Wendel (MF) Earnings Call Transcript & Summary

Good morning, and good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Wendel's 2021 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, Mr. Jerome Michiels, Wendel's CFO and Executive Vice President. Please go ahead, sir.

Ladies and gentlemen, Jerome Michiels. Welcome to this Q1 Trading Update. I'm the Executive Vice President and Group CFO of Wendel, and I'm here with the Investor Relations team to present this first quarter trading update. I would be happy to go through a short presentation of the main items of this quarter for the next 15 minutes or so to be followed by a Q&A session. Should you like to ask questions, you can submit them directly through the web platform or you can use the telephone number you've been provided with. As a reminder, this presentation is recorded and will be available for 1 year on our website. So let's dive into Q1 2021 key highlights on Slide 2. Our net asset value as of end of March 2021 stands at EUR 167.4 per share, up 5.3% since December 2020. The compared to the low point of March 2020, our NAV is up by 41.7%. Q1 has seen a strong -- has been strong for our portfolio companies with a consolidated organic growth of 6.5% and plus 2% in total. This recovery has largely been driven by companies that had been hardest hit by COVID at the end of Q1 2020. We will come to the details later, but let me give you just a few highlights of this quarter. Cromology grew by more than 20% organically, while Bureau Veritas was at plus 6.6% organically and Stahl at plus 9.6%. The financial structure of Wendel and of our portfolio companies remains strong, even more than before the COVID-19 crisis outbreak. Lastly, we are happy to have announced last week our partnership with the Deconinck family to acquire the shares of Tarkett and to support the growth of this company. Now moving to Slide 3, which displays the key revenue trends of our consolidated companies for Q1. Please note that IHS results for this quarter will be approved by its Board next week and that IHS Towers will thus report its Q1 2021 consolidated sales in May. I'll be brief on Bureau Veritas since they have published and extensively commented their revenues last week. But in a nutshell, 2021 is of a good start, with revenues growing by 6.6% organically and by 1.3% on a reported basis. 58% of Bureau Veritas portfolio actually grew double-digit organically, driven by an excellent performance in certification, consumer products and buildings and infrastructure. Bureau Veritas has resumed its targeted bolt-on acquisition strategy with the addition of Secura, specializing in cybersecurity services and Bradley Construction Management, a U.S.-based tick player specialized in renewable energy to its portfolio in order to accelerate growth potential. Currency fluctuations have had a negative impact of roughly 5% over the quarter, mainly due to the depreciation of the U.S. dollar as well as some emerging countries' currencies against the euro. At Constantia Flexible, sales were nearly flat organically, reflecting a mixed performance in consumer and pharma. In the consumer market, the subdued performance of the confectionery market in Europe has not been compensated by positive impacts in pet food and beverages, while pharma sales were affected by lockdown induced mild flu and the coat season. In emerging countries, India is still experiencing an over supply situation. Q1 2021 sales were also adversely impacted minus 3.7% by unfavorable foreign exchange translation. Of note, Constantia Flexible continued to deliver a strong margin over Q1. The raw material price environment is, however, much less favorable this year and some significant prices increases have been -- have taken place in nearly all categories that will start to impact Constantia from Q2 onwards. Let's cover Stahl now. Sales are up 4.6% this quarter, with organic growth at 9.6%. Stahl continued its gradual recovery, which started in the second half of 2020. This recovery has accelerated despite some challenges in the supply chain, and Stahl has managed to increase its order book to a strong level, translating into volume growth, partially driven by restocking across several market segments. Growth has been particularly strong in East Asia Pacific and notably in China. In addition, Stahl's automotive business representing about 1/3 of total sales, continued its rebound. The recovery in other end markets is more mixed at this point, with a very strong momentum in the upper 3 segments, but a more gradual recovery in footwear and luxury goods markets. Our view is that the restocking effect could ease later in 2021, although timing is unclear, and that raw material price hikes are also likely to affect Stahl later in the year. Regarding Cromology, first quarter sales were up by 22.6% compared with Q1 2020, and that's purely organic, confirming the strong rebound in activity observed since the second half of 2020. Since the end of the first lockdown, the recovery has been quicker and larger than expected, with a significant rebound in paint sales, driven by strong demand from end customers. Cromology is currently focusing its efforts on planning and managing operations in the context of the resumption of the pandemic in Europe as well as on pursuing the execution of transformation plans and priority design sources of value creation. Cromology also monitors closely its supply chain since the strong rebound of activity has resulted in tight material supplies and raw materials price increases. Given its solid financial structure, we are working closely with the company to identify potential bolt-on acquisitions. Lastly, CPI is back to organic growth with the level of revenues that has exceeded pre-COVID levels for the month of March. On a quarterly basis, CPI posted a total growth of plus 10% year-on-year, of which 5.4% relates to a purchase accounting adjustment to deferred revenues, whilst organic growth contributed for plus 2.7%. For the first time since the 2020 lockdowns, quarterly sales nearly reached 2019 levels with Q1 2021 sales falling just 1% short of the 2019 level. In Q1, CPI observed an increasing training activity for both new and existing certified instructors, CIs as well as for learners. CPI pursued its shift toward digital solutions at the same time. While there are remaining required in person components to the curriculum, e-learning delivery has represented 1/3 of total learner material volumes. Moving into this year, CPI's activity should benefit from the positive near-term recovery trend in the market amidst accelerating vaccinations and warming weather in the U.S. These 2 trends should lessen restrictions around travel and gathering and ultimately drive a more business as usual work environment for customers, notably in hospitals and schools. Now let's move to the net asset value on Slide 4. As of March 31, 2021, the net asset value stands at EUR 167.4 per share or roughly EUR 7.5 billion. The value of our stake in Bureau Veritas is of EUR 3.8 billion, and the value of our unlisted investments is slightly in excess of EUR 4.1 billion, which is above the level of 2019 year-end pre-COVID. So as you can see, our portfolio has been very resilient, and our financial situation is very healthy with a EUR 546 million net debt position at the end of March, translating into a 6.8% loan-to-value ratio. On Slide 5, the increase in our net asset value over the past 3 months, which is of plus 5.3%. Equally, results from the appreciation of Bureau Veritas' share price, which increased from $22.4 to EUR 23.7 per share and from the increase in the peer multiples used for the valuation of our private companies. We also modestly benefited from some positive foreign exchange translation effect on some of our assets reporting in U.S. dollars. Slide 6 shows our liquidity and our bond maturities. And as you can see, our balance sheet is very strong and healthy. Our LTV ratio stands at 6.8%, with $1.8 billion of total liquidity, including almost EUR 1.1 billion of cash, supplemented by our EUR 750 million committed credit facility, which is fully undrawn. Our level of firepower is commensurate with our roadmap objectives. Our net debt remains at a low level and has a long-term profile, the first maturity arising in 2023. This strong financial structure, the low-cost of our debt and our solid BBB credit ratings provide us with comfort for the future. It is also worth mentioning that we have signed an amendment to our undrawn EUR 750 million credit facility maturing in October 2024 in order to integrate environmental, social and governance criteria. Measurable aspects of the nonfinancial performance of Wendel and companies in its portfolio will, from now on, be taken into account in the calculation of the costs of this syndicated credit. KPIs retained are aligned with certain quantitative ESG targets the group has set in its ESG 2023 road map. Moving to Slide 7. We are very happy about our partnership with the Deconinck family to acquire the shares of Tarkett, which has been announced last Friday. Depending on the success of the upcoming standard offer, Wendel will hold up to roughly 30% of Tarkett participation alongside the Deconinck family. This should translate into a total amount of equity invested by Wendel of up to circa EUR 280 million, depending, of course, on the final number of shares brought to the offer. The Deconinck family will maintain a controlling stake in the company. This transaction will follow the tentative calendar, you can see at the bottom of this slide, and you will find more information on Tarkett's website. As this operation will go through the customary regulatory milestones, you will understand that I will not elaborate that much on it. The only additional comment I would make is that we are extremely proud to have been selected to join forces with the founding family in this transaction. Tarkett is a prime example of French entrepreneurship, and we are pleased to support the company over the long term, alongside members of the Deconinck family. This transaction illustrates our team's ability to identify investment opportunities, which fit our long-term investor profile. We are eager to support Tarkett in its future growth by bringing to the table all Wendel skills and expertise, both in Europe and North America. So to wrap up, I will say that this quarter has shown an encouraging rebound across our portfolio with sales level getting closer to and sometimes above those of 2019 on an organic basis. This shows that the efforts deployed by our company's management and Wendel teams are starting to bear fruit. Obviously, there are some new challenges ahead, like raw materials availability and prices, but our companies have demonstrated in the recent past, their ability to adapt to fast-changing and sometimes very adverse environment. Our net asset value is up, benefiting from increased stock valuations of comparable companies and of Bureau Veritas, but the discount remains at a high level with regards to the long-term average. We opportunistically took advantage of the situation to buy back some valid shares worth more than EUR 12 million through to mid-April and are continuing to do so. Lastly, we have increased our focus on new investments as part of the new strategic road map, which was endorsed by Wendel's Supervisory board. The first transaction has been announced last week, our investments are in Tarkett, alongside the founding family. Our teams, our financial structure, our ample liquidity should enable us to invest in interesting new assets and generate value creation. Thank you very much for your time. We now switch to Q&A, and we will start with questions by phone and then take the written questions coming from the web.

[Operator Instructions] Your first question today comes from the line of Patrick Jousseaume from Societe Generale.

Can you hear me?

Yes, Patrick.

Just one quick question on CPI. So you have shared with us the, let's say, recovery of the revenue of the company. You have depreciated the value of your investments in NAV. And if I remember well, you have removed something like EUR 250 million, EUR 300 million due to the value of this investment. What would be needed to come back to the acquisition price, please?

Thank you, Patrick. It's a bit too early to tell. We are actually using for net asset value at this point in time, the 2020 actual number and the 2021 budget number, so to say. It's a bit too early to tell whether the 2021 forecast needs to be revised upwards. Q1 has been very strong, but this was somehow expected. So we will wait for Q2. I think later this year to see whether we change -- whether management changes their view for 2021. I'm not able to give you a quantification of how much it would take to come back to the initial value. So I'm sorry, I can't answer that one more precisely. But as I said, for the month of March, revenues have been very close and slightly above 2019 levels. So that's just 1 month in 2021. There are already 2 months which are below. So if we get the next 9 months ahead of '19, then I guess we might come back to where we were when we invested, but these are a lot of ifs and buts. So bear with us for the next net asset value and the ones after to see how this evolves.

Your next question comes from the line of [ Jeroen van Aken ] from [indiscernible].

Two questions from my side, please. For my first question, could you give us an update on the leverage situation at CPI? Could you also comment a bit on the waiver, which was set to expire in the first quarter? And if this implies any risk for the governance for CPI going forward, considering current sales and EBITDA levels? And for my second question, which is on Constantia Flexibles. As in the annual report, you mentioned in the outlook that they were working on a new strategy for 2025. Any update on that would be nice? And maybe an idea on when to expect an announcement of that.

Thank you, Jeroen, for your questions. So on the first one, the leverage situation at CPI is improving. The level of activity has helped, as I said, there has been a good rebound. But with margins increasing, meaning that there should be no problem with exiting the covenant early day, the covenant waiver actually in the next quarters. And we don't expect any problem with that should the trading actually continue in line with the current trends. On Constantia Flexibles, you're right, we've mentioned this new strategy. It is still being finalized, but I think it should be -- we are close to the final version now. Well, we typically do not provide any forecast for portfolio companies, neither for current year budget nor for [ other ] years or business plan. But I'm confident that Pim Vervaat, the CEO, will give you more color at the Investor Day. We'll answer questions. It's always a good opportunity at our Investor Day to have direct contact -- to make direct contact with our CEOs and have a better glimpse at their strategy and their vision for our portfolio companies.

Our next question comes from the line of David Cerdan from Kepler Cheuvreux.

A rapid question regarding your last investment in Tarkett. Can you explain the process? What was your relationship with founder family said before the deal? And third question is regarding the situation of Tarkett, which is in -- which looks like a turnaround story, do you think that -- what is the scenario for the top line and margin recovery for Tarkett you have in mind?

Thank you, David. About the Tarkett opportunity, the relationship before the deal, I mean, obviously, we knew the company. As you know, this company has been IPO-ed and before that, it was under private equity ownership. So not ownership, but partially, it had private equity partners already in the past. So we knew the company. We looked at it, I think, back then, not in close details, but we obviously knew and followed this company. We've obviously updated that and worked quite intensively in the past weeks to qualify interest and to finalize, so to say, this partnership with the Deconinck family that we are very happy about. With regards to the situation, well, I think the company has provided a lot of information as part of its Q1 trading update, and you will find some data in the prospectus of the offer. So that's not for me to comment on that. I think details have been provided on what management expects in terms of future growth and that includes margins, obviously.

Your next question comes from the line of Alexandre Gérard from CIC.

Jerome, good afternoon. Good afternoon to the Investor Relations team. I have 3 questions. Sorry to insist on that, on Tarkett again. But what is according to you, the main point of interest for you. What's your investment thesis? Do you consider that company as a recovery play, as a growth play, what's your investment basis on that? Second question is on Cromology. In your press release this morning, you mentioned the fact that Cromology is looking for targeted acquisitions. Can you tell us more about that? In which countries? Are there any specificities that they are looking at? And what is the financial power of the company? And the third question is regarding IHS. You mentioned this morning that they have just announced but I didn't see that, the acquisition of Colombian assets. Can you tell us more about the size of these assets in terms of revenues, margins, acquisition price or multiples? Thank you, Jerome.

Thank you So first one, our interest in Tarkett. While Tarkett is a very, very interesting company, which has a lot of potential, I think, in its market for growth, both organically and through M&A. They have demonstrated in the past, their ability to grow in many of their markets through this strategy of growing organically and doing some M&A over the long term. We are long-term investors. So obviously, we are looking ahead for a longer horizon, if you understand what I mean. It has faced some challenges more recently, and I think this has been well explained by the company. They faced some specific issues, some of their businesses and divisions. And again, management has provided looking-forward views as part of the trading update, and these have been included as well in the prospectus. So it's not for me to give you anything else than that. And I would only invite you to look at this, which is obviously, what has driven our interest in this situation and in this company. Your second question on Cromology about targeted acquisitions. Well, the leverage at Cromology is at a very low level, especially when you compare to what it was in the past. We provided the level of leverage at the end of 2020, which showed that the company was at a very low level, at least -- I mean, it was 0.5x EBITDA. So very, very low level. They are considering some opportunities of various sizes in different countries. We are talking bolt-on acquisitions, not transformational acquisitions, but there are some markets, some geographies where they could develop their positions through acquisitions. So that's what we are looking at. But management is very focused on the activity as well, which is quite good and requires a lot of attention. So we will see whether they can pursue these bolt-on acquisitions in the future months. Your third question on IHS, they have indeed announced the acquisition of, I mean, small acquisitions in Latin America. These are -- this represents a very limited number of towers. I think we're talking of roughly 200 towers, so quite minimal in terms of sales and EBITDA contribution in 2021.

You have a second question on the line from Jeroen van Aken.

Just a follow-up question on Tarkett. If the deal would go through, then LTV could be moving towards 10%. Do you have a maximum LTV scenario today in mind? And then the second one is on the share buyback. Was this a way to capitalize on the above-average discount to NAV? And what are your views on share buybacks in the future?

Thank you. So with regards to the LTV, we haven't set any maximum, but we are committed to maintaining our -- what we call a strong credit rating or investment-grade rating, if you will. The way S&P or Moody's see that is a little bit different. But we think that 20%, 25% LTV is the ballpark number for being an investment-grade issuer. That's, I think, what they would call the maximum. So at 10% or so, we are still quite far from that. We still have some firepower for new investments, although we obviously would like to keep some caution on this ratio. And regarding the share buyback, we've done EUR 12 million year-to-date. We've announced EUR 25 million in total. So we still have EUR 13 million to go. We are opportunistic. We feel the discount is unwarranted. At this level, 38% is quite high with regards to the long-term average. So it's a good opportunity for us to make some share buybacks, but there is a limit to that. And we don't want to go beyond, say, maybe EUR 50 million, EUR 60 million a year. We did 3 years in a row back in 2019, where we accelerated to EUR 200 million with a structured program. We are now back more to the business as usual, which is EUR 50 million, EUR 60 million, which is already quite considerable for us when you look at the size of our company.

[Operator Instructions] No further questions on the telephone lines for if you wish to continue.

Yes. We have questions from the web, Olivier.

We have questions from the web. One from Pierre Bosse. So regarding Tarkett, 3 questions. One, the EUR 280 million will be in equity only or a mix between equity and debt for Wendel. Second question, Tarkett will be your first deal in Europe for the last 10 years, but also the first investment as minority investors, why did Wendel change its policy and agreed to invest as a minority investor? Third question, Wendel in a way is replacing KKR, what have you learned from KKR's investment in target?

Thank you, Pierre. So your first question about the equity investments, EUR 280 million is the equity investment that Wendel would make that the maximum equity investment for us, and we are going to fund that out of our balance sheet in the form of cash so no leverage on this. For the structure of Tarkett participation and of the offer, again, you can look in prospectus, what amount of debt the company is considering for the transaction. Regarding your second question, well, it's not the first deal in Europe for the last 10 years. Actually, Constantia has been acquired in 2015. So that's more like 5, 6 years. We are very happy to, as I said, to have been selected to join forces with the Deconinck family for this great story of French entrepreneurship. And we are very happy as well with our minority position. Wendel, as always, makes some minority as well as majority investments. I think the -- what matters for us is being able to play our role as a shareholder and have rights that are commensurate with our investments. So we feel we have a balanced governance as a minority shareholder of Tarkett participation and are quite happy about that. We are, as you say, replacing KKR, where in the meantime, I think public investors have sort of replaced KKR. We haven't called them to ask them what were the lessons learned. I think they are very professional investors, and they have selected Tarkett, which shows, I think, that it's an interesting company. And we respect very much that and the work that has been done. But it's a new story. It's a new story with Wendel. We are obviously different in the way we operate, different people. We have a different network. And we think it brings value to this situation. And we are, again, very happy about this announcement.

Thank you. Question from Samarth Agrawal from Citi. Just taking a minority stake in Tarkett should be considered one-off opportunistic events, or is it a departure from your stated preference of acquiring controlling stakes in portfolio companies?

Thank you. Well, I think we've highlighted that we would like -- we are flexible with regards to making minority, majority investments. We -- it's -- I would say it's not a one-off opportunistic, there could be some others. Our investment type is majority control, but also what we call large minority investments. So this one is very much at the core of this sub strategy, if you will, of minority investments. And we might do others going forward, depending on the opportunities.

Okay. I have no more question on the web. Operator, do you have any additional question by phone?

We have no further questions on the phone line, sir.

Okay. If we have no more questions. Thank you very much for your attention, and looking forward to see you at our next event this year. Thank you very much. Bye-bye.

Thank you. That does conclude your call for today. Thank you all for participating, and you may now disconnect.