Wendel (MF) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Wendel's 2022 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 Executive Vice President, CFO.

Good afternoon, ladies and gentlemen. Jerome Michiels speaking. I am here with our Investor Relations team, Olivier Allot and Lucile Roch, to present our trading update for the first quarter of 2022. I'm going to walk you through a short presentation of the main items of this quarter for the next 15 minutes or so, and I will be then happy to take your questions. [Operator Instructions] And as a reminder, this presentation is recorded and will be available for 1 year on our website. So let's dive into Q1 2022 key highlights. Q1 has been strong for our portfolio companies, with consolidated sales up 14.9% and 9.9% organically. Our net asset value as of the end of March 2022 stands at EUR 165.8 per share, down 11.9% from the almost all-time high point of last December, driven by the impact of the war in Ukraine on financial markets. But when compared to 12 months ago, the net asset value is down by 1% only. This last quarter has been busy again in terms of portfolio rotation. The disposal of Cromology has been closed, as you know, generating almost EUR 900 million of proceeds to the firm. We have also closed the acquisition of ACAMS in the U.S. for an equity investment of roughly EUR 300 million. Additionally, we have further committed capital to the Wendel Lab, adding EUR 30 million in new commitments, increasing the total to EUR 145 million. Lastly, we have bought back EUR 15 million worth of our own shares during the first quarter. All of the above, combined with an active management of our debt liabilities, results in a strong financial structure with an LTV ratio at 5.8%, EUR 1.7 billion of liquidity and a weighted average maturity of our debt in excess of 7 years. We have also returned capital to our shareholders with EUR 3 of dividends to be paid in June 2022 -- sorry, and roughly 377,000 shares to be canceled on April 29, which will generate a pro forma positive impact of EUR 0.70 per share on our net asset value. Let's now have a look in more details to the performance of our portfolio companies. Now moving to Slide 3, which shows the contribution of our portfolio companies to consolidated revenues. Please note that IHS and Tarkett are not included in the total as they are, respectively, not consolidated and equity accounted. In addition, ACAMS is not consolidated since March 10, 2022, only. In total, consolidated sales have reached roughly EUR 2 billion for this quarter, which is 14.9% more than last year and 9.9% organically. This strong growth comes with challenging conditions regarding raw materials availability and price, but our companies have clearly shown their ability to adapt to fast-changing environments. Let's start with Bureau Veritas, which revenue for the first quarter of 2022 amounted to EUR 1.3 billion, an 11.7% increase compared with Q1 2021. Organic growth was 8% compared to a 2.5% increase in the last quarter of 2021 and benefited from a catch-up effect following the cyber-attack which occurred in Q4 2021. 3 businesses delivered strong organic growth: Industry at 11.9%; Agri-Food & Commodities at 9.5%; and Buildings & Infrastructure at 7.1%. The rest of the portfolio saw mid-single-digit growth. The scope effect was a positive 0.5% and it reflects bolt-on acquisitions realized in the past few quarters. Currency fluctuations had a positive impact of 3.2%. Following this good quarter, as you will have seen, the company confirms its 2022 outlook. At Constantia Flexibles, Q1 2022 sales totaled EUR 464.2 million, up 26.6% compared with Q1 2021. Constantia sales were up 17.8% organically over the period, driven mostly by waves of price increases to compensate for the inflationary pressure input costs, notably raw materials and energy. It is worth noting that Q1 2022 has marked an encouraging return to organic volume growth, confirming the good momentum instilled by the new management team's commercial initiatives. However, the market in India remains very challenging, and management is reviewing several options for this division in order to address the challenges there. Consumer market revenues grew organically by 20%, driven by price increases and volume growth, notably in snacks and baked goods. The Pharmacy division posted plus 11.5% organic growth, driven mainly by prices. Q1 2022 is not completely comparable with Q1 2021, benefiting from the acquisition of Propak in June 2021, resulting in a scope effect of plus 6.8%. The quarter is also positively impacted by favorable foreign exchange rates, plus 2%. Constantia is carefully managing the inflationary cost environment as well as the availability of raw materials, particularly aluminum, focusing its effort on preserving the profitability of the company, working both on the pass-through of input costs as well as pursuing its cost control program. Let's move to Stahl, which posted sales of EUR 224.9 million in Q1, representing an increase of 7% versus Q1 last year. Organic growth was 5% over the quarter, while foreign exchange was positive at plus 2%. Activity over the quarter was above expectations at group level with a strong performance in Performance Coatings offsetting lower-than-expected volumes in Leather Chemicals. Across all segments, price increases were implemented at the beginning of the year to mitigate the strong impact of rising input costs. Management continues to closely monitor the inflationary environment and is ready to take additional measures to protect its margin where needed. Order book increased in Q1 2022 and is close to the all-time high level as new intakes remained solid in volumes and benefited from price increases measures. This gives good visibility on the top line performance for Q2 2022. Crisis Prevention Institute recorded first quarter 2022 revenue of $23.4 million, up 26.4% versus Q1 last year. Of this increase, 27.2% was organic growth, offset by minus 0.8% impact from foreign exchange movements. Despite the Omicron COVID surge in early 2022, CPI continued to see volume growth in new certified instructors, CI, and uptake of new program launches. Growth was tempered by a number of COVID-related delays of on-site programs, which were rescheduled into Q2 2022. But compared to Q1 2021, the number of affected programs were less as the previous year's Q1 experienced more widespread COVID restrictions. CPI continues to enjoy a mixed shift toward digital solutions for both new CIs and renewals with programs retaining the required in-person components. Lastly, ACAMS, acquired a few weeks ago, and it's the global leader in training and certifications for anti-money laundering and financial crime prevention professionals, generated total revenue of $24.8 million, up 31% versus Q1 2021. Certifications, membership and training sales each grew at double-digit rates versus Q1 2021. Conferences generated the highest growth of any segment as a result of both a return to in-person events with growing attendance and also a timing benefit as ACAMS's second largest conference took place in Q1 2022. However -- but the previous year's event was held in Q2 2021. Organic growth for the quarter ending in March was 31%, and the impact of foreign exchange was 0.2%. Now let's move to the net asset value on Slide 4. As of March 31, 2022, the net asset value stands at EUR 165.8 per share or EUR 7.4 billion. The value of our stake in Bureau Veritas is of EUR 4.2 billion, which is 10% more than 12 months ago despite the payment of a dividend in the interim. IHS' share price reached a low point at the end of the quarter at $10.4 on average, resulting in a valuation of our stake shy of EUR 600 million. The share price of Tarkett also decreased during the first quarter, resulting in a valuation of EUR 110 million for our stake, owned through Tarkett Participation. The value of our unlisted investments stands at EUR 2.9 billion. The only impact there being multiples apart from the disposal of Cromology and the acquisition of ACAMS. After taking this into account, our financial situation is very healthy with a EUR 453 million net debt position at the end of March, translating into a 5% -- 5.8%, sorry, loan-to-value ratio. Of note, the cancellation of shares that will be carried out on April 29 is not reflected in this net asset value calculated at the end of March. But pro forma for this share cancellation, this would have resulted in an increase of EUR 0.70 per share on the net asset value. Now let's look at the main drivers on Page 5 of the change in our net asset value. Year-to-date, we are down 11.9%, reflecting the market sentiment. Actually, most of the change comes from the decrease in the share prices of our listed assets following the war in Ukraine. Bureau Veritas, which represents 2/3 of the EUR 15.5 that we have isolated for listed assets, has seen its share price decreased by roughly 10% over the first quarter, but has regained almost 5% since the release of its Q1 trading update. IHS has also suffered a strong decrease in share price on account of a general disinterest for emerging market stocks and the low level of liquidity induced by the limited free float. On the side of unlisted assets, the decrease in market multiples has had an impact of EUR 5.2 in total on our net asset value. Note that none of our companies have revised their outlook for the year at this stage. In terms of financing and liquidity, as you can see on Slide 6, we have a strong balance sheet. Our LTV ratio stands at 5.8% with EUR 1.7 billion of total liquidity, including EUR 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 road map objectives. Our net debt remains at a low level and has a long-term profile, the first maturity now arising in 2026, following the successful exercise of the make-whole provision on our 2024 bond. This strong financial structure with an average maturity of 7.1 years, the low cost of our debt and our solid BBB, Baa2 credit ratings provide us with comfort for the future. Now let's wrap up before I take your questions. Q1 2022 has been strong, and our portfolio companies have had a good start into the year. We have continued executing our road map of capital redeployment with the acquisition of ACAMS and further capital committed to the Wendel Lab. Still, some uncertainties on raw material prices, on shortages, inflationary pressures, COVID-related lockdowns in China and geopolitical turmoil remain. But our companies have already shown their capacity to adapt and to deliver strong profitability. We have a robust balance sheet and little corporate and portfolio company leverage, which provides us with a sound foundation for executing our road map. We think the current environment of greater volatility and uncertainty might result in attractive acquisition opportunities, and our teams are busy working on finding those. Thank you for your time. We now switch to the Q&A. We will start with questions by phone and then take the written questions coming from the web. So operator, can you please start with the questions by phone?

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Patrick Jousseaume with Societe Generale.

[Foreign Language] So 2 questions on my side. The first one is about Stahl. Could you give us more clarity about the organic growth, excluding the price impact? I have seen that in Constantia Flexibles, you clearly mentioned that volume growth is positive. It's also the case for Stahl. And on both companies, I appreciate that you mentioned that the 2 companies makes a big effort in order to mitigate the impact of raw material price increase, but could you be a bit more -- a bit clearer on margin, please?

Thank you, Patrick. So regarding your first question on Stahl, as I said, actually, the organic growth is driven by price increases. Over the first quarter, volumes have been negative at Stahl. Obviously, the trend is different if you look at Performance Coatings or if you look at Leather Chemicals. But overall, volumes have been negative during Q1 2022. In terms of margins, as you know, we do not comment on margins at this point of the year. But for the 2 companies you are asking about, both companies have implemented price increases at the beginning of the year to mitigate the strong impact of rising input costs. And they continue to closely monitor the inflationary environment. And they are ready to take additional measures to protect their margin, if needed. So far, as I said, none of our companies have revised their outlook for the year, which means that raw material prices have increased as expected, but the mitigation through price increases has been enough to register margins that are in line with expectations. We will see, as we get into the next quarters of this pass-through mitigation work. But so far, our companies have been in line with expectations.

The next is from Geoffroy Michalet with ODDO BHF.

Congratulations for having a growth portfolio in the end.

Thank you.

My question is linked to the surprise in your portfolio. What would be the most positive surprise and the most negative surprise you had in Q1? And if you could develop a bit on it. Also, the -- how is the pipeline for further acquisitions?

Okay. Thank you, Geoffroy. Sure. Most positive surprise -- not a surprise, but most positive news is the level of growth that we have seen in our U.S. companies, the CPI, which is really on a great trend since, I would say, mid-2020. Right after COVID, the company recovered very quickly. And since then has been really on a roll. You might remember that we showed figures of plus 64%, I think at some point last year. We were up 27% at CPI. So this is really great. This investment that we made in late 2019 was under pressure during the second quarter of 2020 because of COVID, but they reacted, and this is very positive. Same for ACAMS. We closed in March, and the first quarter shows plus 31%. So that's obviously in line with our investment thesis, although we should not expect that type of growth for every quarter going forward, but our investment thesis was to shoot for at least double-digit growth. And we are happy to see that this materializes over the first quarter of Q1. Big disappointments, as you can imagine, on IHS. The share price was down by 50% versus the IPO price at the end of the quarter at $10.4 and change. It recovered a bit since then at 11-point something dollars. But obviously, still a big disappointment versus the IPO price, reflecting, as I said, general disinterest for emerging market companies and the level of liquidity, which is low actually. But we'll see. The company will report its Q1 revenues in a couple of weeks or so. And we hope that a string of good results will have -- will draw more confidence into the stock and more buying interest. But obviously, that's a big disappointment. In terms of the -- yes? Sorry, Geoffroy.

Yes. No. Just to follow up on that in terms of the negative surprise. Let's say, operational negative surprise because the share price is, well, you don't have much impact on it, unfortunately. But what didn't you expect or didn't you measure enough that affected Q1 of 2022?

I would say we were already seeing a lot of what has materialized over the quarters since the end of last year if you think of raw materials inflation. We were expecting that. So there is no negative surprise per se. As I said, our companies, I mean, traded in line with expectations, if not slightly above -- actually, some of them slightly above expectations. We were expecting big impact of raw materials and prices increases have -- increases had been implemented already in Q3, Q4 2021 and again in Q1 2022. So, so far, so good. Obviously, I have no idea whether these price increases will still be acceptable for customers going forward and for the general environment. But so far, no disappointment from an operational perspective, I would say. Regarding your second question on the pipeline, well, this is the deal season, as we say, currently. So our teams are very active and are working on transactions that could materialize before -- I mean, this side of the year, pre summer. We still see a lot a healthy pipeline, a lot of opportunities, both in Europe and in the U.S. So it's too early to tell whether they will materialize, but we are actively working, and we see good companies offering interesting prospects with good growth, and we are working on this. So I cannot be more specific, but these are in line with our road map, which is, as you know, to invest in private companies given the share of listed investments within our net asset value at this point in time. And in companies that can offer growth for ticket sizes ranging between EUR 200 million and EUR 500 million max. So that's what we are currently working on.

The next question is from David Cerdan with Kepler.

I have a few questions for you, please. The first one is related to the value of the unlisted asset at the end of March compared with the end of 2021. So for which one -- for which asset, unlisted asset? Have you cut the fair value -- or the opposite, have you increase the fair valuation of the asset? So this is my first question. Second question is related to Wendel Lab. How much do you expect to continue to invest in Wendel Lab over 2022?

Thank you, David. So regarding your first question. The only thing that we did for the fair value market value of our unlisted companies is to adjust for multiples. There has been no adjustments to the EBITDA because the EBITDA, as I said, have not been updated by our companies. Given the trading at the end of Q1, there was no need to change their expectations for this year. And the net debt hasn't changed. So we have -- we really only have adjusted for multiples. Having done that has resulted in a decrease of, on average, I would say 10% because the multiples of the peer sample that we use for these companies has seen their share prices decrease by roughly 10%. And the rest, if you compare, as I said, to the end of last year, is the exit of Cromology and the entry of ACAMS. But the rest is really about market multiples, about 10% decrease, which is broadly in line with the market. If you look at the main indices at the end of March, they were down about 10% versus the end of 2021. Regarding your second question on the Wendel Lab. You know Wendel Lab has 2 legs. The first one is what we call the Fund of Funds. And there, we have committed EUR 145 million, and we have increased our commitments during the first quarter by EUR 30 million. And the second line is direct investment. On the fund side, I think if we are close to where we expect to be at the end of this year, we might add maybe another EUR 20 million for this year, which would mean EUR 50 million of commitments for this year, and we end up the year at EUR 170 million, or close to EUR 170 million. So that would be for the fund part. And for the direct, we are looking actively at some opportunities right now with ticket sizes between, say, EUR 15 million and EUR 35 million, something like that. So we could do 1 or 2 or maybe 3, if things go well, which would mean potentially maybe EUR 50 million of investment or slightly more than that if we found the good opportunities, resulting in a total value for the Wendel Lab, if you include commitments plus investments maybe at the end of the year, north of EUR 200 million. That's what we are shooting for, but the market remains elevated in terms of multiples for the start-ups. There has been some cooling off at the beginning of the year, driven by the tech stock sell off in the U.S. But companies are still raising capital at very high valuations. There are still very exciting investment opportunities out there because this company is -- are growing very fast despite the situation, the war in Ukraine, COVID in China, et cetera, these start-ups are still growing very, very much. Obviously, the interest rates have had an impact on the valuation for these companies. So this creates some opportunities, and that's what we are pursuing, and we are looking at this currently.

Is it possible just to come back on what you said about the estimate? So you said that you have not changed the budget for your unlisted asset. So those budgets has been -- has been established by the end of 2021. So now the world is completely different. But do you think that you will have to cut or maybe to upgrade some of your budgets?

I really don't know the answer to this question, David. What I can tell you is that at the end of Q1, based on what we have seen -- but I acknowledge that Q1 has only been very mildly impacted by the situation in Ukraine because, as we all know, the war started on the 25th of February. So it has only impacted March. The lockdowns in China have started, I think, in the -- during the second part of March. So we haven't seen that much of an impact in our companies. In Q1, performance came in either in line with expectations or slightly above, which is why our companies haven't revised their budget yet, saying Q1 has been in line or even a little bit better. So even if there are uncertainties out there and some challenges, they haven't seen any reason to change their expectations, but that was, again, at the end of Q1. Logically, in any company, you would typically confirm or revise upwards or downwards your budget based on Q2 performance. So I guess this is something that we will closely look into as we will report on our Q2 or H1 trading update. But for the time being, I really have no idea whether they will increase, decrease or confirm. The only thing I can tell you is that at the end of March, there was no reason to change.

Okay. I have a last question. It's regarding the liquidity and the debt leverage in unlisted assets. Which one are roughly at risk? Or for which one do you think that it could be required for you to reinject cash or to refinance some debt at some higher prices?

When I look at the portfolio of unlisted companies, I really see none. I can't give you the numbers for the end of Q1, but I have them in front of me. But if you look at where they were at the end of Q4, I mean, Stahl was like 1x EBITDA. If I remember correctly, Constantia was around 2 and CPI was at 6.5, so -- and well below the level they went through for the previous quarters. ACAMS, we closed at -- with around -- a debt-to-EBITDA multiple slightly north of 5x as per the credit documentation. We see no issue with regards to liquidity and leverage. As I said, we have a very healthy portfolio at this stage in terms of leverage in the -- in our private companies. And we see no reason for any requirement for cash at this point in time.

And is there a risk of [ Constantia breach? ]

No, no, no. No risk of [ Constantia breach. ] We are running these scenarios on -- almost on a quarterly basis, and we -- we look at the headroom versus the covenants. And at this point, we see no big issue with regards to the headroom at these 4 companies.

And have you some important refinancing to do over 2022 and '23?

No, we have a maturity coming up at Stahl in 2023, 2024. So we'll have to look at that. The other companies are much more protracted in terms of maturity because they've been either refinanced recently or acquired recently. So Stahl, yes, we might be looking at it. But starting with the leverage, which was at 0.8x EBITDA at the end of 2021, I guess it's going to be quite an easy discussion with the lenders.

Your next question is from Alexandre Gérard with CIC.

Four questions on my side. First -- first of all, on cost of Constantia Flexibles, you said, Jerome, that you were reviewing the company's options in India. Can you comment a bit further on that? How big is India for the company in terms of percentage of sales? And is it a profitable or loss-making unit? Also timing-wise, can we expect a decision by the end of the first half? Second question. On CPI also, in the press release, you were saying that the mix of the business is shifting more and more towards e-learning. Are there any, I would say, profitable impact or the shifting mix on the company's profitability? Third question regarding IHS. So you're blaming emerging countries for the lack of investor interest in IHS. But are there any country where the company is active and where the economic situation is currently deteriorating? And my last question is regarding the Wendel Lab. Out of the EUR 30 million of new commitments, can you comment further on the type of funds you invested in? Give us some names, some typology of funds, et cetera.

Thank you, Alexandre. So regarding your first question on Constantia, I'm going to stick to what is in actually the press release because this is sensitive information. So as I said, the situation is challenging in India. Management is currently working on several strategic options there. And it's -- there is a project going on. So I think we will report more about it down the road. In terms of materiality within the group, it's not material from a profitability perspective. So it's not like it's not going to change materially the profitability of the company, but it's definitely something that needs to be fixed. And management is actively working on that.

It's a loss making BU, huh?

I really can't give you more information about this. It's not material. That's the only information I can give you. Regarding the -- your second question on CPI, the shift to e-learning, is it impacting profitability? Well, profitability is increasing at CPI. So actually, it's I think at the end of last year, we showed an improvement of profitability, but it has been going on. We showed 900 basis points almost of profitability increase between 2020 and 2021. We moved from 41% to 49.4%. And in there, you have some mix effects, yes, from the shift to online. Regarding your question on IHS, I think I heard you asking whether there were countries outside of Africa where the situation was deteriorating. I think it's for the company to comment on that. And you can -- you will be able to follow their Q1 sales. But for 2021 -- for 2021, the company posted a very robust results with organic growth north of 15%, profitability increasing. So it has been really a very good 2021. For Q1, I don't have any information. So really I'm not able to comment. And regarding your last question on Wendel Lab. The Head of Funds is going to kill me because I'm not sure I can disclose any name in there. But we -- well, you know already that we are investors in Andreessen Horowitz and Kleiner Perkins. And there, we have re-upped, as we said, because we committed to new funds launched by these 2 managers over Q1. And we also secured commitments from 2 other very well-regarded managers. But I'm not sure we can disclose these names. So while we might come back to you during H1, if in the meantime, we can disclose these names. But I would say that they are as well regarded as Andreessen Horowitz and Kleiner in terms of reputation and track record. Do we have a question?

Gentlemen...

Go ahead. Yes, for the web, yes?

Yes. So we have a question from Joren Van Aken. As Tarkett is now above 30% below your offer price, would you consider to start buying shares again? Or is Tarkett for you in the past and are you more looking for new additions to the portfolio?

Well, it's not something which is on the agenda right now. We are -- obviously, management is very much focused on the current situation, which is inflation, obviously, and operational challenges related to that. We are happy with our level of shareholding, and it's not something that we have on the agenda. Regarding the future and the -- actually the present, we are focusing on unlisted opportunities because following the IPO of IHS, we have a very strong exposure to listed assets within our net asset value, which is why we are actually solely focusing on unlisted investment opportunities at this stage.

Thank you. We have a question from [ Gabrielle Etagi ]. Congratulations for these excellent results. What are your guidelines for the year -- the rest of the year?

Thank you very much, [ Gabrielle. ] What I -- we don't provide any guidelines for the company. We don't provide any guidance. But in terms of what's ahead of us, obviously, big uncertainties, big challenges with regards to raw material inflation. As I said, the situation in China with 390 million people under lockdown last time I looked, and we will support our companies to navigate in this very volatile and challenging environment. But apart from that, we don't provide any guidelines.

Thank you. So last question from Samarth Agrawal. Thanks for the presentation. Two questions. So one, I wanted to understand if you have seen an increase in the sourcing activity post the recent de-rating across broader markets? Any comment on the pipeline would be much appreciated.

Thank you, Samarth. Do we see an increase in bid sourcing activity? Well, it went on pause for a couple of weeks following the invasion of Ukraine. So the LBO market went quiet for a couple of weeks, but it has resumed since then. And with no material impact, I would say, from the situation on valuation multiples. Companies that are up for sale have good results. As you can see it from other companies or when you look at our portfolio, 2021 has been good. Q1 2022 has been good. I mean, we are talking double-digit organic growth. And these companies are, most of the time, profitable, well managed, et cetera. And there is still a lot of competition to acquire these assets as corporates have financial means, as private equity firms have a lot of financial means, and debt is still available because interest rates have risen and are expected to rise in the next quarters, but that's still acceptable when you look at LBO models. So it has not increased, and it remains very competitive. But we are trying to find our way into this universe of opportunities, and we are trying to work on opportunities that -- where we can win and where we can have what we call an angle, either by having a very deep understanding of the underlying market or having connections with the environment, with the management, the shareholders, et cetera. So this is really what we're focusing on. And we have a few interesting currently in the pipeline. In terms of the impact on profit margins from the higher sales across Q1. Again, I'm not -- I can't comment on the profitability of our companies, but it went as expected in terms of profitability during Q1, but that's only 1 quarter. But I mean, broadly speaking, the impact has been good, meaning that price increases have been higher than the increase in raw material costs. So such that the company's earnings came in line with expectations if not slightly above.

Thank you. We have no more questions.

Thank you very much, and have a good day. We will report our H1 earnings at the end of July. And until then, thank you very much.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.