AURELIUS EQUITY OPPO

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Transcript : AURELIUS Equity Opportunities SE & Co. KGaA, Nine Months 2022 Earnings Call, Nov 10, 2022

10/11/2022 | 00:00

Presenter Speech
Matthias Taubl (Executives)

Thank you very much, and welcome from my side, Matthias Taubl here, CEO of AURELIUS Equity Opportunities. Warm welcome to the presentation of the first 9 months and the third quarter of this year. I'm here together with Richard Schulze-Muth, our CFO, who will give you more detailed color in a couple of minutes' time on the numbers.

Let's talk about the highlights. Where are we right now in general? A fair summary would be we have a very strong balance sheet, around about EUR 285 million of cash. It's strong balance sheet meets and operating performance and then the P&L, which is currently impacted by the overall macroeconomic disruptions in the markets. So the key words here are energy prices, inflation and in general there are still hiccups in the supply chain, supply chain issues, labor shortages. So all these ingredients we do see it doesn't come as a surprise, definitely also the recession ahead in some of the legal restrictions does impact the operational performance of our portfolio companies, which is then reflected in a still very solid operating EBITDA of EUR 160 million, close to EUR 165 million, a slight decline year-over-year. So given that the overall market circumstances, still a very solid performance. And this is also then reflected in the net asset value where we will talk about in a minute in more detail.

Midterm, long term, I think nothing has changed. We remain optimistic when it comes to the robustness of our portfolio companies. But for the moment, I think it doesn't come as too much of a big surprise that the overall macroeconomic turbulence is also impacting our portfolio companies.

On the transaction side, we have been quite active when it comes to transactions on the buy side, 7 add-on acquisitions, 7 co-investments where from 2 of them are not closed yet. And for exits, one of these exits happened in October. So not in the first 9 months but was a very successful one. We will talk about it in a minute as well in more detail.

On the shareholder value side, nothing has changed. Our overall strategy stays in place and remains. Definitely, we will have a more detailed conversation about this one early next year when we have a more detailed outlook, hopefully, by then and maybe the dust has settled a little bit overall in the macroeconomic side.

Let me now hand over to Richard Schulze-Muth who will give you the details to the numbers.

Presenter Speech
Richard Schulze-Muth (Executives)

Thanks, Matthias. So welcome also from my side to our Q3 '22 earnings call. And let me talk you through our 9 months 2022 key figures. And our consolidated revenues came in with EUR 2.351 million. On an annualized basis, revenues from continued operations were EUR 3.092 million compared to EUR 2.436 million in Q3 2021. The EBITDA of the combined group was EUR 182.3 million compared to EUR 175.6 million in Q3 2021. The EUR 182.3 million are split as follows. The bargain purchase is 0. So in the last 9 months, the AO acquisitions have led to good work so far. The restructuring and nonrecurring expenses are EUR 45.7 million. So over EUR 10 million lower than in the same period for last year.

And showing here then sort of performance and further restructuring need on portfolio, the earnings resulting from the fair value revaluation of co-investments as of September 30, 2021, are EUR 14.1 million, and this is related to co-investments that are longer than 6 months with us, i.e., besides APS and NAV. As of the last quarter, Minova and the increase in valuation of the co-investments pursuant to the equity method accounting is book profit that goes through the AURELIUS Equity Opportunities' P&L.

Gains on exit are EUR 50.1 million in the first 9 months of 2022, and these are coming mainly from the successful AKAD exit and Hammerl exit. The operating EBITDA is EUR 163.8 million. This is 10% lower than the operating EBITDA of Q3 -- Q2 2021 half year numbers. The reasons for this are mainly increased energy costs, the transportations and the material costs. And the purchased goods and services rose by 32% compared to Q3 '21 to EUR 1.455 million.

The cash compared to year-end 2021 has reduced to EUR 284.6 million as of September 30, 2022, and this was mainly driven by the deal activity in the first 9 months with 7 add-ons and 5 co-investments, the dividend payment in June and the share buybacks of approximately EUR 35 million.

Free holding cash in AEO and the holding companies, including the proceeds from the buyer exit, Matthias will talk in a minute, in October is over EUR 200 million. And therefore, we have sufficient firepower for upcoming deal opportunities, and if needed, financial support for our portfolio companies.

The equity ratio remained stable at 25.3% as of 30th September 2022.

Move to Page 6. On Page 6, you can see a split of our portfolio in total consolidated revenues and operating EBITDA by 3 categories: segment, portfolio status and vintage. The revenues from continued operations by segment, you see here, Services & Solutions with EUR 279 million; the industrial production with EUR 847 million; and regional consumer products with EUR 1.094 million. The operating EBITDA margin of the segment, Services & Solutions, was EUR 24.9 million; in retail and consumer products with EUR 109.5 million, still good and stable. The operating EBITDA margin of this segment, industrial production, with EUR 41.3 million came down in line with the current market environment. And as Matthias just mentioned, increased energy costs, the transportation costs and material costs.

The operating EBITDA of the segment, Other, was negative EUR 26 million driven by the holding costs of AEO and holding companies, including the transaction costs here relating to the acquisitions and exits in the first 9 months and the management compensation relating to those.

By portfolio status, you can see that the portfolio companies and the improvement phase contributing an operating EBITDA of EUR 21.5 million. BMC moved up into the optimization phase. And the portfolio companies and the optimization phase and growth phase contributing the majority of the operating EBITDA of over EUR 154 million.

By vintage, you can see that there is a strong operational performance of the 18 to 38 months, vintage frame of EUR 78.7 million, resulting mainly from Distrelec, Zentia and Rivus. They have developed very well and strengthened here the respective operational performance of portfolio companies in this vintage frame.

Let's move on to our NAV on Page 7. The total NAV for 30th September 2022 was EUR 909 million, a decrease of 9% compared to half year 1, 2022. The NAV as of 30th September for industrial production was EUR 337.3 million, a decrease of 14%, which is related to the weaker operational performance of portfolio companies in this segment due to the challenging market environment with the energy costs and the material costs and the supply chain pressure in that regard.

In the sector Retail & Consumer Product, the NAV as of 30th September was EUR 306.2 million. Sales in EIG and Distrelec are still performing strong, but the overall Retail & Consumer sentiment is clouding. The NAV, as of 30th September for the sector, Services & Solutions, was roughly EUR 52 million. The decrease is mainly due to the development in one portfolio company in this segment, which has a potential material negative impact on revenues in the next years. The NAV of the segment, Other, was approximately EUR 154 million. The valuation here consists of the cash of AURELIUS Equity Opportunities and the nonoperating holding companies. And our brand company, Blaupunkt, is included there as well. And as you know, the nominal amount of our Nordic bond is deducted here, and the treasury shares are not included in the calculation.

The NAV of the co-investments, i.e., the investments we are doing together with the AURELIUS European Opportunities IV Fund was EUR 59.9 million and includes APS, NAV and Minova at fair value, CTD Tiles, McKesson, the Pluradent and dental bauer Group and Footasylum at acquisition costs. This valuation leads to an NAV net per share of EUR 33.59 at 30th September 2022, and the treasury shares are not included in this calculation.

Generally, the NAVs are calculated consistently based on the DCF model, and we used the actuals as of 30th June 2022, including the budget of the portfolio companies until end of 2024. We assumed a conservative growth rate of 0.5% thereafter and have a WACC of 12.43% on average. The WACC was increased compared to half year 1, 2022. At this point, it was 11.21%. And the increase in the WACC is mainly driven by the increase of the risk-free interest rate, which raised from beginning of the year from 0.15 -- 0.12% for Germany to 2.09% and for the U.K. of 1.13% to 3.76%, a year plus of 2% or 2.6%, respectively. And this increased, of course, the respected equity and debt cost accordingly.

I think we can skip Page 8 as this is more a narrative for later to read on the different sectors.

Finally, on Page 9, you can see the NAV by vintage as of 30th September 2022. And you can see that the majority of the NAV comes from the portfolio of companies with holding periods of over 36 months in line with the AURELIUS support and the stable operational performance of the portfolio companies in these vintages.

The NAV of the co-investment is EUR 49.9 million and is contributing actually 6% of the total NAV, together with the portfolio companies that are not longer than 18 months with AURELIUS, and it's roughly 10% of the NAV.

Now I'll hand over back to Matthias.

Presenter Speech
Matthias Taubl (Executives)

Thank you, Richard. Let's talk about the transaction year-to-date. Then let's start with the add-on acquisitions. As you know, accelerating the transformation and the growth of our portfolio companies via inorganic growth, which means that add-on acquisitions is one of the main levers. We do have and therefore, we have seen a couple of them already. Typically, we aim for 5 to 6 years. We have seen 7 in the first 9 months already. Despite them, there are -- amongst them, sorry, are a couple of them, like, for example, CameraNU in the Netherlands. It's a business for our portfolio of company EIG.

So the retailer of semiprofessional and professional photographers and equipment, talking about a revenue of EUR 60 million -- around about EUR 60 million. So quite decent in size for an add-on acquisition. On the other side, some smaller ones, like for example, for VAG, RTL in Brazil and Latin America, which is also a geographical expansion, but also a transformational add-on acquisition or 2 of them for our automotive aftermarket supplier in Norway, NDS, which has acquired Hovdan and Nordic Wash. Both of them have more of a transformational add-on acquisitions. So they are bringing an additional product mix to the table, which is beneficial in the divestment -- the diversification off of NDS.

Always, what is linked to this add-on acquisitions typically as well is, of course, a quite high synergies here as well, which makes it even more attractive to us. Going forward, I think this is still something where we have a strong focus on doing add-on acquisitions for a portfolio of companies, definitely. And for some of our -- the competitors and for our portfolio companies, it's difficult as well at this point in time. And so therefore, there is lot of opportunities out there for doing add-on acquisitions. Of course, we have to be careful that at the same time as some of them are also heavily impacted by the current situation. And so therefore, we need to pick the right ones.

On the exit side, we have seen 4 exits to date, 3 of them in the first 9 months and Briar Chemicals just recently. Needless to say, I think that at this point in time, given the overall macroeconomic circumstances, it's not the ideal time for doing exits. So therefore, we are always in contact with potential buyers of our portfolio of companies. We have mentioned in the last couple of months already that we do have some portfolio of companies in our portfolio who are more or less ready for an exit. This remains unchanged. But of course, we need to be really careful. There is no pressure to sell it if the purchase price is not right from our point of view. And definitely, this is a more challenging discussion right now than it might be in a couple of months' time again.

Definitely, Briar, we will talk about it in a minute in more detail, a very successful one, but also AKAD, our Distant Learning University, which we exited in February this year, was a very successful one with a purchase price above EUR 45 million.

The exit of Briar, it's a typical blueprint case study for what we as AURELIUS do. It's a corporate carve-out. It's everything linked to transformation of this business, making an independent stand-alone contract manufacturer and then sell it to a strategic one who will take this company to the next level. We bought this company from Bayer. It was more or less a kind of a manufacturing site in the U.K., in Norwich for Bayer. And therefore also revenue-wise, it was pretty much 100% related to Bayer. It's a CDMO, so a contract developer and manufacturer for agricultural, chemical products.

And what we have then done to this company with our taskforce is typical transformational measures we did put in place. So we have put in place efficiency improvement projects. We have also streamlined and improved the business competitive position by adding new products to the portfolio of Briar. And also Briar has undergone rebranding after the acquisition, of course. And so therefore, we were able not only to increase the revenue, but also at the same time reduce the dependency on Bayer.

So as of now, around about 75% of the revenue is still related to Bayer, which means 1/3 is with external customers, third-party customers already despite this very still strong relationship with Bayer as a strategic supplier to them. But Briar was able to obtain, for example, [indiscernible] is new customers. And the outlook shows that by 2026, only 35% of the revenue should be linked to Bayer anymore. And so therefore, it's really kind of a stand-alone company focused on a variety of different customers.

The transaction itself, when it has come to the exit, we sold it to Safex Chemicals India Limited, which is a strategic buyer backed by one of the biggest private equity funds in India. We sold it for EUR 83 million. So one significant purchase price, which translates into a 20% premium compared to the net asset value we have seen for this company in the first quarter or by the first quarter of 2022. The deal was done as a share deal, signed and closed in October, which means also that cash is already on our bank account.

On the co-investment side, we were very active there. We have seen 7 transactions year-to-date, 2 of them, Agfa and Sappi, not closed yet. The other ones are already signed and closed as well. Agfa, one of the recent acquisitions or signed acquisitions so far, it's an Agfa Offset Solutions, around about EUR 750 million in revenue, around about 1,700 employees, active in 75 countries, a very global footprint. They are producing everything what is needed when it comes to offset printing, so like offset plates, graphic films and equipment services, but also software and chemicals.

It's a typical [ cost out ] situation with all the ingredients where we have to build up. Some stand-alone structure here as well is on the IT side where we have to perform the carve out on the management side where some of the existing management teams will stay behind this Agfa. So we have to really build a stand-alone company here, and this is exactly what our sweet spot looks like.

Same applies for Sappi where we have signed a deal together with the Fund as a co-investment deal for fee acquiring 3 European sites based in Finland, Germany and the Netherlands, quite decent in size, with a revenue above EUR 1 billion, around about 1,400 employees, and spread already 3 manufacturing sites. Again, the same ingredients, it's a typical [ cost out ] from Sappi to big corporates and the South African corporate. And we have to build up the stand-alone structure so that this company can run on its own feet with a lot of potential to further growth when we have this more entrepreneurial spirit in the company.

On the next page, let's talk about one of this just recently signed and closed deals, Footasylum, the deal we have signed and closed in August of last -- this year. It's an omnichannel athleisure and retailer based in U.K., headquartered close to Manchester, in Rochdale, very interesting background of the transaction. So this company was bought by JD Sports, one of the biggest streetwear and fashionable streetwear and sports. They are retailers in not only the U.K. but also in the U.S., the CMA, so the market authorities in U.K. didn't give green light for this deal finally.

So JD had to sell this business again, needless to say that this was not really an option to send it to a competitor and so therefore, we bought this in a very attractive transaction. It's around about EUR 350 million in revenue. It's quite decent in profitability, 7% around about of EBITDA margin. So decent, but not where it can be when we compare it in that -- to the competitors. It's all the ingredients there to make this happen and possible. We bought it for an enterprise value of EUR 45 million. We do have a lot of really good mix of products so we have on the big brands included in the portfolio like Nike, Adidas, North Face, New Balance.

It's a decent footprint, around about 61 stores right now, 5 different websites for different brands and also a very interesting wholesale channel. So all the ingredients where we can optimize but also further accelerate the growth of this -- of Footasylum and growth means also that this leads to an increased profitability additional to our efficiency improvement measures we have put in place. So very excited about this company definitely also, of course, impacted at the moment by the overall retail sentiment, especially in the U.K. But midterm and long term, we are very excited about this portfolio company. This brings me to the overall status of our portfolio. As you can see on Page 15, where we do have the holding period on the X-axis and then on Y-axis, there's 3 different levels: improvement, optimization and growth.

So there's 3 levels of maturity. As you can see, it's very balanced. And on the right side, you can see the numbers for the first 9 months, revenue and operating EBITDA. By nature, the companies who are just -- or who have just recently been acquired a little bit less profitable. So altogether EUR 21.5 million of operating EBITDA, whereas the companies who are with us for a little bit longer where we have improved the situation there already and the profitability is responsible for EUR 84.1 million. And overall message stays the same. It's a robust portfolio. It's balanced when it comes to industries, when it comes to countries. So I'm not worried about the midterm and long-term view on our portfolio. But as we have seen the short-term view, of course, it is a little bit more difficult to predict as it is quite challenging the current market, macroeconomic environment.

The same applies on Page 16, where we have now also added the co-investments, which are shown here with this green circle. And on the right-hand side, it's not revenue and the EBITDA, but this is the net asset value for our own portfolio companies, but then also for the co-investment side shown here on the right-hand side of this page. Again, it's also the co-investments are very, very balanced on where you can see we have the -- some of them in the improvement phases, but some of them already in the optimization phases and contributing quite nicely to our net asset value.

In long-term, I hope this will increase further. I'm pretty sure this will increase further but same applies than what I've said before, we need to be careful. We need to stay close to our portfolio companies in the upcoming months with our taskforce, making sure that all the not-so-nice ingredients we do see right now like energy price increase, like inflation, like the supply chain issues are handled in the proper way. Also, our current core topics remains unchanged. We still are focusing very much on the expenditure of our investment focus as you have seen in the recent transactions.

And we have a nicely field sales pipeline going forward as well. Definitely, we will remain and stay picky and of course, there are some of the potential targets out there, quite heavily influenced by the current market circumstances. And so therefore, we will remain careful and overall the expenditure of our investment focus is definitely 1 of our core topics despite making them sure that we have an increased investment focus, and therefore also maybe more in a bigger portfolio of companies with our operating model that will stay in place to this entrepreneurial spirit and on-site operational engagement, all the ingredients, which are needed to perform a proper carve-out in a timely and fashioned manner. This is still one of our main topics.

And last but not least, our ESG approach in all different angles. Is it on a holding level or is it on our portfolio company level when it comes to tendering processes? For example, but of course, also for our investors, it's important that we are working on our ESG approach. We have hired another employee who will start -- or he will start on the 1st of December and will then help also not our holding only, but also the portfolio companies to sharpen the ESG approach and really make sure that we are focusing on the right things there.

Finally, when it comes to the outcome, I think we mentioned most of the topics here already, staying close to our portfolio companies is our operational taskforce's key, making sure that we pick the right companies going forward. It's a nicely filled pipeline. So it's more about picking the right ones here. And short-term view on our operational performance is a really challenging one given the overall market circumstances. Definitely, we can see that some impact of the potential recession ahead is impacting our portfolio companies as well. Midterm, long term, I'm not worried and remain optimistic when it comes to the robustness of our portfolio companies. But for the upcoming months, It's definitely about staying close and making quick decisions there so that the impact is limited.

Finally, the other topics, I think most of them we've mentioned already. It's about shareholder value. We will discuss early next year in more detail then given -- hopefully by then when we have a little bit better understanding of how the upcoming months might look like. And also the ESG approach I've mentioned already.

So overall, an optimistic and positive outlook, but maybe difficult to predict, as we said, for the upcoming months. But to determine long term, I remain positive for our portfolio and also for the business model itself.

Thank you very much for listening for a moment. And I would now like to open the line for questions.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] We will take the first question from Gerhard Schwarz from Baader Bank.

Question
Gerhard Schwarz (Analysts)

Gerhard Schwarz here. I got a question on your operating margin. In the third quarter, you cited rising costs. We are a couple of lines. But overall, I think also the revenue side in the third quarter was tight weaker than I would have expected. Can you give me some guidance if this was basically more a seasonal issue? So a weak third quarter in general or if there have been some new issues that have been heard this quarter, in particular?

Answer
Matthias Taubl (Executives)

Yes. Thank you, Gerhard, for the question. Maybe I'll take this one. It's not a seasonal issue to be honest. Typically, third quarter and fourth quarter is more the -- the stronger ones on our side as well. So it's not really a huge cycle [indiscernible], but third quarter and fourth quarter typically is a little bit strong on our side as well. So therefore, yes, it's more linked to the overall recession-like circumstances or that we can see in some areas, especially when it comes to the retail area, but also some in the industrial area. And we do see some issues.

Sometimes it's not so much about the demand -- customer demand, but it's also sometimes about supply chain, for example, in our industry, for the portfolio companies in the industry segment, and they have some difficulties, for example. If customers don't get all the parts in place, therefore, this means that they don't -- are then so much relied on our product. And therefore, the -- it's getting delayed. So I don't think this is a general long-term decline in revenue. But what we do see is that all the ingredients definitely in retail is far more than recession, which is impacting it on the industry side. It's more the supply chain, which is leading to a delay. And this is the status quo for the moment.

Question
Gerhard Schwarz (Analysts)

Maybe I have a follow-on question regarding the mediation because of the portfolios because, actually, we saw a 30% decline in the NAV of the portfolio companies as we have been laying out. This certainty was also driven by the quite significant increase in the WACC you have been applying for the valuation, which was up 1.22 percentage points since midyear. Can you say something about the rationale for that? Is that something where we have also made some kind of precautionary effects, again, to warrant against a further increase on the WACC going forward? Yes. What are your thoughts there?

Answer
Richard Schulze-Muth (Executives)

Let me pick that up. So coming to the WACC, which is here, the driver -- the main driver of this, and as you know, that we are calculating this on the basis of the individual peer groups. The peer groups here as said at the initial consolidation, and they're not changing over period, and we see the Capital IQ. When you go into that, you see here that the WACC increase is mainly driven here by the -- and I mentioned that earlier, the increase of the risk-free interest rates from the beginning of the year and most likely will increase further towards or in Q4 as we all read here over the respective Central Bank decisions. I think there was an earlier question on one of the previous calls where -- how this is baked into the WACC business here? Now with the steps in July, September and October taken here from the respective central banks, of course, the majority in it.

In addition to that, there is, of course, a risk premium included in the WACC for some individual portfolio companies in connection with the market environment and their individual operational performance or risk or in what phase of the restructuring phase they are in. And this is, of course, included here in the current trading. And the actuals as of 30th September, the trading year end, particularly in September and now in October to see that. So this is then the subjective individual and risk premium year for some of the portfolio companies, including in the industrial production.

Answer
Matthias Taubl (Executives)

But Richard, maybe you can line out once again what's the current WACC average compared to the second quarter. I'm not sure, Gerhard, you mentioned 1 point something percent. I think it's not the correct number.

Answer
Richard Schulze-Muth (Executives)

Right. So actually, it's 12.43% in average, and it's ranging from 8.12% to 18.23% here for respective individual portfolio companies and compared to half year '21 where it was 11.21%. This has increased to over 1.2%. And I mean as a general rough increase here of 0.5% in WACC is converting roughly to a 2% and 5% NAV reduction, i.e., EUR 35 million.

Question
Gerhard Schwarz (Analysts)

As you mentioned, one further question if I may because you mentioned the rising central bank rate. There are different approaches for this risk-free rate in the market, the ones that would rather use money markets that are closer to the central bank rates or others that would use longer-term bond here, so 10-year bond yields, for instance. Are your risk-free rate estimates closer to the money market rate, which would mean as the ECB keeps hiking, then your risk-free rate assumption rising in the future? Or is it more linked to capital market rates, meaning 10-year bond yields or 5-year bond yields where probably most of the further hikes is already in the price?

Answer
Richard Schulze-Muth (Executives)

Maybe it's just me, but I hear you very, very silent. Is that just me, Matthias, or is the same for you? I could not follow completely.

Answer
Matthias Taubl (Executives)

No. Same for me, but Gerhard, maybe you can summarize or repeat the question.

Question
Gerhard Schwarz (Analysts)

Yes. Sorry. My question was on the risk-free rate that you use in the WACC calculation. Is it more that you are looking at the money market rates when determining the risk rates? Or is it more a capital market interest rate, so 10-year bond yield, for instance, which is certainly already pricing in future rate moves by the central bank. And therefore, would -- this would make a difference for the future evolution of your risk-free rate. If the ECB would hike rates further, then the question is if this will translate into a higher risk-free rate estimate at your -- in your models or if this is basically mostly in the price as 10-year bond yields have risen to price in further increases already?

Answer
Richard Schulze-Muth (Executives)

So then it's clear. Thanks. So it's the latter one, i.e., we're using the 30 years government bonds for Germany and the U.K.

Question
Gerhard Schwarz (Analysts)

30-year bonds?

Answer
Richard Schulze-Muth (Executives)

[indiscernible].

Question and Answer Operator Message
Operator (Operator)

The next question comes from Marie-Therese Gruebner from Hauck Aufh?user Investment Banking.

Question
Marie-Therese Gruebner (Analysts)

Can you hear me well?

Answer
Matthias Taubl (Executives)

Yes.

Question
Marie-Therese Gruebner (Analysts)

A couple of questions from my side. First of all, again, coming back to the NAV and in light of what Gerhard was just asking. So is it fair to assume that at least the bulk of the NAV correction is now behind us and we can expect some minor cuts going forward? So that was my first question.

If you don't mind, I would ask the 2 others once you responded to this one?

Answer
Richard Schulze-Muth (Executives)

So we are just in the balancing process for that, and we're looking into that and follow that and, of course, have in mind what, let's say, the short-term outlook will be. So we're just assessing this year for the upcoming period in that respect. But we are, again, in the middle of the budgeting process.

Question
Marie-Therese Gruebner (Analysts)

So again, is it fair to assume that the bulk of the correction is behind us? I mean companies have been warning in the market with respect to deteriorating gross profit margins, personnel cost effects for a while now, right? So I'm seeing that you're kind of correct, and the way it's reflected in the NAV is coming a bit late. And you know what I mean. So now companies are realizing on the contrary that they are too conservative. So this is why I'm asking if you think that this is basically more or less it or whether or not we should be expecting a worsening?

Answer
Matthias Taubl (Executives)

Maybe it's about -- Richard, maybe sort of intervene when I jump in here. As you know, this is -- our NAV is based on a 3 years discounted cash flow -- based on 3 years forecast discounted cash flow method. And so therefore, definitely the biggest impact, which we do see right now where we have more predictability, which means that current trading outlook for the fourth quarter and then for the first and second quarter of next year, this is baked in already more or less, of course. Nobody knows exactly how the recession is like, current circumstances might further develop. Therefore, we need to stay a little bit more careful here to have a key predictability, but I do not expect that it's worsening a lot in the upcoming months or more or less this has been a bit in here already. So therefore, I hope this answers your question.

Answer
Richard Schulze-Muth (Executives)

So -- correct maybe and let me jump in, Matthias, that's exactly. So I mean we did add a step, and it's coming now based on trading here and the respective outlook. So this is baked in the rest [indiscernible] and outlook year for the...

Question
Marie-Therese Gruebner (Analysts)

All right. Great. The next question I have is regarding your 3 segments: Services, Industrial, Retail & Consumer. Can you give us a sense for each of what you are seeing in terms of growth rates at top line level and EBITDA margin development for next year? I mean what is it that we should be assuming, increases of X EBITDA margin deterioration or increase of X? I mean what -- could you give us a bit of guidance there in terms of these 3 subsegments?

Answer
Matthias Taubl (Executives)

That's a tricky one, to be honest, if we would see this in a serious way. Definitely, what we do see that -- or it's difficult also that the revenue growth, of course, is driven by inflation in a couple of our industries as well. Definitely on the retail sector, I would not expect too much of really quantity-driven growth in the upcoming year, especially that the first and second quarter will remain very bumpy. Everything beyond this is really hard to predict. But therefore, hopefully, the third and fourth quarter is to catch up, then maybe the more tricky first and second quarter. So therefore, I wouldn't expect really quantity-driven growth. Of course, inflation-driven growth might be well the case.

On the margin side, pretty much the same. So it's -- definitely, we do see in some areas that it is more difficult to pass the prices through, that there is some resilience from the customers to accept this. And then maybe to hold back a little bit more than what we have seen in the past. Same applies -- not the same, but it's a similar outcome finally on the industrial side more. As I said before, it's not so much that we do see that the customers -- or our main customers for our main portfolio companies have general issues.

So the market -- the underlying market is -- we're typically in more the asset-rich niche market. So this is still okay. Of course, definitely, we do see some recession-like impact there as well, but it's been okay-ish. But definitely, what is more difficult to predict, as I've mentioned before, is what we see that some of the customers have difficulties to solve the supply chain issues. And therefore, they are impacted, I don't know, for example, for moveero, producer of the wheels for the agriculture -- agricultural select tractors.

This is still a very healthy underlying industry, but many customers have difficulties to get all the parts, which is needed to build the trucks there. And therefore, they don't need the wheels then as ordered. And so therefore, we do see some backlog or they're pushing back some of these orders then. So therefore, I do not expect a growth -- a huge growth here as well in the upcoming 3 quarters. Everything beyond that -- I still remain optimistic for the long-term view, but short-term view is hard to predict.

Answer
Richard Schulze-Muth (Executives)

Yes. I agree to that. And in addition, again, some of the budgeting process. And then when this is done, we will include here in our annual report, of course, the outlook here going forward for 2023.

Question
Marie-Therese Gruebner (Analysts)

All right. And then one more question regarding the strong decline in NAV and Services & Solutions. You are referring to a particular company where you're concerned about the outlook for next year. I mean is it fair to assume that the EBITDA margins for that particular segment should be going down at least, I don't know, 5 points or 3 points next year? What is it...

Answer
Richard Schulze-Muth (Executives)

Yes. So that's why we -- so this is more the risk premium for that because there is an ongoing discussion and the outcomes -- could there have been a material outcome? So if this is true, then yes. But it's a bit pending at the moment because they are in negotiations here when it comes to customer contracts.

Question
Marie-Therese Gruebner (Analysts)

Okay. Got it. So maybe a customer. All right. And then I have questions regarding your WACC shares. More than 200 million after the -- including the proceeds from Briar. Does this mean that we can -- we in the capital market can hope that you can use some of that at least to pay a dividend, which is a bit more than EUR 1.50? Or what -- how do you see it from today's standpoint?

Answer
Matthias Taubl (Executives)

Yes. As you know, we typically do make our proposal for AGMs when we are closer to the AGM, which would mean in the first quarter next year. A lot of things can change until then. At the moment, we know that we have an ongoing buyback program up and running. We do think at the moment, this is creating a lot of value for our shareholders given the current share price compared to the net asset value. So therefore, this is still where we try to find the right balance. In general, our strategy remains unchanged, and the decision what we would like to propose to the AGM will be made in the first quarter.

Question and Answer Operator Message
Operator (Operator)

We will now take the next question from Zafer R?zgar from Pareto Securities.

Question
Zafer Rüzgar (Analysts)

I have 2 questions. The first is regarding the so-called underperformer currently in your portfolio, which suffered from the market environment. And on the other side, your restructuring costs were even lower compared to Q2. Looks like that your companies or your portfolio companies don't need external support or where there are some capital injections or financial support to single portfolio customers -- companies in Q3? And if so, in which amount? Or do you expect some financial measures here in the future to support the currently struggling companies? And it seems that in particular, the newly acquired companies in the improvement phase are struggling?

Answer
Matthias Taubl (Executives)

No. As you said, Richard, go first, yes. Sorry.

Answer
Richard Schulze-Muth (Executives)

Yes. So when it comes to the restructuring and nonrecurring expenses, this is more of the one-off. So in general, we have to say that the overall portfolio is stable, and therefore, we have, of course, reduced restructuring and nonrecurring expenses on that. But the difficulty as we see at the moment are not just one-off. It's more general margin topic, but not related to restructuring or nonrecurring expenses. So generally, we have to say it's a more stable portfolio with less one-off restructuring and nonrecurring expenses. But -- and so therefore, you see the reduction here from the 56.5 from last year to 45.7 this year.

Question
Zafer Rüzgar (Analysts)

Okay. And with regard to potential support to these companies, which are currently struggling, do you see a net sensitivity or...

Answer
Richard Schulze-Muth (Executives)

So we've mentioned in the beginning, when it comes to the -- our firepower we have, and it could be that the one or other might need some support here with the actual developments, and we are, let's say, have the financial power here to support. Is there any that is extraordinary at the moment? No, it's more support when it comes to working capital topics, et cetera, but that is exactly what we are doing at the moment. We've always done when it comes to the support of our portfolio companies. And so no, nothing big at the moment. And that is worth to mention, it's more in the ordinary cost.

Question
Zafer Rüzgar (Analysts)

Good. And then the second question is regarding the cost inflation. Just to get a better feeling where you're currently struggling the most to adjust your prices or to increase your prices. And I mean this is also a general trend what we see at other companies. And there is always opportunity to increase the price with a certain time lag. And how is this -- your companies, in particular this -- the current quarter -- so with the fourth quarter, do you think you are able to adjust at this certain portion here? Or is this a situation, which will continue also in the Q4 situation?

Answer
Matthias Taubl (Executives)

I think it really depends on the industry itself. If you think about, for example, NDS, the automotive aftermarket in Norway, everything, which needs to be done to make your car winter fits in Norway, this will be done, but any kind of extraordinary spend, maybe this will not be done right now in this current circumstances, especially given the energy prices also for private households also in Norway where maybe you wouldn't expect it. But even there, there were rocketing, so therefore, this is definitely where we -- I would expect this impact stays in place for a little bit longer.

Everything is more industry B2B-related. And definitely, we have some pushback when it comes to energy prices because we do see some areas that the energy prices are decreasing already again. So therefore, this kind of a difficult situation between where they are right now and then maybe the midterm and long-term outlook to get price increases in place. This is definitely where we have challenging discussions. It has been easier at the beginning. It's more challenging right now, and this is what I would expect to remain in place for the upcoming at least 2 quarters for sure.

Question
Zafer Rüzgar (Analysts)

Okay. Good. And maybe the last one, more housekeeping question. Regarding the firepower for M&A, I mean we have seen the cash position. The question is to which extent you are in a position to use this for M&A? What would be your firepower?

Answer
Richard Schulze-Muth (Executives)

So as mentioned earlier, we have now freeholding cash in AEO and the holding companies of over EUR 200 million. And therefore, we have sufficient firepower here to cover the upcoming deal opportunities and as well, as I mentioned, the financial support of portfolio companies. And so we feel well equipped.

Question and Answer Operator Message
Operator (Operator)

That will conclude today's question-and-answer session. I would now like to hand back over to Mr. Taubl for closing remarks.

Answer
Matthias Taubl (Executives)

Thank you very much for listening. Thank you very much for your questions. I think the homework we have in front of us is crystal clear. We need to stay close to our portfolio companies as we have outlined to make sure that the impact is limited. Long-term, midterm outlook, let's say, remain positive. But for the upcoming months, we have to stay close to our portfolio companies, which we will do to make sure that we reserve the shareholder value here. Thank you very much for listening, and have a good day.

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