2025 02 04 CHAPTERS Group Roundtable

Thanks a lot and thanks for joining. As said, I'm Marlene Carl, CFO of Chapters Group AG, and pleased to present a little bit about ourselves today in this presentation. When we got the invite from MWB, I actually thought that the title is quite fitting for us with focus on it, because focus has been one of the major topics for Chapters Group AG over the last one and a half years.

So kind of given that we only have half an hour and I wanted to leave enough time for Q&A, I kept it rather short, but wanted to start with a short introduction on our history. So founded in 1998 actually as a software company back then, we went public in 2005 in Frankfurt and then just kept on running our software business. And what we did back then is a software for the procurement of hospitals, which was a market that was consolidating itself. And hence we ended up selling our business in June 2018 in an asset deal. And that was the starting point for transforming what was back then Medican Group AG into a holding company.

With a focus on digital businesses, that is now Chapters Group AG. This all started with our very first acquisition in December 2018, a small company in Doron who is active in the trading of cable products, etc. And that was what I would call our first test in this acquisition business. It went well. And then in 2019 we established our platform model and established the first two platforms with Okam Software back then and NGC Capital. And those two platforms started to acquire businesses actually back then in a lot of different sectors. 2021 we did the first sizable equity issue to jump start our acquisition strategy, as the funds that we received from the sale of the legacy business were actually fully invested. And we saw that this acquisition model of small niche businesses in Germany worked well. So we did the first equity issue, kept on acquiring businesses from a few different sectors, all with a focus on lean businesses, asset-light businesses. And all of that went really well.

What we then realized in 2022, probably over the year, is that we actually should focus on a few certain things. And in 2022 we started that process of transforming ourselves into what is now Chapters Group. And we started to double down on the acquisition of mission critical digital solutions. And we actually ran quite a strategy process back then and one of the outcomes was...

I'm really sorry, I don't know what went wrong, but my colleague gratefully lent me his laptop.

So in 2022, as said, we started the strategy process and one of the results was to hire a COO. And we started to adopt what we call the manuscript method as our key management methodology to drive organic and inorganic growth. And now by end of 2024, the vast majority of our revenue actually comes from digital solutions. To give you a bit of an outlook, back in 2022 only 41% of our revenues came from what we would define as digital solutions, mission critical digital solutions. And over the last four years this grew to roughly 86%. And we want to continue to double down on these specific solutions, so by end of 2027 we expect this to be close to 100%.

One of the driving factors for our transformation is what we call the manuscript method. The manuscript method is inspired by policy deployment, which is a strategy or management tool originally developed by Danaher. Mr. Ra from Danaher is one of our largest investors, and we had a lot of discussions with Mitch about how to run a decentralized organization like ours. And policy deployment is what we think is very fitting for us, so we adopted that. And based on policy deployment we are building our manuscript method. And the entire idea is to keep a decentralized organization. We do not want to centralize decisions, we do not want to centralize running the businesses, but we want to have a joint internal language to align on goals and objectives. As said, decentralization is one of the key values and one of the key organizational approaches we have at Chapters Group.

And what we mean with decentralization is that we empower all of our platforms or operating companies with great autonomy. So when we talk about autonomy, we think that autonomy requires two things. One is authority. So we have to give decision-making authority to the people closest to the customers, because we think that they are the ones taking the best decisions. We also need to make sure that we work with people that actually want to take authority, that feel comfortable with taking decisions and that feel comfortable with taking responsibility. But in order to give this authority to people, we also think that it requires accountability. And what we mean by that is that people really take responsibility for results and really take responsibility for courses of action if things do not go entirely as planned. And that is our way of working and that is what we think is important. The manuscript is designed to allow this accountability and authority. What we want to do with the manuscript is to benchmark results but also share best practices, share processes. Not everyone has to reinvent the wheel. And we think as Chapters we can really provide value to our operating companies by sharing these best practices.

All of that is rooted in our three values. Which are: we grow together. We do provide the opportunity to build equity to key talents in our organization. And we think that if everyone's working towards making the cake bigger, at the end of the day you can share with more people and still everyone gets more cake. And that's always a good thing. We think in decades. As a publicly traded company, by definition we can think in decades. We are obviously not the only ones in the market acquiring attractive companies, but compared to let's say private equity funds that just have a certain fund lifetime, we can actually think in decades. And the third key value, as said, is decentralization, which we call 'reserve the edge'. So we as a holding company are here to actually support our platforms, our operating companies. And by that we think and we want to create shareholder value over the long term.

Now I wanted to give a quick glance at what the group looks like today. As said, majority is in digital businesses. And we are now, this is what the group looks like today. So we are at roughly 50 companies, most of them coming from the vertical market software or internet services businesses, financial technologies with now three companies. It's fewer companies obviously than the rest, but it's a very important pillar for us. FBA has been part of the group for a very long time, is a new addition. And then we still have some of the other businesses with Speak Easy, AMC, and Kelterhon. But as you can see, the group really has a focus on what we would call mission critical digital solutions.

And quickly talking about our platforms. Mlog is active in France. Alam Mount is active in software solutions for regulated industries, for transport industries, P Transcom being the latest addition to that group. And they have a bit of a focus on governance and risk solutions. Vun also was added last year and did their first acquisition in September already. And then obviously the Okam group, which has been part of the group since 2019, now has numerous companies. I actually forgot to count, I think we are at 24 or so in their group. Karma is active in the telecommunication sector. And then we also have some direct investments as Chapters Group. One of them being Explain, which is our first acquisition in Switzerland. And then Software Circle is a UK-based serial acquirer for VMS businesses, where we own 29% of the shares.

To give you an outlook on what events are happening next year or this year actually, where you can expect further information. We intend to publish preliminary results in March. And then we will be at the Redeye conference in Stockholm, Sweden on 17th of March. We've been there last year already and really enjoyed it. Annual report will be published in May, with our annual general meeting planned for 9th of July. And the day before we will do an investor day or capital markets day. And then for October we expect to publish our half-year results. And before we move to questions, this is the countries where we're currently active in. And kind of here's hoping that by end of next year there will be a few more countries that are not in the light blue but in the darker color. And then as said, I really wanted to make sure that we have sufficient time for questions, so over to you.

I'm not sure whether 'getting into' is what I would say, but we do have one company in the Czech Republic. And a few months ago we partnered up with someone who's actively looking into Eastern Europe, whether there are additional deals that can be done, amongst others in the Czech Republic. We're also looking at Croatia. So that is most definitely an area where we're actively looking for new transactions.

I would say probably both. As you can tell, we now have much more platform than we had three years ago. So just driven by that, we probably are able to do more transactions. We simply have more people, more boots on the ground to find the companies, to do the due diligence, etc. But we are also moving towards a bit bigger acquisitions, still at the lower end of the market, still in an area where there's limited competition from other players. But moving towards a bit bigger companies allows us to work a little bit more with the companies. We think that a bit bigger companies might be a bit more stable. It's a question of number of FTEs for example. So there is a tendency to moving towards slightly bigger transactions than we did in the past. Yes.

So to answer your first question, yes, the bigger the transaction, the more likely it is that we are competing with the well-known other players in the market. Though we actually also in the past did compete with those players. I think there are a few factors that give us an edge over the competition. One is, as said, we are a publicly traded holding company. We are here, by definition, forever. And we are usually buying from founders who are handing over their life's work. It's understandably super important to them that they hand it over to someone who wants to continue the business forever and who doesn't have to sell in five, seven, or ten years. There's also a certain level of transparency that just comes with being public, which I think can provide some comfort to the founders. And then we think, and that is one of the benefits of establishing that manuscript method, that we actually can bring those companies to the next level. If you become part of a group of what is now 50 companies, there is a lot of knowledge that can be shared, there is a lot of sparring that can be given. There are 50 other MDs that you could call if you have a problem that you need to solve, if you want to discuss something. So becoming part of the group is something that can be very attractive to companies, that can provide a lot of value to the employees but also to the clients, etc. And I want to say, so far so good. We won a few deals against the well-known competition, we also lost a few deals against the well-known competition, but that's part of the game. That's part of the game.

From a compensation point of view at AG level, it's all based on our share price. We strongly believe that if we increase shareholder value, that is actually what we are aiming for. And that is why our compensation structure is linked to our share price. On operating level, at the end of the day it comes down to EBITDA growth. The way we structure it really depends on the specific needs of an MD, specific needs of a company. There are different ways to express EBITDA, but what we want to incentivize is profitable growth.

We do not have a target. The number of acquisitions we do is probably one of the most difficult things to predict, just given the dynamics of the market. The lead times for those transactions can be three to four years. We did acquire in 2023 a company where the first touch point with the founder actually was in 2019. So that was kind of four years in the making. So we do not have a target on number of acquisitions. We do have what in policy deployment you call breakthrough objective. We do have an internal breakthrough objective for all of our platforms in terms of EBITDA to acquire, not number of acquisitions but EBITDA acquired. And if we reach that, we think that would really move the needle. But that's an internal target.

So we do have, when we establish a platform, the platform heads usually get equity in the platform. And we do have a mechanism, subject to meeting certain goals, that they actually can convert this into Chapters shares, or that we can convert this into Chapters shares. So yes, there's a program. I wouldn't call it a classical share option program, where we wanted to make sure that all of our platform heads do not only think for their platform, but that they always also think for Chapters. To give an example, we recently had a transaction where one of our platform leaders was approached by a seller. And that specific transaction actually would have fitted better, we ended up not doing it for other reasons, but it would have fitted way better in a different platform. Now if each platform head only thinks for their platform, there's absolutely no reason to share information, to work on anything together. If they all think for Chapters as well, there is a reason. And in that specific case, it actually worked well with the two platform heads just sitting together and figuring out how to work on that deal together.

So we do have a lot of international investors. Most of them actually, I would say, are American. I'm not sure whether IFRS is easier to digest if you're used to US GAAP, or more difficult to digest if you're used to German GAAP. For me personally, I have to say IFRS is harder to digest than any local GAAP I've ever seen. Having said that, we're well aware of the topic and we are indeed working on a project how to make our accounting more digestible for international investors. Whether we end up converting to IFRS isn't decided yet.

Okay, so I'll add some color to that. So for us, roughly two years ago we reached the size where this entire structure made sense and was able to support itself and to keep on growing. The question is how fast do we want to grow. All of our operating companies are cash flow positive. We use leverage. We can grow also inorganically just based on the current group structure. Now if we want to grow faster, then we need to raise additional equity. So whenever we think about doing an equity raise, we ask ourselves three questions. One is whether we have sufficient deal pipeline with our platforms to actually deploy, and whether that deal pipeline makes the entire group better. So if we raise equity to acquire a new company or to acquire new companies, we want to make sure that the overall business quality of those companies is at least as good, if not better, than what we already have in the group. The second question we ask ourselves is whether we can place the equity at attractive valuations that puts a fair value to the existing business. And the third question we ask ourselves is whether we can actually place the equity, because that needs to be one of the questions to ask yourself.

So policy deployment is working out pretty well. I think this week alone we have three policy deployment workshops with our operating companies. And we also had a lot of those workshops last year already. And we do see the first effects from that. Now in terms of when will you see it in the numbers, this most likely will be end of 2025. Because one of the core value levers for all of these companies is the pricing. And we're doing a lot of price normalizations at the moment. Now one of the great things about these companies is that most of the maintenance invoices are sent out in January, which is great because you have security and you have all the cash in in January. Now what that also means is that if you want to do something with pricing and you don't do it in 2023, you won't see a major effect in 2024. So every pricing project we did in 2024 will only be reflected in the numbers for 2025.

So yes, below the operating EBITDA there are holding costs. And we actually have, I would say, two levels of holding costs. One is pure AG costs, and the other is platform costs. I think in terms of what to expect for AG, given our growth, just of the size of the organization, cost of the AG will also grow a little bit. We added a COO, we added some people supporting me in the finance function. We're not building a huge headquarters, but we are adding a little bit of capacity. In terms of platform costs, I'd say for now I would expect a slight increase because we added a lot of platforms in order to support growth. We will provide some guidance on what to expect there probably at the Capital Markets Day.