Wendel (MF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Wendel Q1 trading update conference call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, André François-Poncet. Please go ahead, sir.

Thank you very much. Good afternoon, everyone. Good morning. As the case may be, if you're in North America. I'm on the line with David Darmon, who is Wendel's Deputy CEO, and who is currently based in New York; Jérôme Michiels, Wendel's CFO; as well as Olivier Allot and Lucile Roch, our IR team are also on the line in Paris. We're all operating from our homes, which comes with the occasional tech hazard or other hazards. So apologies in the unlikely event, something goes wrong, although it's the second time we've used this format. So we believe we're now used to it and so you. We hope you do all well and fine. We're hoping your family, your community, your firms are being preserved as best as possible. So our best wishes for that. As the operator just said, the call will be recorded. It will be available on the website for a year. You can download the presentation. You can follow it on the website in real time. We will systematically try to refer to the page we're speaking from, and we will answer questions at the aided section on the webcast platform. We've been told that some of you have had trouble with the teleconference numbers in the past and maybe also today, so apologies for that. Don't hesitate to use the platform, the webcast platform, if you feel access is difficult. So now let's review the main features of the quarterly sales announcement. And then, of course, we'll do our best to update you on COVID-related developments. Their current impact on Wendel and on our company. So I'm speaking from Slide 2, which is called Q1 2020 trading update key highlights. Our net asset value as of March 30, 2020, was EUR 118.2 per share, down 28.9% since December 31. At the time, as a reminder, it was EUR 166.3 per share, impacted by stock market declines and by updates in company-specific metrics, which we use to value our unlisted assets. This decline is in line with the range estimate, which we gave to the market to view on March 18, so it should not come as a surprise. Jérôme Michiels, our CFO, will provide more detail about the NAV later during this presentation. Our consolidated sales were down 2.5% overall in Q1 2020, of which 2.9% organically. While Bureau Veritas was the first of our portfolio companies to evidence the negative impact of lockdown mainly due to its very significant presence in China, most other companies followed suit with the strong effect generally starting mid- to late March. Companies with so-called essential activities such as Constantia Flexibles, which supplies the packaged food and pharmaceuticals industries and IHS, which owns and operates telecommunication towers, have nevertheless been much less impacted to date, as you would expect. Let me now turn the mic to David, who will delve deeper into each company's activity, and who will say a word about yesterday's sale of our remaining stake in Allied at a precrisis value, which we're obviously very happy with. So David, the floor is yours.

Thank you, André, and good afternoon, everyone. Good morning for people based in North America. David Darmon speaking. And now I'm on Slide 3 to talk about our company's activity. And first, as André was saying, a few words on this morning's news. So this morning, we announced that Wendel disposed the entire remaining stake in Allied Universal, and this will generate additional proceeds of around $196 million, subject to price adjustments. And the total net proceeds for this pretty successful investment in the U.S. were 2.5x the equity invested, thus generating an investment IRR of around 30% per annum in dollar. This achievement further strengthens our financial structure, which was already pretty solid. As now, pro forma disposal and the cash received from the sale, our total equity amounts to EUR 2.1 billion of which a EUR 750 million undrawn revolver. I'm turning to Slide 4, who's title is Q1 2020 performance of Group's companies. And I'm going to spend some decent amount of time on this slide, which is crowded, but very important. So let's talk about now our company Q1. Here are the highlights. Bureau Veritas delivered resilient revenues in Q1 despite the first effect of COVID-19 shock. The company published its Q1 last week on April 23. I invite you to refer to the website, but I can nevertheless remind you that its revenues totaled EUR 1.14 billion in Q1 2020, negative 3% decline year-on-year, of which minus 1.9% on constant currency. In the first quarter, the COVID-19 crisis mostly impacted Chinese operations. Elsewhere, the pandemic will have a very significant impact from Q2 onwards. Now about IHS. IHS Q1 2020 sales totaled, [ $305.6 million ], up 8% from Q1 2019. The organic growth was up 10.4%. With regard to external growth, in February 2020, IHS completed the acquisitions of around 1,600 towers from Zain in Kuwait and around 2,300 towers from Cell Site Solutions in Brazil, Peru and Colombia, bringing the total number of towers close to 28,000. Please note that considering the aforementioned acquisition closed in February 2020, pro forma net debt as of December 2019 before IFRS 16 would amount to EUR 1.742 million. IHS was only marginally affected in terms of its business by the COVID-19 pandemic in the first 3 months of 2020. Nevertheless, the macroeconomic environment, particularly in Nigeria, is impacted by the drop in oil prices. As a result, the naira has devalued against the U.S. dollar by around 7% in the first quarter of the year. IHS is monitoring the situation very closely, including implementing its business continuity plans regarding remote working and production of the supply chain. Turning to Constantia Flexibles. Q1 2020 sales totaled $383.9 million, up 0.7%. After a slow start of activity in January, the activity was boosted in March by a very strong demand, both in consumer and the pharma divisions due to the essential nature of the respective products within the context of COVID-19 outbreak. To date, customer demand in the first quarter has been robust and so far it has not been negatively impacted by the various lockdowns implemented in most geographies. While today, the majority of its plants continue to operate at capacity, Constantia faces some operational challenges in some countries related to access to labor, materials and logistics services. Regarding Stahl. Stahl sales totaled EUR 201 million in Q1 2020, representing a decrease of minus 2.4% versus Q1 2019. After a tough 2019 due to the headwinds in the automotive end market started in 2020 with a positive volume trend. Nevertheless, the rapid spread of COVID-19 has derailed this early recovery. The impact on sales in the first quarter was limited and mainly related to China, where production has been gradually restarting since mid-February. However, the situation has deteriorated since as containment measures are impacting the Group's customers in many countries. Cromology sales totaled EUR 135.5 million in Q1 2020, down minus 16% compared with Q1 2019, impacted by the COVID-19-related Lockdown in Europe. The first 2 months of the year were both 2019 activity and budget. But March showed a very strong decline in revenue around minus 41% versus last year. This is due to the lockdown measures, which started to have an impact on activity around the middle of the month. The company is currently operating with latest monthly level of sales dollar approximately minus 70%, 7-0, versus last year as muted customer demand, stringent health and safety measures and COVID-19 regulations have led it to shut down a significant part of its operations across geographies. Regarding CPI, Crisis Prevention Institute, the company recorded first quarter 2020 revenue of $16.8 million, down minus 10.1% in total from Q1 2019. Out of this delta, minus 4.9% was related to a purchased accounting adjustment to deferred revenues, minus 0.5% was due to FX movements and minus 4.7% organic change was due to the recent lockdown-related slowdown. Overall, normalized sales in Q1 had been trending up high single digit versus prior period until the beginning of the lockdown. In response to the ongoing need for certification, CPI has recently introduced a virtual program for instructor renewals, which offers interactive digital training modules. As of early April 2020, 100% of employees are able to work remotely. CPI anticipates a significant slowdown in revenues until social distancing restrictions lessen. Last, regarding Tsebo. Tsebo's Q1 2020 sales totaled $114.5 million for the quarter, down minus 9.3% from Q1 2019, notably due to the continued deterioration of the economic situation in its home market with organic growth of minus 4.5%. Tsebo and its shareholders have initiated discussions with the company's lenders to find a capital structure solution that will enable the business to continue trading adequately in the face of these unprecedented challenges. Such restructuring efforts might lead Wendel to winning increase control of Tsebo. In accordance with IFRS 5, the contribution of Tsebo to Wendel has been reclassified as net income from discontinued operations and operations held for sale. Thanks for your time. I'll be at your disposal at the end of the call for Q&A, and I now leave the floor to Jérôme Michiels, our group CFO.

Thank you, David. Good morning, ladies and gentlemen, and thank you for attending this call. I'm now on Slide 5, where you can see the net asset value as of March 31, 2020, which has been prepared by Wendel to the best of its knowledge and on the basis of market data available at this date. The global impact of the COVID-19 outbreak on comparable companies is, we fear, still far from being accurately measured by many analysts and companies as well, of course. Consequently, all forward data items retain for a net asset value calculation as of March 31, 2020, that means consensus estimates for comparables used to derive multiples and even our own portfolio companies we forecast, for example, could change materially in the weeks and months ahead depending on the health environment and the resulting business environment. You can see the detail of net asset value on this slide with Bureau Veritas being included at EUR 2.93 billion, based on our method, which uses the 20-day average share price, which was then at EUR 18.2. The total value of our unlisted assets was at roughly EUR 2.8 billion. Please note that within this total, our residual stake in Allied Universal was still included and valued as per the transaction closed late 2019, i.e., roughly the same figure and not yet treated as cash. CPI is also valued at the initial acquisition price in accordance with our methodology. Cash on hand was EUR 1.125 billion, while net debt was at EUR 499 million, meaning our net asset value was EUR 5.28 billion as of March 31 or EUR 118.2 per share. Turning now to Slide 6 to give you an overview on the main drivers of the change in our net asset value since December 31, 2019. You can see that the decrease relates to stock market declines and updates in metrics used for the valuation of our unlisted assets. The decrease in the share price of Bureau Veritas was of 22.4% from the previous figure in December. The value of our unlisted assets went down by 30% year-to-date on account of -- for approximately 2/3 the full enlisted peers multiples used for valuation as well as adjustments in valuation samples. Regarding IHS Towers, the peer sample we use is now 100% based on emerging markets comparable companies in order to account for current item concerns of stock market investors for emerging market risks. For approximately 1/3 of the decrease, it relates to adjustments to 2020 forecast of our portfolio companies to account for the potential impacts of the lockdown. Moving to Slide 7. As you can see, we have a very strong financial structure. We have no maturity before 2023 and have a very high level of liquidity with cash on hand at EUR 1.13 billion, that was before the sale of our remaining stake in Allied Universal and EUR 750 million of available credit facility fully undrawn. Our rating levels are on par at S&P and Moody's at BBB and Baa2 with stable outlook. In terms of LTV, we were at 8.6% at the end of March. And have calculated that when adjusting for the sale of our remaining stake in Allied Universal announced today, our LTV would stand at around 6% -- 5.8%, a level that is well below what is considered by rating agencies as the limit for strong investment-grade issuers. The amount of net debt in absolute terms is EUR 490 million and adjusted for the proceeds of sales -- of the sale of Allied Universal remaining stake, it is down to circa EUR 380 million, pro forma. I now hand it over to André, and will be available to take your questions at the end.

R Thank you very much, Jérôme. So I'm now on Slide 8, which is called what's next. That's the easy one, of course, and I would like to make a few additional comments before we turn to Q&A. There remain, of course, considerable uncertainties, such as the future timing, sequence, processes and effects of de consignments. The state of economies, the mindset of consumers as we emerge from the crisis. The picture I like to use with the team and the Board is Tsunami, where the water eventually evaporates, and then you have the opportunity to see where the damage lies. And it's hard before the water has evaporated to truly understand in the economic system where the damage lies. At all our companies, including Wendel, intense efforts are being deployed to mitigate such negative impacts on employees, health and safety, #1 priority on communities. And of course, by management teams on their businesses, their liquidity, their cash flow. We remain confident, nevertheless, in our ability to weather these extraordinary times due to our experienced teams at Wendel, our strong balance sheet or modest leverage, ample liquidity, extended debt maturities and solid investment-grade ratings, as Jérôme is just reminding us, count on us to remain very disciplined. On a more tongue-in-cheek note, I would like to add that I personally had COVID. I was tested and diagnosed positive. It's now several weeks behind. And as we resume work, I have every trust and confidence that I'm immune. And I may be the only one believing that, but still do, so do -- I do believe that. And we're ready to pick up the situation where it is as soon as everybody is back in the offices and companies can operate their factories, stores can open, and we see where we are. So that's really it. And I now open the floor to Q&A, either on the phone or through the web. Thank you very much.

[Operator Instructions] We have our first question coming from the line of Liz Miliatis from Bank of America.

The first one would be on the dividend. You've still not decided whether to pay it or not pay it. Just wondering what are the catalysts there? And would it be coming back out of lockdown? Or what's the catalyst to -- in making that decision? And then secondly, on Constantia, you mentioned that January sales were quite weak due to U.S., India and a couple of other countries, what exactly was driving that and are those issues resolved? And then thirdly, if I can, on Cromology, obviously, that's being massively impacted by stores being shut. I think you said in the release, 96% of sales are driven by stores. Are there any plans to reopen stores partially given, I think, the measures are being eased in some of the European countries that Cromology operates in, yes, what are the plans there?

Okay. I'll answer the first question. I'll start to answer the second one, but at the end maybe David will add color on the second one. And David, perhaps you can answer the third one as well. So on the dividend catalyst, obviously, it's -- a number of factors will go into the thinking, and we want the benefit of time. In no particular order, there is obviously always a desire from us to pay the highest dividend we can, and we have made an announcement on the dividend. There is additional considerations, of course, the -- our financial situation, which is good, understanding the best -- the most we can about the situation of the world in the confinement, how long they confinement last, what's the damage. We'd like to see how the month of April has been in the various portfolio companies. We want to also understand the political side of things. What is the mood there. And of course, in France, there have been some statements by the large companies, body, asset Midas. There have been some statements by the French Minister. So we have to put that in the equation and think about it. So we want to see what all the other folks are doing. We have the luxury of time because our shareholders' meeting is later. We want to run some stress tests into 2021, which we're doing, 2022, get an overall picture. And then we will sit down with the Board, and that's when we'll come to decision. So whole bunch of factors to make a responsible long-term decision here. So David? I just want to say, the sales last year was slightly improved in December and January was a bit of a reversal of that. There was a push to close 2020 on a good note, so some of it is just between 2020 and 2019. But David, I'll just let you maybe comment further.

Well, I actually did not hear the second question. So I'm going to respond on Cromology. The line went blank with the second question.

Oh, it was on Constantia. So I would say I would have added perhaps that beyond the cutoff effect 2020 versus 2019, which meant that December 2019 was probably a bit improved. And January 2020, a bit penalized, the company was still in efforts to sort of get -- upper its game. And so it was not -- its sales book wasn't so positive, let's say, it was okay, it wasn't great. But business did pick up a lot because of the circumstances in the following months.

So on Cromology, you're right, the company did suffer a major impact from the COVID-19 as we describing our previous communication, the tide has started in Italy where they had to shut down all their stores pretty early in the crisis. And then in March, it was the French stores and then the French warehouses and the whole supply chain. So the company had to adapt its operation very, very quickly. And it is starting to resume operation and slowly reopening few stores, but it's changing this model to a dry model, where you're going to order your painting -- make you painting orders by phone or online. And the order will be ready for you at the back of the store, usually in the parking lot. And without any contact with our employees, the customers can actually pick up his order. So it's slightly resuming operations in a very adaptive way. And we are financing increase in revenues from previous weeks, but we are very far from precrisis numbers. I mentioned during my presentation the levels of 70% lower than last year, month-over-month.

Our next question comes from the line of Pierre Bosset.

I'm glad that you are all now in good healths, so well done. I have 3 questions, if I may. The first one on IHS. Given the fact that [ Nigeria ] is less and less important in the IHS, can you give us some granularity on the impact of the devaluation of the naira on IHS in total? And secondly, can we have a bit of granularity on how the diesel price, which is supposed to go down will impact positively or not, the profitability of IHS? That's my first question. My second question is on Constantia. I wonder if there is any packaging product, which is more resilient or more suited to fight against the virus. And if you expect any -- if you have product and if there will be a strong demand on that? And lastly, just a point of detail on Page 6 of the net asset value is EUR 1.8 decline of orders. Is it the cash burn and decrease of treasury stock? And if yes, what is the cash burn in the first quarter?

Okay. So IHS, I think, David, you're on the board, maybe it's best that you address the question on Constantia, either you do it or I do it. And on the third question, Jérôme. So David, do you want to start?

Yes. So you're right, the naira devaluated recently. And as you know, in the country, currently, there are 2 FX rates actually that you can actually trade and those rates have converted slightly. So the overall devaluation is not a good news for IHS, but the fact that those 2 rates are getting closer to each other is actually a good thing. So it's -- I would say, overall, it's a slight negative, but as you say, part of the reasons of this devaluation is the oil price going down because that means that the Nigerian government has less resources. And this, in fact, is a good news for IHS because diesel is the #1 cost item in its P&L. And so the overall impact is net positive.

On Constantia, the -- I would add, in general, I don't think that devaluation of the naira is beneficial to us because we do have debt in dollars. But on the operations and reported accounts of the company, it's a bit too early to see the balancing of these various factors, not all negative because diesel is actually very big cost item. On Constantia, I'm not able to tell you that some products are more resilient than others versus the virus. I don't believe that we have any information to that effect. I think what is relevant is that plastics and limited products have proven to be very useful, very effective in -- as the protection measure, people have been buying much less fresh and much more packaged goods. So the pressure that exists long-term on these materials is still there, and the company is still addressing them. But perhaps people will not view plastics as such a negative as they did in months before the crisis. And regarding others, Jérôme?

Yes, André Poncet. So on the others, you're right in saying that the decrease related to the value of treasury shares being lower between the 2 dates. There are other small items in there. And there is also some caution, so to say, that we've taken into account with regards to the situation at Tsebo. So we will see whether this needs to be applied, but we have taken some caution there. There is -- it's...

There are no more questions on the line. Please continue.

So we have a number of questions that came in through the net. I can read them. We have a question from David Cerdan. Do you expect required cash injection in some assets? If so, which ones and what kind of amount? And other question is about CPI, does the crisis change CPI fundamentals? So on the first one, do we expect cash injection in some assets? At this point, we don't know yet. We might have a cash injection depending on the shape of the crisis. And depending on dialogues here and there and with banks, but generally speaking, we don't believe that it is significant, but it's too early to tell. So we want to see how it plays out. I won't elaborate on which one. And regarding CPI, David, you want to discuss in what aspects the crisis may or may not change CPI fundamentals?

I will guess that it's going to have a 2 full impact. First, for the on-site training session, the social dispensing measures are going to add some changes on the format and the protocols. Being the number of participants, the way the trainings are going to be organized, are we going to use some dummies rather than working with some real bodies for some physical training. So there will be some changes in the physical training sessions. But probably more importantly, I would say the virtual sessions are going to change as well and going to be -- they're going to accelerate the development of mutual programs. Today, they have an online program for renewals, which is pretty successful and the core of the current revenues. And they are about to launch, I think, 6 weeks from now, a new online program for a new certification. So people who want to try the first -- for the first time, the CPI training will be able to do that online. So it's a sort of acceleration of the migration of the content to online, which we had in plans, but we had to accelerate that.

Yes. One, it's a big unknown, what will be the behavior of people in the months after the consignments. CPI is usually not big groups. It's small groups, but it's not like people right now relish the prospect of being together in a room, trying to work together on practicing physical contact. So that will evolve. We think that it is effectively a population of clients who are in contact and will be in contact with patients and in environments where there are diseases and bacteria viruses, et cetera. So we're confident about the ability of the company to take advantage of the circumstances to continue to prosper, but it remains to be seen in practice in months ahead. So Patrick Jousseaume, who works at Societe Generale. What are the main COVID-19 challenges with CPI? I think we've just touched upon that. What is the organic growth trend in April? It's not growth. It's down, obviously. It operates at a fraction of the revenues that typical April would be expecting. We're not commenting further, but it is obviously at diminished level. Alexandre of CIC. 3 questions on CPI. You said -- could you -- could we elaborate on the mention of an allocation of acquisition price to deferred revenues, to explain the minus 4.9%. So maybe, Jérôme, you can address that one. Second point was still no syndication insight to other investors of this investment. While we didn't try particularly hard to syndicate, I'll answer that one. And as you can appreciate, this is not a great time to syndicate anyway. So no, there is no syndication in sight. And then the third point, CPI is still accounted for as an acquisition cost of $569 million, can we have a rough idea of valuation adjustment, if any, if you were to mark-to-market that asset. So I'll let Jérôme address that one. So Jérôme, it's the accounting point in the market.

Yes. Sure, Patrick. So the -- actually, the minus 4.9% related to the accounting of deferred revenue, which is not accounted for in the same manner when you apply IFRS. So we transitioned the company from U.S. GAAP to IFRS. And the stocks of this translation, we had to change the way we account deferred revenue, which has an impact of 4.9% during Q1.

And on the mark-to-market, we have not done it yet, but I can say that it will be likely substantial in terms of mark-to-market, which does not mean that we believe the asset is lost or anything like that. But just mechanically, it will be -- with our method, it will be very substantial. I think that concludes the questions that I have from the web. So unless...

We have a -- so there is a question one from, David Cerdan, [ Kepler ]. Has the Bureau Veritas canceled its dividend? And as you are the controlling company, why don't you do the same for Wendel?

Is that a suggestion, a recommendation or question? I'm assuming it's a question. Well, quite simply put, we did not as Wendel takes its state aid. The BV cancellation has a number of reasons. The main one, like any thought process, about the -- what's going on, level of activity, et cetera, but a very -- amongst the significant drivers, obviously, was the fact that DVI applied for and secured aid from the French Government, we do not request any such aid. And then I explained that there were lots of other considerations going into our thinking.

We also have a question from Geoffroy Michalet. On the Allied Universal sales, what can be expected in terms of post-closing adjustments regarding COVID-19 impact?

I'll let David answer of that. My belief is it will be small potatoes. David?

Yes, yes. The accounts -- the company was not impacted presigning, and those adjustments are to reflect more the nature of -- and the amount of working capital at closing rather than anything else. So I would say COVID-19 is not going to have a big impact here.

It's mechanical. It's not formulaic. In other words, it has to do with adjustments David talked about, that kind of thing versus, oh, you're earning less, so I'm multiplying you and taking a big cut. That's not what's involved here.

From Geoffroy Michalet, again. Your efforts for more transparency is highly appreciated when it comes to giving more color on multiples and financial aggregate, so thank you for that. My question is, will you in the future, continue to provide us with this kind of details?

Well, don't know. We need to think about it. But thanks to your comments, it's duly registered.

A question from Ben Glaze. Can you share where Tsebo is marked at this point given you may have to hand over the piece? Also, how much impacted valuation methodology change at IHS to move to emerging market only comps, change the implied blended average EV to EBITDA and multiple. Did it go from mid-teens to high single digits?

I'll take the last question. No, it did not go from mid-teens to high single digit, but it did come down some, and we did not give the detail in the past. We're not giving it today. But as we speak, there is 0 weighting on the comparables outside the emerging markets, which is a big difference. And maybe it's -- I mean I can't comment whether or not it's -- it's partly should make his own opinion about that. Regarding the other question, what was it again, just to say...

How much impact did the valuation methodology change at IHS to move to emerging markets?

No, that I just answered. The other one.

Can you share where Tsebo is marked at this point given you may have to end...

Jérôme, do you want to answer that?

Yes. So Tsebo is marked at 0. As I said, we've taken a conservative approach with regards to the current situation. And we've included a further caution as part of as other assets and liabilities. We have a small amount thereof less than EUR 1 per share when you look at it from the net asset value perspective. And I would -- and again, I reiterate, it's a caution at this stage, the situation is fluid. And we think that we've put the valuation on the conservative side, remains to be seen what the final outcome will be.

And we have 3 questions from Alexandre Gérard. Can you please remind us the frequency for the update of your unlisted assets valuation? What part of the minus EUR 27.3 decrease in line due to unlisted assets will relate to IHS? And the last one, given that you apparently use multiple to value assets, how have you cost with the IFRS 16 transition translating into higher EBITDA and higher net financial debt?

Mr. Jérôme, do you want to handle all of those?

Yes, yes. Alexandre, so we are doing 4 times a year, a proper valuation of each private assets. Obviously, we do it for Bureau Veritas. We just use the share price, but we calculate multiples and run a full valuation of each private asset at each quarter end. We won't disclose any detailed figure on the impact of the weighting of the sample on IHS or any other company. As you know, we don't disclose any individual valuation within the unlisted assets, save for very specific situations like the one we just discussed with Tsebo. And lastly, we haven't taken into account IFRS 16 yet as we haven't been able to ascertain that consensus -- are consistent within all the companies we're using, some companies have reported or provide guidances, including IFRS 16, others have not. So we've retreated everything so as to exclude IFRS 16 at this stage.

No more questions from the web.

Okay. So thank you very much for your attention. Happy to remain in active dialogue. And we'll be minding your assets or the assets of the companies you cover with great care and discipline. Thank you.

Thanks, everyone.

This concludes the conference for today. Thank you for participating. You may all disconnect.