Vantiva S.A. (TNM2.MU) Earnings Call Transcript & Summary

Good evening, everyone. Welcome to the Vantiva Fiscal Year 2022 Presentation. Today's call is shared by our CEO, Luis Martinez-Amago; and Lars Ihlen, our CFO. [Operator Instructions] Before handing over to our CEO, I invite all of you to read carefully the disclaimer regarding all forward-looking statements contained in this presentation. Luis, the floor is yours.

Thank you, Thierry. Good afternoon, good evening, everybody. So I'm glad to be here to share with you the full-year results for Vantiva. So if we go to Slide #4. So I'm very pleased to report that the first annual results of Vantiva as an independent company following the spin-off of Technicolor Creatives Studios last September. And as you all know, both companies are operating as independent entities since then. In Vantiva, we have achieved a very solid result for 2022. We were beating all operational and financial KPIs and delivering better than the guidance for the year that we shared with you last year. This is a great achievement, showing the group's ability to navigate in a volatile and not always favorable environment. The Connected Home division has been executing well and was the driving force for the last year, good results sent to the good level of demand for our broadband products in particular. The other division, the Supply Chain Solutions has experienced a bit more contrasted year with a decline in the optical disc volume, but a very good performance in the growth activities in the activities that we are launching to diversify the activity. And this is the core of the strategy in this division. We keep investing in our future. We are improving our activities across all business and functions and we have recruited recently a good number of new talent to reinforce our portfolio. Concerning our deleveraging plans, they are under recognition to the recently announced refinancing of TCS, and we will comment that more with you in the coming future. In short, as a summary, I would say that 2022 has opened a new chapter for this new company and we are very proud of all the achievements that we have done during this year. If we move to Slide #5, let's now see some of the figures. So the revenues, as you can see, has been up. So I wait for this slide to show up. So as you can see, the revenues were up 23% and reached EUR 2.8 billion versus EUR 2.2 billion in 2021. As I already told you, the growth was driven by Connected Home division, which was up 37.3%, while the Supply Chain Solutions division, the revenues were down 6.6%. In terms of EBITDA, Connected Home increased its contribution by more than EUR 30 million that more than offset the small decline in DVDs of EUR 11 million. Maybe even more importantly, the free cash flow before interest and tax improved by EUR 200 million and was positive at EUR 88 million for 2022. Later, Lars our CFO, will detail all these figures in a bit more detail. If we move to Slide #6, and as you can see in that slide, our performance has exceeded the guidance that we shared with all of you in the past. We are very proud of this achievement. And as you know, and we have discussed this in the previous calls, the environment has been pretty volatile and very challenging, mostly into supply chains restrictions. This is why the results make us very proud and very happy. Now if we move to 2023 in the next slide. So we are still building our business in -- based on our strength. Here, I mentioned some of them. You know that for already some time, we decided that broadband was one of our key pillars of growth and development because it's a very dynamic market. And this has been adding a lot in our business, and we still perceive this being a very dynamic space in the market, while operators are using this to compete and to add more revenues in the plan. So we are doing very well in this space. We keep incorporating new technologies, as I will explain in a minute, and we are having the traction that we were planning to have. In the Video segment, the market is a bit weaker with a significant amount of changes. Our priority is to add value into the offer. And as I [ shared ] previously, we are investing in new innovative solutions, not only in the functionality, but in the capabilities of these type of products. In the past, I shared with you, for example, that we are incorporating in a sound bar, the set-top box functionality, which is proving a significant good type of innovation and is having a good traction in the market. In the Supply Chain division, as you know, the axis of growth, we have a natural business which is in decline in the DVD space in the optical disc, but we are investing already on the vinyl business, which is showing quite a strength. And we keep extending and enlarging our production throughput, installing more press as we speak in order to capture all the growth that this market is providing to us. There are a number of initiatives [indiscernible] that we also discussed in the past. One is the microfluidics, which is quite interesting. We are working for pharma companies in this concept, taking into account all the experience that we have obtained in this type of production of this type of material. And also in the IoT for vertical space, taking all the experience that we have serving operators. We are stepping now in working for enterprises in the digitalization objectives and with all the competence and technologies that we are using and we have for service providers. Moving still in 2023, there are a number of areas of attention. I think we are in the change of a market. We are shifting from -- in 2022 and the years before, a significant strong demand in a very difficult supply space in which memories before chips in the recent past was creating a lot of challenges for our industry and for us, as you can see in the results, we managed quite well. But now the macroeconomic situation with an inflationary situation that creates uncertainty. We are seeing some weakening demand, uncertain demand, but we are working very close with our customers to really make sure that we navigate through these uncertainties, and we can keep serving them as they need. The supply chain constraints that I was mentioning, they are improving as we speak. And in any case, we keep strengthening our competence there, because, as you know, in the last 4, 5 years, there has been always disruption. I assume one thing that characterizes the way we manage this disruption to keep serving our customers, working with our suppliers and delivering results that you see. So even if we see this easing and improving, we keep investing in our endurance of the supply chain because more disruption may come in the future, and we need to be prepared for it. And as you can see the results in terms of free cash flow and working capital, it has been very good in 2022 and taking into account the areas of concern that I just shared with you, we may reverse a bit the situation in 2023. Still, I will share with you the guidance, still, we are respecting and maintaining the previous guidance, that we need to -- when the demand is a bit more volatile, we need to really make sure that all the operations are still at the level in order to preserve this, but we need to be prudent in this space. Okay. If we move to Slide 8, so as you can see, we are maintaining our previous guidance. We are expecting to have -- despite all the uncertainties still north of the EUR 140 million in EBITDA, higher than EUR 45 million in EBITA and higher than EUR 50 million in free cash flow generation. So every year, we are confronted to new challenge, but I'm happy that at that moment, being able to confirm this and deliver it. Moving to the next one. Let me go a little bit deeper [indiscernible] I will make it quick, and I'm ready to take any of your questions, if you want more details on that. Let me start by Connected Home in this slide. So we had significant growth in EMEA and Americas in 2022, boosted by the broadband space in areas like fiber and all the needs of Wi-Fi new technology, our customers, the service providers, they need to keep enhancing the bandwidth to the home and the bandwidth in the home and this is why all the standard in the access, mostly fiber, but also evolution of DOCSIS and even wireless. This is creating a quite dynamic market, but also the quality required in the home with new technology in Wi-Fi, Wi-Fi 6, 6E and very soon Wi-Fi 7. This is creating still a significant area of growth for us. This is also we are maintaining the leadership in the place we were. I think you know that we are leading the Americas market and we are growing in EMEA gradually, and okay, we need to keep basing our future in this growth. And the point I already mentioned is not only about good product, good technology, good time to market, it's also having a very resilient supply chain, very agile, reacting in real time to any event. And we are investing in automation and flexible manufacturing in order to be ready for any new challenge that the market will send to us. On the recon side, you see some details about the different technologies. I will not go through it. I mentioned some of them previously, but I think we are pretty happy of our strategic choices in this space, emphasizing the areas that has been proving right and has been -- are the engines of growth in this market. So the eco/sustainability priority is a priority for us already for some time. As you know, we have a Platinum EcoVadis qualification and we keep improving this effort in this space. We are working not only with our customers in this space, but our suppliers and our employees in order to add more innovation and to keep really developing a better impact in this space in the years to come. Concerning the financials of Connected Home. So as I was mentioning before, the growth 37.7%, thanks to a very strong growth for broadband products. It is true that we have been helped by a favorable ForEx impact. But even at constant rate, the growth has been significant and solid. And we have even had an improving product mix that is also helping us in this growth. On the other hand, you see the video business is a bit weaker in some countries with very entry-level products, for example, in India, that due to the economic situation, customers are replacing some of the investment. And as you know, we are deprioritizing a bit there. So you see the business in video a bit more flat than the growth on the broadband space. EBITDA of the division increased by 31% and reached EUR 135 million and the margin in percentage decreased a bit due to the impact of the price increases due to the inflation of some of the components we buy that has a dilutive effect in the overall margin. Moving quickly to the Supply Chain Solutions, it has been, as I said before, a more contrasted year for the division. We are prioritizing the development of new activities, diversified activities, what we call growth activities because as we were expecting the traditional market, which is the DVDs is having a natural decline that we are adding more efficiency in this business, but we are putting the priority in developing new activities that will keep this division contributing as we are planning. Demand in optics are increasing as I said, and -- but we remain the leader of this market with a significant dominant position with more than 65% market share, okay? And if we look a bit on the figures in the next slide, the revenues went down 6.6%. The EBITDA contribution stood at EUR 56 million versus EUR 67 million the year before. And the margin received by only 91 basis points as the division implemented cost reduction measures to mitigate the negative volume effect. For this year, we will pursue our efficiency efforts to assure that the division keeps generating the cash on all activities and specifically on this. We will benefit from a significant higher vinyl manufacturing capacity as new machine will increase production output throughout the year. And with this, I will let Lars maybe to walk you through some more financial information. And then I'll take questions at the end of Lars presentation. Lars?

Okay. Thank you, Luis. So if you move to Page 15. So as Luis already presented, the group's EBITDA amounted to EUR 161 million, which is a EUR 20 million improvement over the previous fiscal year. The improvement is coming from higher revenues coming from higher volume, but also measures to mitigate the inflation impact and a positive ForEx impact. Depreciation and reserves show a modest increase, notably coming from investments in vinyl equipment for the Supply Chain Solutions division. EBITA stood at EUR 55 million versus EUR 39 million in 2021, mainly explained by the increase in EBITDA. PPA amortization is stable at EUR 31 million and non-recurring items were EUR 12 million more than last year, despite the fact that we had lower restructuring costs. The main reason for this is a decrease in capital gain that was booked in 2021, following the liquidation of a legal entity last year. Continuing the P&L, the EBIT was negative at EUR 11 million, a EUR 2 million improvement over 2021. And I will give you a bit more details on the net profit in a minute. The fixed cash flow before interest and tax stood at EUR 88 million, which is a EUR 200 million improvement over last year, mainly explained by which amounted to EUR 155 million. Free cash flow after interest and tax was positive at EUR 6 million, and the net debt in IFRS amounted to SEK263 million. So if we move to Page 17 -- 16. So this shows the walk from EBITDA and down to EBIT. I think this mainly speaks for itself, so there is not too much more to comment here. So Page 17. So here, you see the details from EBIT and down to the net result. So net interest expense for 2022 reached EUR 168 million compared to EUR 117 million in 2021. It is worth noting that about half of the '22 amount relates to the cost of the anticipated reimbursement of the existing debt prior to spin-off and the remainder includes the interest of the debt of Technicolor until the spin-off took place in September. All other things being equal, the running cost of our debt can be estimated in the tune of EUR 60 million for 2022. Tax is a charge of EUR 30 million versus EUR 14 million in 2021. This increase is mainly explained by a change in the calculation of the deferred taxes, but also by a less favorable distribution of profit by company. Share of profit from associates was a loss of $311 million coming from the depreciation of the value of our stake in TCS. This is now calculated at the December 31 market value. This led to a net loss of the continuing operations of EUR 529 million. After the profit from discontinued operations explained by the profit of the value of TCS at the time of the spin-off, the net profit stood at EUR 151 million. So Slide 18. So this shows the free cash flow before interest and tax worked from our ending point in 2021. As I already explained, the main driver for the improvement has been the improvement of working capital, but we also had a higher EBITDA and lower restructuring costs that also contributed to these improved results. Finally, on Page 19. Here, we have liquidity and the debt situation at the end of the year. So our liquidity stood at EUR 167 million at the end of the year. So this was our cash balance, not including the available credit line we had on our ABL facility, which was EUR 91 million at the end of the year. This made our net debt EUR 282 million. So this marks the end of my presentation. And Luis and I will now take whatever questions you may have.

Okay. Thank you, Lars, and now we open the Q&A session. So who is first on the list.

[Operator Instructions] The first question comes from Fiona Williams from Edison Group.

And first of all, you talked about the impact of inflation on the margin. Can you just walk us through a little bit what the potential impact is in the current year? And secondly, can we have some more…

Okay, which means is, we have increased the prices, but sometimes not diluting a little bit the percentage of the margin we make in order to work together with the customers on that one. On the second question on the investments, okay, this is part of our diversification strategy. We can mention several, but it will be very extent. But the 2 dimensions that you are asking about is on the vinyl, we are the leader of the DVD reproduction and distribution market. This is pretty similar in terms of competence, industrial and technical competence that vinyl. Vinyl is quite strong market those days with a significant growth for the foreseeable future and it cannot be otherwise -- customers in this space, they are looking for companies like ours to serve the demand. For the moment in the first year of this, they have been leaning with maybe smaller companies that as fragmented and with the volumes are trying to increase they want to do what they did with the DVDs, go to a big player that we can manage the volumes, the quality, the consistent that we do for degrees. We do now for vinyl. And as I mentioned, now we are the critical path for this business is to put enough capacity in place, okay? And there are many others. I mentioned my colleagues that we covered before, but I don't want to spend a lot of time on that. This is something that will be using the same technology we use for DVDs, but for body fluids analytics. And we are working with pharma companies in making sure that when this market grows, we should be part of it.

Okay. And have you given any sort of quantum to that investment?

Sorry, can you say it again?

Yes, after what sort of size of investment you're talking about?

The investment in terms of amount is not that much in the whole scheme of things. In the vinyl is the press machines, okay? And I don't want to go in many details, but we have a very short payback period. And in a number of cases, also some customers are helping in structuring this investment. So it's not material in the whole scheme of things of Vantiva. But we are investing there in [ macrofluid ] is we invested already in the past and it's more than we are in trials of making prototypes to customers. So it is not material from a financial point of view, but is important from a strategic point of view.

Okay. And my final question, if I may, is just on the seasonality of the working capital. You obviously had a very strong performance on working capital in '22. How should we expect the phasing to pan out through '23?

Maybe, Lars, do you want to take this question?

Yes, sure. We will see the same patterns as we have had every year for the last 10 years, okay? So you will see H1, we will have a drain on the working capital because of the differences we have in our payment terms. So we are funding a higher quarter coming from the past, and we have a lower quarter going forward that we are collecting from. So don't be surprised when we do our numbers in March and in June that you will have a negative impact on the working capital and cash position for those 2 quarters. Then we expect that to reverse again in H2. And you see the guidance we are having that we expect to be back to more or less in all levels at the end of the year. But yes, we will continue to see high seasonality with negative impact in H1 to be reversed in H2.

The next question comes from David Cerdan from Kepler Cheuvreux.

I have a few questions for you. I will start just by the first one, if you may. Just on Connected Home, how do you expect the year to be? What is your visibility and backlog? And do you think that roughly in 2023 and maybe 2024, you could face some difficult environment as the COVID has boosted this activity and maybe people are quite equipped with new equipment?

Okay. As I mentioned, I don't think it's related to COVID, David. In my opinion, it's more the global macro economy that, as you can imagine, all our customers are taking a prudent stance. Consumer confidence may be less strong than in the past and maybe a bit of what you mentioned, COVID that people has already changed. But there is enough technology out there and improvements in the way we do things, we're still having a structural, let me say, a strong market. For me, the point is prudence in all sense from our customers in maybe the possible demand efficiencies that everybody is looking in planning very cautiously for the year. So your question is about coverage, we are pretty well covered because lead times of components, as you know, remain very long, specifically for chips. But now we need to work with our customers and adapting a little bit the plans to what they are planning today. So I don't think that is a market fundamentals that are changing. There is strong, as I mentioned, on broadband is and will be still a very strong market. And the only thing is to go through the uncertainties of the moment, adjusting a little bit the plans to what the customer wants. Concerning mix, and it's an important thing. When you introduce new technology, you can have a better mix because the more complex product is better for us and we may see some product mix moving forward that could benefit. But overall, if I need to say something, as you know, we are confirming the guidance, but we are very, very attentive to any market evolution and to adjust to very quickly to the real market demand. But that's what I can say.

Okay. And my second question is related to TCS. So what is the rationale for you to reinitiate cash in TCS?

Okay. First, we are happy that this year has got refinanced. I think this is good news for everyone for the company itself. And as usual, we prioritize the interest of our shareholders, Vantiva shareholders. And we believe that taking in the new money, it will be beneficial -- a benefit for our shareholders and for us moving forward, okay? I think it's a very secure, very senior investment, and we expect that this will be the right decision for our shareholders moving forward.

And this decision, does it change, I would say, your debt structure or your next debt structure?

For the moment, we can keep serving the debt, as I said in the last call and this doesn't impact us operationally. And it depends very much on how we will instrumentalize this new money in terms of when we will make an action on that one could benefit our debt structure. But it's not something urgent that we need to do in the coming months. I would say that is the right decision that what we are doing now, and we expect that, that will have a good benefit in the future.

Okay. And I have a last question, just to -- on the financial charges for 2023. Can we expect something around EUR 60 million of financial charges for 2023?

Lars?

No, that will be lower, okay? So I think we have discussed in the past that this should be more in the area between 30% and 40%.

Okay. Sorry for the misunderstanding, 30% to 40%. Okay.

The next question comes from Yemi Falana from Goldman Sachs.

Overall, the message I got on Connected Home appears to that -- be that there very much are secular tailwinds behind the business, but the current macro is creating a bit of a bump in the road. So could you provide a bit of a rough comfort zone in terms of the constant currency revenue declines that you expected in Connected Home next year? Is it kind of a 5% to 10% decline? Or is it kind of a smaller market than that? And what's the key swing factor? Is it destocking amongst your networks of our service provider customers, the message we get is quite upbeat in terms of the investment profile, at least in the European telecom side, so interested to know there. And then secondly, just on free cash flow and net debt. It came in very strong relative to our expectations, good operating performance, but also working capital. I appreciate you've mentioned that the phasing will be the same next year. But is it prudent on an absolute basis to be baking in negative overall working capital in 2023, i.e., slight unwind? And then finally, positive free cash flow and net debt means a bit more balance sheet headroom. Could you maybe talk us through the rationale between -- the rationale of committing to potentially some future financing of TCS rather than, for example, scaling more aggressively in vinyl and other diversification initiatives.

I'll take the first 2 and maybe the last one and Lars will take the working cap. So we don't guide in revenues. And I can tell you, yes, we expect a decline in revenues, but it shouldn't be a KPI that you should be concerned for the following reason. Because our business has a quite substantial different mix and not any specific decline may be in the same. For example, I mentioned that what business we do in India may have a decline. And -- but this is not as contributive as the business we have in the other geographies with the different customers. So yes, we expect a bit weaker revenues than in 2022, but still with a solid performance in terms of EBITDA, and this is because of the mix that we expect in. The second part of this question is the reasons why we expect that, okay, and this is a [indiscernible] as you can imagine. I would say the general headline is prudence on all service provider in the world related to the macroeconomic situation. And then this is a very big statement, but then you need to take it per geography. And there are events in countries like India or maybe Latin America, depending on the type of businesses people have, they may delay more or wait for certain investments. In other geographies, there is heavy competition between service providers, and they will keep investing in order to get share. In others, they may be taking a very prudent plan and waiting a little bit on how the economy evolves in order to maybe increase demand. So I would say overall prudence, yes, I'm expecting a bit weaker revenues than in the past because the things I'm mentioning, but it with uncertainty that it can go a bit, we need to follow, and it can go in any direction, okay? But as you see, we are still guiding quite a strong EBITDA profile. And we believe that we can go through it navigating all this. Now let me answer the last question, and then Lars will take the working capital. So I think the investment on vinyl, I think we are doing the maximum we can because the demand is strong. And even if we could put more capital in increasing the capacity, the throughput of the industry in building this machine, it is what it is, okay? So we have a plan. We are comfortable with this plan. And as I mentioned before, it's not a major investment in terms of cash in order to build that and even we are partnering with some customers to go there. So it's not a decision if the money we put in one place could be put in the other one. I think our investment plans for this year are quite analyzed and will shoot it for the plans that we have.

So on the working capital, we did have a positive surprise in 2022, mainly linked to collections coming from a factory program that came in place at the end of the year that we hadn't anticipated. So this brought roughly EUR 25 million of additional positive impact on the working capital. Do you expect that to continue in 2023, okay? So we are not expecting to reverse that factoring program. We do forecast that the working capital will stay flat. So there is no -- we haven't -- in our guidance, we are not factoring any reversal of these positive impacts on the working capital from 2022. But okay, there are a lot of things that can happen in the market that we do, of course, need to manage this, but that are our assumptions for 2023.

The next question comes from Thomas Coudry from Bryan Garnier.

A question on the net cash flow outlook, please, because when we see what you're guiding short and medium term and if we subscribe indeed financial and taxes and operating leases, it seems that your free cash flow could remain after taxes and leases and everything could remain negative for another few years. What is your objective in turning into a positive free cash flow? And the related question around that is, how do you see that compatible with your current debt level? Indeed, you're probably going to put money in TCS as well. So do you intend to refinance your current debt as well because I understood also that interest rates were supposed to rise over time in the current debt structure. So I'm trying to understand how you are trying to manage this negative cash generation at the level together with the debt that you intended to pay back initially with the sale of TCS stake? So again, do you need to refinance somehow the current debt that you have? Do you feel comfortable like this, when do you expect cash flow generation to turn positive? Maybe I will stop my questions here.

Okay. Look -- go ahead, Lars and I complement after that.

Yes. So we are not guiding on the net cash flow, Thomas. So it's difficult for me to give you a very exact answer on this. We have discussed in the past the buckets we have below the level we are guiding at. And you're right, if everything stays the same and the EBITDA comes in at the lower end of the guidance, we will not generate a positive cash flow all the way at the bottom for 2023. However, what we need to do to improve that, as you are saying, it's mainly coming from higher profitability. So we need to work on generating more EBITDA in order to generating more cash at the bottom line. And that's what you will see in the plan coming in '24 and '25, okay. There is no plan to refinance at the current time. You are right. The cost of the debt will get more expensive as we move forward. But today, there is no plans of refinancing as we can still handle the interest we have to pay on this debt in 2023.

As a conclusion is -- for me is, we don't have an urgency to do that in the short term. We have our plans, as I said in organically and positively and organically to increase the profitability and then we will be in a different scenario. But one step at a time, we are not going to guide on '24-'25 at this moment with the uncertainties. But with everything we said we do in terms of diversification and investment in growth areas, we are confident that we are going to really be able to do that in the coming future.

We have no further questions for the moment. [Operator Instructions]

Okay. If there is no more questions, I thank you all for your participation and your questions, and happy to talk to you in the next occasion. Thank you very much.

If you have further questions, feel free to call me whenever you want. Good evening for now.

Thank you.