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

Ladies and gentlemen, good evening, and welcome to Vantiva Full Year 2023 Results Conference Call, chaired by Luis Martinez-Amago, CEO; and Lars Ihlen, our CFO. [Operator Instructions] Just to remind you all this conference is being recorded. We would like to inform you that this event is also available live on the Vantiva's website with synchronized slide show. During this conference call, statements could be made that constitute forward-looking statements based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the future results expressed, forecasted or implied by such forward-looking statements. For a more complete list and description of such risks and uncertainties, refer to Vantiva's filing with the French Autorité des marchés financiers. I would like now to hand over the call to Luis, please go ahead.

Thank you, Thierry, and good evening to everyone. 2023 has been a very challenging year for our business, but at the same time, also very exciting. As you all know, last year, we signed an agreement for the acquisition of the CPE activity of CommScope, which was finalized earlier this year. This operation is a very important step for Vantiva, and it gives us a scale, a significant amount of synergies and very limited synergies. This is a nice platform for us for improving our financial performance moving forward. This acquisition is significantly reinforcing our customer footprint and is also complementing our talent pool to keep creating value to our customers. I can confirm that the expected synergies mentioned at the time of the agreement will be achieved. And the more we work on the integration, the more we discover potential for additional synergies. This makes us confident in the group's future despite the current challenging markets. Let me now highlight the key achievements for 2023. The acquisition of CommScope Home Network division has been completed in January 2024. We were able to make this acquisition with no cash payment, as you know, thanks to the successful reserve capital increase which has made CommScope, our largest shareholder with 27% of our capital. Beyond this key strategic operation, I'm proud to communicate that Vantiva was able to achieve all the financial targets of our guidance in a difficult market condition. As you will see in a minute, our market decreased significantly last year in the context of weak consumer demand overall and a still significant number of inventories in the hands of the service providers, our customers. The Supply Chain Solutions division suffered a difficult year as well due to the structural decline of the DVD business amplified by the [ inflationary ] context. But thanks to our excellence in execution, responsiveness and agility to react quickly to the market events, we have managed to deliver on our guidance. We have even improved the margins in percentage for our 2 divisions compared to previous year. As you know, most, if not all, the equipment suppliers of the market, in the telecom industry have changed their profitability guidance during 2023. We are proud to deliver on our profitability guidance for 2 consecutive years of the life of Vantiva. Now in 2024, we started a new area for the group. Let me turn now to the key figures of 2023. Our revenue went down by 25.3% to EUR 2.1 billion, but the EBITDA fared better and show a decline limited to 11.7% at EUR 142 million. Despite this significant decrease in revenues, the EBITDA margin improved by 1 full point at 6.8% versus 5.8% in 2022. Free cash flow before interest and tax remain positive at EUR 13 million showing a decline of EUR 75 million. As explained last November, when we released our Q3 revenue and made a guidance adjustment for the free cash flow, this decrease is largely explained by the impact of the deliveries push outs within the Q4 of 2024 by some customers that impacted our impacted negatively our working capital at year-end. As you can see from this slide, we have achieved all our guidance KPIs. This is the second year in a row that Vantiva delivered on our promises. One word on Home Networks integration within our company. We managed to close the deal in a very short time. And since then, we have been working actively on the integration of the activities and synergies execution. I am pleased to report that we are moving faster than initially planned, and the potential that we foresee should be better as well. It is too early to share numbers with you today, but we should be able to provide you with an update at the quarter 1 revenue publications due at the end of April. Let's move to 2024 exercise. The potential synergies opened by the acquisition is certainly 1 of the major priorities this year. It brings scale and opens huge opportunities for synergies. Beyond this, this acquisition reinforces our position with Tier 1 and Tier 2 clients by adding new relevant accounts to our portfolio of customers. We have aligned already the product portfolio of both companies, setting a new product portfolio, which is ready now to be offered to key customers. On the diversification front, we have -- we are adding new initiatives coming from Home Networks from CommScope. And with this, we are positive in really create materiality in the coming few years. But as I have already mentioned in previous calls, 2024 will still be a year of weak demand. As you may have already heard from other companies, such as some of the leading chip companies or equipment manufacturers, service providers are still planning to reduce investment this year while they are still depleting existing inventories. Recovery is expected by the end of the year and into 2025. We expect a weak first half of the year with a gradual recovery in the second half. On the SCS side, the maturity of the DVD market should continue to drive down the demand, and we are counting on the ramp-up of the diversification activities launched last year to offset progressively this natural decline of the DVDs. To sum up, we will continue to focus on profitability and to focus on delivering as fast as possible the synergies from the recent acquisition. This drives me to the guidance for this year. In the context of a decrease in top line, we expect to deliver a group adjusted EBITDA of over EUR 140 million, and more importantly, a positive free cash flow after interest and tax, but before the restructuring and expenses related to the acquisition. It means that despite the difficult market I have described several times and putting aside the costs related to the restructuring and acquisition of Home Networks, Vantiva should be able to cover all its cash needs by the cash generated by the business. This will be a major improvement. And on this ground, the company is confident that by 2026, it will be able to generate a sustained and substantial free cash flow generation. Now turning to Connected Home division. All markets has been affected by lower demand from operators and only fiber and fixed wireless access has seen some small growth. Nevertheless, we have confirmed our leading position in the market with new deals with major operators. Thanks to our strict cost control measures and flexible organization, we have shown good resilience of our results and achieve our targets. This environment has not prevented us from continuing to innovate and to benefit from our recent innovations. Wi-Fi 6 and 6E are now a market reality. We have introduced new features with our set-top boxes, new products like the Soundbars, and we have launched also new video products into the market. Wi-Fi 7 and DOCSIS 4 are already shipping. We were the leading supplier of DOCSIS 4 starting to ship this product at the end of last year, and we will continue to do this, this year. And last but not least, Vantiva continues its eco sustainability policy by reducing CO2 emissions, increasing circular economy projects and incorporating sustainable designs to our products. A quick look now to the numbers of the division show that revenue was down 26.3% and amounted to EUR 1.6 billion, while EBITDA contribution declined to EUR 120 million versus EUR 135 million in the previous year. The actions taken to defend the profitability drove the EBITDA margin to 7.7% versus the 6.3% in 2022. Supply Chain Solutions division also showed a good resilience of its margins in a context of volume decrease. In addition to the maturity of the market, the demand has been impacted by the rise in inflation that has weighted on discretionary consumption. On the other hand, additional Vinyl records capacities have low production of records to move them -- to more than double and to get close to 4 million units. Nevertheless, revenues for the division declined 22% to amount to EUR 512 million. Price and cost adjustment explained the 17 basis points improvement, the EBITDA margins. For this year, the group will continue the same policy and accelerate diversification activities. I hand over now to Lars for a short presentation on the accounts.

Thanks, Luis. I will now walk you through our financial schedules. As Luis mentioned earlier, the sales decreased with EUR 701 million to EUR 2.075 billion in 2023. The lower activity led to a decrease in adjusted EBITDA of EUR 19 million to EUR 142 million. The lower profitability in Connected Home and Supply Chain Solutions was partially offset by lower corporate costs. The margin increase in percentage of 105 basis points come from margin rate improvements in both businesses and the lower corporate costs. The depreciations and reserve movements are decreasing by EUR 21 million, mainly due to lower R&D depreciation from Connected Home. And as a consequence, EBITDA increased by EUR 2 million year-over-year despite the impact of the lower top line. PPA depreciation decreased by EUR 5 million to minus EUR 26 million as most of the values of Scientific Atlanta that we purchased back in 2015 was depreciated by November this year. Nonrecurring costs increased from minus EUR 35 million last year to minus EUR 167 million this year, driven by the goodwill impairment in Supply Chain Solutions that we did back in June. Higher costs linked to the acquisition of Home Networks was offset by lower restructuring costs. This brings EBIT to a negative EUR 136 million versus a negative EUR 11 million last year, explain the walk from EBIT to net results on a later slide. So then if you look at how we go from EBITDA to free cash flow, the EBITDA, as I earlier explained, EUR 142 million versus EUR 161 million last year. The CapEx decreased by EUR 3 million to EUR 77 million and nonrecurring items improved by EUR 5 million to minus EUR 45 million, mainly driven by lower restructuring payments. The working capital increased by EUR 8 million this year versus an improvement of EUR 57 million last year. In total, this gives a free cash flow before financials and tax of EUR 13 million versus EUR 88 million last year. After financials and tax, the loss was minus EUR 45 million, after paying EUR 14 million in taxes and EUR 44 million in interest. The net debt at IFRS rate stood at EUR 407 million at the end of the year versus EUR 263 million last year, mainly coming from the bridge loan of EUR 85 million, the accrued PIK and the lower cash balance. On Page 17, we have already explained the walk from EBITDA to EBIT. So I will move on to the next page. And on Page 18, we will explain how we get from EBIT to the net result. EBIT from continuing operations was, as mentioned, a negative EUR 136 million and the net interest expense decreased from minus EUR 167 million last year to minus EUR 70 million in 2023. You should remember that the interest expense of 2022 was impacted by the repayment of the debt prior to the completion of the TCS spinoff. Other financial increased by EUR 28 million to minus EUR 37 million, mainly linked to the impairment of the TCS assets and interest of factoring. All this gives a profit before tax of minus EUR 243 million compared to minus EUR 188 million last year. The tax decreased to EUR 15 million versus EUR 30 million last year, mainly coming from dividends and capital [ extraction ], reducing the taxable baseline in our distribution units. Equity accounted income was a loss of EUR 25 million compared to a loss of EUR 311 million in 2022. Both years are driven by the depreciation of the value in our shares in TCS. The net result from continuing operation landed at a negative EUR 283 million, which was EUR 246 million better than our results in 2022. The net result from discontinued activity was almost 0 this year compared to a gain of EUR 680 million last year, which took into account the gain in the valuation of TCS at the time of the spin-off. This leads to a net result of a negative EUR 285 million versus a profit of EUR 151 million last year. On Page 19, we will look at how -- we will look at the free cash flow from continuing operations this year. So from the starting point in 2022 of EUR 88 million, we need to deduct the EUR 19 million lower EBITDA, which is partially offset by the lower need for CapEx of EUR 3 million and the lower restructuring of EUR 4 million. The main impact on our free cash flow this year was due to the change in the variations of the working capital. As mentioned back on Page 16, this year's working capital increased by EUR 8 million, while in 2022, the working capital decreased by EUR 57 million. As we are looking at this year's variation in versus last year's variation, the result is a decrease of EUR 65 million. Pension and others improved by EUR 1 million and the free cash flow established is EUR 13 million before interest and tax, as mentioned earlier. The last page, we can look at our liquidity position. So we ended the year with EUR 133 million cash on hand, and we had an available credit line from Wells Fargo at EUR 76 million, which was fully undrawn at the end of the year. That leads to an available liquidity of EUR 209 million. The gross debt, including operating leases, amounted to EUR 555 million and subtracting the cash on hand, the net debt reached EUR 422 million in 2023. This concludes my part of the presentation, and we now move to the Q&A session.

Thank you, Lars. [Operator Instructions] Operator, do we have questions?

Mr. Martinez-Amago. At the moment, there are no question registered at this time.

Okay.

[Operator Instructions] We have a question from Antoine Lebourgeois with Bryan Garnier.

Antoine Lebourgeois with Bryan Garnier. First, I would like to ask about your visibility regarding Connected Home demand normalization and whether the inventory digestion is extending, could you provide insight into what you're observing maybe from your largest customers? And within your auction guidance, are you anticipating a rebound as soon as Q3 or more towards 2025. And for my second question, I'd like to focus on your new product launches, within the Connected Home division also. Maybe can you provide some commentary on the anticipated impact on the top line and the timing of those launches?

Okay. Thank you, Antoine. I'll cover the first question. First, so traditionally in this industry, it varies per customer. But if I can give you a kind of reference normally, customers have about 3 months of inventory in hands that normally, in a rolling basis, they keep these 3 months to serve their needs, okay? And this inventory is growing or decreasing depending of the cyclical demand that the year is not equal per month. You know that normally, first half is weaker second half is stronger. But let's assume that the 3 months is the norm, okay? There are people with less, people with more. But in a normal market situation, this is the basis. During the last year and this year, we have seen customers in average being even north of 9 months, some people even a year. And now what we see a number of people still in the 6 to 8-months of inventory in hands, this vary per customer type of products, et cetera. But if you take as a norm, we believe that this depletion of the inventory because this you need to [ mess ] with the final consumer demand or customer success in the marketplace. So all the indications, and we are in line with many of the people in the industry, we believe that in the second half, we need to start seeing some of these people going back to normality. And by the end of the year, if the situation normalizes, that will be assigned that in 2025 it may become a much more normal market, okay? So this is the view a bit more you were asking if we see a recovery in the second half. We are seeing a very weak quarter 1 that we were already planning for some time, and we see a gradual recovery over the year. Still the whole year will be lower than last year, but we see that quarter 2, 3 and 4, it will be a gradual recovery due to the natural volumes that normally is following this trend and also the some of the customer consuming and going back to normal level of inventories. Your second question in terms of the new products, new wins, this is a normal cycle of our business. We don't see any change on that. Customers are incorporating new technologies. I mentioned during my presentation that DOCSIS 4, for example, mostly in the United States is the key new technology that is happening in the market. We start shipping to 1 of our main customers at the end of last year from October, November, we are the first 1 in the market with this product, and this product will start growing throughout the year and becoming really material next year. We see the appearance of Wi-Fi 7 and in the market as well. And we have leading wins in this technology with key Tier 1 operators that will hit the road this year. And we are really -- and we can commit more in the April session. We see growth in the fiber, which is a market that will grow over the next years. We have a significant wins there, that is contributing also on the future. So if I would say, the cautious warning is in the level of demand. But in terms of commercial wins and commercial presence, okay, we are -- with the combination of the 2 companies, we are leading this industry, leading this market, and we keep winning substantial deals to keep our market footprint. As soon as the market recovers, we will enjoy the recovery with the market that we'll see. Okay?

Thank you Luis. Next in line.

The next question is from David Cerdan with Kepler.

I have a question regarding your cash position. So including the [ underwood committed ] line, you have roughly EUR 200 million. Do you think that this will be sufficient to cover the cash consumption in H1 as well as the restructuring costs related to CommScope acquisition.

Yes, of course. I mean, we are an audited company, and we have auditors checking our cash forecast for the next 12 months and there will be no mention on our going concern in this closing of the yearly results. So yes, we have sufficient cash to manage us through the next 12 months.

Okay thank you.

And -- I mean this includes paying back, we had the bridge loan of EUR 85 million that matures in H1 this year. We paid back already half a million -- half of the bridge loan is paid back. The other portion is now delayed until the end of June, but we expect the synergies we are subtracting from the Home Networks acquisition and improvement in working capital to take care of the rest of our cash flow needs.

And regarding your expensive or cost of debt, when do you think that you will be in a position to renegotiate the financing commission with bankers?

We are monetary the market to see when it will be most beneficial for us to renegotiate the debt. I mean today, the debt matures in September 26 for the first lien and in March 27 for the second lien. So okay, we are in a hurry to do so from a repayment perspective. And as the markets have been quite strained lately, and we haven't been in a great financial position, we are expecting that when we -- as Luis has just been guiding, we can have a cash flow that is higher than 0. It should be much better to renegotiate this debt as well. But as I'm saying, we are in no hurry. We can cover interest expense, and we will do this when it makes the most sense for the company as a whole.

Do we have more questions?

No. We don't have any more questions registered at this time. [Operator Instructions]. I confirm there are no more questions at this time.

No. In this case, it's time to close the call. Thank you for being on the call this evening. And if you have further questions, feel free to call the IR department whenever you want. Have a good evening.

Thank you very much.

Ladies and gentlemen, this concludes the conference call and webcast. Thank you all for your participation. You may now disconnect. Thank you.