Stroer: Astounding AGM Transcript via Muddy Waters
General meeting of Stroer SE & Co. KGaA on June 22, 2016 in Cologne
Vilanek, chairman: I hereby declare this year’s ordinary general meeting open [………]
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Muller: Thank you very much. – Good morning, ladies and gentlemen, good morning, shareholders. On behalf of our colleagues in the board of management I extend a warm welcome to you at the general meeting of Stroer SE & Co. KGaA. I would also like to welcome the shareholders’ representatives, our business partners from banks and our guests. I’m glad you were able to come today.
You have all been following the latest developments. Our last year’s results, which I would like to describe to you in detail in a minute, speak for themselves. Today we can look back on the most successful 12 months in our company’s history. At the same time, we are facing our next record year: in 2016 we will exceed the psychologically significant revenue mark of one billion euros for the first time. At the same time, we expect a new record for cash flow and our annual result.
Special mention should be made of this given already considerably higher results in 2015. Last year we very considerably increased the adjusted profit per share by 74% and our cash flow before M&A activities by about 46%. But more details on that in a minute, too.
The strategic addition to our traditional out-of-home business in order to open up new digital business models, the related establishment of a networked digital eco-system and the numerous growth initiatives of past years are already proving correct decisions and we’re pleased about that.
Typically for a family-owned company, we have taken calculated risks – which some critics have repeatedly questioned – in order to ensure the long-term, positive value of our company. And precisely these risks are beginning to pay off as expected.
In our out-of-home business, we have a longterm, structurally growing core business in which we are continuing to invest unchanged. We are also supporting this with new, also growing and many kinds of profitable digital business models. This is precisely what distinguishes us from many competitors in the media industry at the moment. We are in the fortunate situation of not having to make up for any shrinking business models due to digital growth. On the contrary, we can secure and further accelerate our structural growth in the out-of-home market through targeted investments in new digital business models.
This fact puts us in an excellent starting position for the next few years. With our very commercial management approach and as a major founder-managed media company on the capital market, we are currently also able to obtain some of the most talented digital business heads in the industry and thereby lay major foundations for successful development over the coming decades.
We aligned our business with digitalization – which will determine life in future – early on and have built up a strong, cooperative digital company DNA over the last three years. Stroer is increasingly becoming an interactive digital platform. It creates all the necessary basic conditions so that our management team and our equity partners can further develop and successfully manage their innovative and long-term value growth-oriented digital business models.
In the course of progressive digitalization, the market continues to change quickly. The key questions for every company are: what are the key differences in the digital future compared to the analog past, and: how should management react to them? One basic difference must be the reduction of market entry barriers of all kinds.
When people wanted to manufacture gym shoes a few years ago, you had to build a gym shoe factory. Today you only need a 3D printer you can get in any shop. Digitalization makes everything that used to be highly complex a short time ago, suddenly very simple or reduces it to a commodity, changes entire markets from scratch and reduces market entry barriers for many companies.
In the digital future, the often unsuccessful strategy in analog times of the vertical integration of value chains is appearing on the agenda again with great enthusiasm under new conditions and perspectives. New and innovative, often tech-based and mostly intermediate business models may be very successful in the short term in these times of the transition to digitalization but, in the long term there is, of course a very great risk of being forced out of business by vertically-integrated business models.
On a global and hence very large scale, Amazon is the blueprint for a successful digital model in its segment which is essentially transferrable to many sectors these days. Initially a solely sales platform for offers from third parties with a horizontal approach, it is vertically integrated backwards and forwards on the basis of the data already generated as a first step with unique consistency. For example, those dealers who know on the basis of the right data what their customers want to buy can produce these goods themselves in the digital future without any major risks. If the volume is large enough, dealers can also deliver goods, thereby ultimately controlling an end-to-end, completely integrated digital value chain.
In this example, logistics companies – categorized to date as safe success models due to ecommerce – will suddenly have only an intermediate business model with the risk of being forced out of the market, permanently and unexpectedly.
After an initial phase of horizontal consolidation, we are also seeing corresponding developments in the field of digital media offers. In an increasing number of cases, vertically integrated companies are today forcing newly-started intermediate business models off the market again with much premature praise.
Our strategic response to the challenges of digital transformation is crystal-clear: we will not be investing in intermediate business models such as ad-tech companies, we will be concentrating on integrating our various digital out-of-home and content platforms in the desktop, mobile and public fields and have become a genuine multichannel media company.
We are expanding and integrating our value chains vertically in order to create long-term value for our shareholders by establishing a fullyintegrated digital eco-system. The continually improving results over the past 14 consecutive quarters prove, quarter by quarter, the strength and robustness of our continuously developing integrated portfolio approach, which is based on synergies between the segments.
Our coverage platforms are both location-based, i.e. our traditional out-of-home business, and content-based. The digital out-of-home platforms in railroad stations, shopping centers and on the street benefit from the contents of the content area. The various desktop, mobile and social platforms in the content area are significantly increasing their range by expanding their content on our national public-display infrastructure. Both will benefit from each other over the long term and will merge successively as part of digitalization, supported by our competence in data and technology.
Our concept of an optimized monetization of our out-of-home and content-based ranges is based on three mutually complementary target group approaches in a structured waterfall approach. As one of the leading German advertising marketing companies, we are simultaneously the clear leader in our core segment and, because of our advantages of size, can thus ensure an optimal marketing result in our marketing in Germany.
At local level, we are the only German supplier of local advertising products and are continuing to dynamically expand our position month by month. We monetarize inventory not marketed locally or in Germany in a media-for-equity value creation approach within our new transaction group with subscription business models and niche ecommerce. This allows us to vertically expand and integrate our value chain simultaneously.
In this context, I would like to mention the essentially pleasing development in our share price in the last few years. For the year as a whole, Stroer share prices have been some of the few shares in the media sector to have gone up again. But given the continuing economic situation and Brexit worries – the latter will hopefully be resolved in Europe’s favor in a few hours – it must also be said that shares of growth companies have been less in demand on the capital market so far than in 2015. We have naturally not been immune from this business climate, which is still independent of our positive business development.
In this context I would like to comment briefly on the attack by the Muddy Waters hedge fund a few weeks ago. Until April 21, 2016, I was in fact not aware of the term “activist short seller”.
The business model of this fund has been basically described with the above-mentioned generic term but also quite precisely. People borrow shares to sell them and then actively try to exert a negative influence on the share price in order to repurchase them at a lower price. The shares are then returned to the parties who lent them.
Over the last few weeks we have all seen the excesses this can lead to and the means people use to lower the share price for personal advantage.
(Klein: Excuse me, could you please repeat that a little more slowly? I didn’t quite understand.)
– Of course. With pleasure.
Until April 21, 2016, the term “activist short seller” was in fact unknown. However, the business model of this fund has already been described in the aforementioned term.
You borrow shares – for example from a bank (many people don’t know that their shares are lent out: there’s this aspect as well) and pay a small fee of 0.5% a year. You then sell the shares you borrowed. Let’s suppose you borrow a share, sell it for 50 euros and want to buy it back at a lower price.
You then have two options: either you believe in your “short thesis”, i.e. that the share is overvalued and the price will fall. You’ve borrowed the share, sell it and wait and speculate that, a year later, the price will be 30 euros instead of 50 euros. You then buy the share back and give it back to the party you borrowed it from. You’ve made 20 euros profit on the share.
“Activist short sellers” borrow shares, sell them for 50 euros and then think about how they can manipulate the price, i.e. how can they make the price fall. How can they do this? For example, they can “discover” something. There’s the famous case of a Chinese company that said it had forests that it didn’t actually have. Then someone found that out and the price fell. The buyer who was “short” has bought cheap again and made a profit.
But if you don’t “discover” anything because there’s nothing to discover, you have to think about how you can manipulate the share price. Of course, manipulating share prices is prohibited – theoretically. But in practice you first have to legally obtain some.
At the end of the day, our share was an ideal target. Why? The price increased to ten times its value. When that happens, those people who have had these shares for a long time get nervous and wonder whether they should sell or whether the price will continue to go up.
Secondly, as you all know, we carried out the Stroer Interactive transaction in 2012, in which we had a “related party” transaction, of which we disclosed all details. After three years, this was a popular subject topic and you can bring it up again as if you’d discovered it. Plus, we’re also doing a lot of M&A – another favorite issue: people can always say Stroer does a lot of M&A because they want to cover up problems in their core business. And then there are the usual corporate governance problems, etc. etc.
The colleagues publish a report. But it must be said that the share price doesn’t fall because of the report but for the following reason: let’s suppose, you borrow some shares – at the most, it was seven million.
Then things start getting funny. You talk to some fund managers who have bought the shares. They tell you, my management has lent out my shares. I don’t understand it. But if you’re convinced about the matter, i.e. if you have Stroer shares and the price can only go up over the long term and you want to keep them for years, of course you’re going to lend them and make 0.5% on the deal as well because you know the price is going to go up, even if you sort of risk ruining the price in the short term.
In other words, we lent out seven or eight million shares at the most. At the moment, the price is falling every day. The short seller sells some and keeps some back. And what happened on April 21, 2016? The short seller – quite by chance – then sells some more shares from various quarters because they’re not allowed to agree on an artificial price. Then, completely by chance, ten times the daily volume of shares comes onto the market in half an hour.
What happens then? A lot of shares are sold in one fell swoop. These days there are quite a lot of electronic trading systems. That means that the price drops and stop-losses are triggered, and then more shares come onto the market. That’s the whole idea. It’s like an avalanche: you throw a little stone off a mountain and when it really starts to roll, no-one can stop it until it reaches the valley.
At the same time, colleagues have done three things: firstly, they’ve flooded the market with shares, then they’ve published the study – in inverted commas – no-one can read it in 30 minutes – and then someone from Muddy Waters goes on TV, like Bloomberg, and says, “Muller, Schmalzl and Stroer are all criminals and I’m going to protect the world from them.”
What he didn’t say was that, when he went into the TV studio, he’d closed sales of the shares again. That means, he’s tried to create panic: now that people have sold the shares, there’s a lot of liquidity and at 35-36 euros, he’s made a profit and can return them again.
That makes people quite angry because normally, when you sell short, you think the price is going to stay low for a relatively long time. It’s the same when you’ve held the shares for a long time, in other words, you’re speculating on rising share prices. Then you hold the share for a long time. But in this case, the shares were on the market on Wednesday the 20th and then taken off again on the 21st. But no-one knew except them.
That’s why I find the whole matter absolutely ridiculous. But when I flood the market with shares, I publish a study – in inverted commas – and go on TV and say they’re all criminals, I can wipe out a billion euros worth of shares in 45-60 minutes. The share price has then fallen from 52 euros to just under 35 euros inside 45 minutes. I’ll say a bit more on that later, but that’s kind of how it works.
Unfortunately, shares that sell very badly or very well are particularly vulnerable to tricks like these. If you bet on a profit or a loss, people get more nervous than if that doesn’t happen. If you buy shares for 50 euros and it stays at that price, you’re not going to sell them as quickly as you would if you bought them for 50 euros and the price suddenly goes up to 500 euros because you always wonder how high the price is going to go. That’s how this model works. Has everyone understood?
(Klein: Thank you.)
– You’re welcome.
We’ve all seen over the last few weeks the excesses this can lead to, the means people use to trigger negative share prices to their own advantage.
What’s noticeable, besides various other aspects, is the method of offering former employees money for every 15 minutes or even per minute to get them to make statements supporting the attackers. By making up to five contacts a day over weeks and months in individual cases, you more or less get an idea of the efforts that are made. “Evil be to him who evil thinks.”
I can’t imagine who of our former employees have been attacked, via email, mobile text message or telephone. People have tried to find something. Anyone who has read the report will have seen that the only thing they found was that we sued some former employee in Turkey who illegally used our … Ultimately, there was nothing to find.
If you’re short, want to earn money and haven’t found anything, what do you do? If you’re reputable, you just wait. If you’re an “activist short seller”, you need to cook up a story, which is exactly what the others tried. If you’re obviously not convinced about your own story, you liquidate the shares; but if you’re convinced, you keep them.
I was in the US last week. This practice is normal over there. The American fund managers have commented on this correspondingly and have said, “We can’t stop the problem. We first have to deal with them. These are disreputable practices. They all ought to be in jail.”
In Europe there is less experience with this problem. So I don’t think it won’t be the last case in Europe or in Germany. You’ve seen that much has been written about it in the press and seen the first effects. By comparison, share prices only fell about 5% in the last attacks in America because it’s more common there.
What’s particularly regrettable is that, as a result, it’s mainly those who suffer as a result whom the attackers claim to want to protect, namely the existing shareholders of the company under attack.
In our case, we reacted within 24 hours, i.e. as quickly as possible, to the unsubstantiated accusations. The so-called report published by Muddy Waters consisted primarily of information made up of known facts already published by Stroer which were deliberately presented incorrectly, mixed with false claims and insinuations, thereby giving an overall false impression.
Muddy Waters’ intention was to damage Stroer shareholders for its (MW’s) own commercial interests, which were based on the hedge fund’s short position.
All Muddy Waters’ conclusions are basically false. Muddy Waters had a basic self-interest in destroying Stroer’s reputation with false claims and conclusions, manipulating Stroer’s share price and, when that had fallen considerably, making significant, speculative profits at the cost of our shareholders.
In doing all this, Muddy Waters, which by the way, liquidated its shares on the day of the attack to a large extent contrary to the usual conventions, clearly crossed ethical and legal boundaries. We reported these actions directly to the BaFin, the responsible regulatory authority but, due to what we regard as wholly insufficient legal controls in such cases in Germany, we have foregone applying for criminal proceedings to be instituted so far.
The auditors Ernst & Young, who are also Stroer’s auditors, then had another look at our financial information after the accusations by Muddy Waters. As part of the audit by Ernst & Young, none of the allegations raised by Muddy Waters were substantiated.
The investigations by Ernst & Young led to no objections and no errors were found in our calculations. What is more, our group accounts for the 2015 business year were given an unrestricted certificate by our auditor in March 2016. With regard to the unjustly attacked organic growth calculation and the identification of exceptionals, which as so-called non-GAAP measures are not part of the audited group accounts, we actually appointed Ernst & Young as announced to carry out targeted, additional investigations. As expected, these investigations led to no objections.
Stroer: Astounding AGM Transcript – Muddy Waters
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