business. So restructuring expenses at AURELIUS amount to EUR 61 million, which is nearly on the same level like last year there was – that we had a number of EUR 58 million.
Third element is the exit part, and is related to the sale of our portfolio companies. Result from sales above book value amount to EUR 98 million, which is mainly driven by our very successful before mentioned exit of Solidus. In the first nine months of 2018 we realized a gain of EUR 3 million.
Short outlook into Q4, Matthias just mentioned the exit of CE, Office Depot and Scandinavian Cosmetics, you will then realize an addition to further exit the side after closing all those exits in Q4.
Cash increased from EUR 291 million at the end of 2018 to EUR 312 million as of end of September 2019.
The equity ratio amounts to close to 20% after 25% last year. The only reason for that decrease is the before mentioned first-time adoption of IFRS 16 which leads to higher assets but also to higher liabilities and therefore a new relation of equity and total liabilities.
Let’s move on to our NAV. I’m on Page 13 now. So net asset value of the portfolio at the end of September amounts to EUR 1.24 billion after EUR 1.4 billion end of 2018. The decrease is related mainly to the dividend payment in July and some adjustments in the retail business. The NAV is based on the DCF model. For the NAV calculation as the end of September we used our Q3 actuals and our three-year budget from last year. That we used growth rate for the terminal value is still on a very conservative level of 0.5%.
For listed portfolio companies, which is currently only NDS, we use the respected market cap instead of the DCF valuation.
The WACC is based on respective into a peer group, and as of September there was spread between 5% and 11%, the average is still around 8%.
The second table on the chart shows the NAV by maturity or vintage, plus that by the holding period of our portfolio companies. So as you can see, the main value of our portfolio companies comes from the older and already developed companies. More than 80% of our portfolio NAV is related to those major ones.
Our last chart for today, there I will give you a brief outlook for the upcoming month. Let me give you a short overview about our deal activities. The actual deal pipeline is strong. We see some opportunities for the near future, so that means for Q4 and also for the first half of 2020. All in all, we expect further platform investments during the next month.
In Q4 two exits will be closed, Matthias just to give you a few explanations on that that will be Scandinavian Cosmetics and the Office Depot CE business which will have a further positive impact on our P&L.
Closing of our platform investment Armstrong from Knauf is expected for the first quarter in 2020.
So we still pursue a way to develop the venue enhancement of our portfolio. And after a turnaround phase, which needs in an average 12 months to 18 months, we are focused on the optimization and the organic growth of our portfolio companies. Besides organic growth, we develop and strengthen our portfolio by our strategic add-on acquisitions, good examples for that or our add-ons for GHOTEL and in the past for Calumet WEX. Quite a considerable number of portfolio companies already developed to market maturity as you also can see on Chart 11 Matthias gave you just some further explanations a few minutes ago.
If you talk about market maturity, we should talk about further exits. We still see a strong exit pipeline. So our planned exit projects are still on track and we expect further profitable exits in the next two or three quarters.
Thanks to all of you for listening and we are now happy to answer your questions.
So we will now begin our question-and-answer session. [Operator Instructions] One moment please for the first question. The first question is from Alina Köhler of H&A. Your line is now open.
Yes, hi there. Thanks for taking my question. I have two actually. One would be how large is the IFRS 16 effect on the Q3 EBITDA, like approximately? And the second is could you give us a little more color on the NAV development of each segment? Thank you.
Thank you, Alina. I think the two questions are from my side. So NAV development is just as we expected to stable especially for the IP, industrial production, and service and solutions. We had some minor adjustments in the retail business related to the actual overall business, in the retail business in the UK, but also invest in Europe. So there we had some minor negative adjustments.
And the second one was IFRS 16, the effect there is in the high 60s for the first nine months.
Okay, thank you very much.
[Operator Instructions] The next question is from Christoph Blieffert of Commerzbank. Your line is now open.
Good afternoon. I would like to come back to the net asset value. And maybe you could help me understand the movements in the other lines please.
Yes, thanks Christoph for that. So we have a plus in the other segment or in the other line item of nearly 70. There are a combination of multiple reasons for the development. So own shares are – the treasury shares are, at the end of June, were a little bit higher than in Q3, so that had a negative impact. We had some cash investments in new subsidiaries in Q3, for example, the before described Rivus Fleet acquisition, which was closed in September, 2019. We had some investments, growth investments in the portfolio, so we provided some cash into our operating portfolio companies from KGaA. And there was a minor amount for the disposal of the Solidus plant which is held by GIP, this is our brand owner company located in Luxembourg. So that was also a small impact on that side. So a combination of multiple reasons for the development of us.
Okay. You have said – you have quantified the IFRS 16 impact of some EUR 60 million.
Higher 60s certainly higher 60s.
Higher 60s, okay. Higher 60s so if I assume some EUR 20 million per quarter and deduct EUR 20 million from your operating EBITDA to make it comparable to last year, it brings me to EUR 12 million and this compares to EUR 25 million as of last quarter. Is this quick relation correct?
That’s in the right direction, yes. So as you can see, so we had some acquisitions last year in the end of Q4 2019 related to a weaker Q3 when compared to Q3 2018. So what we see here is if you sell IFRS companies like we do and you acquire companies which are in front of a development process, you always have some negative impacts from year-to-year. But for the end of the year we see us still in our always mentioned corridor between EUR 95 million to EUR 120 million for the operating EBITDA.
Okay. The last question, on the last call you mentioned some inventories run down in your retail business related to Christmas and for the Christmas season. I mean what could be a good estimate in terms of cash inflow from inventory reduction in Q4?
So we see first impact in Q3 that was what I mentioned in the half year call that we always have stronger working capital second half year. So it will be a lower double digit number.
Okay, perfect. Thanks a lot.
You are welcome.
There are no further questions, I hand back to the speakers.
Yes thank you for listening us for the Q3 earnings call. So thank you all to you and have a good last working day and see you all here soon. Bye.