Wendel (MF) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Wendel's 2022 H1 Trading Update Conference Call. [Operator Instructions] Olivier Allot, Director of Financial Communication and Data Intelligence, will read them. I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mr. Andre Francois-Poncet, Wendel Group CEO. Please go ahead, sir.

Hello, everybody. This is Andre speaking. I'm here with David Darmon, the other member of the Executive Board and Deputy CEO; with Jerome Michiels, Group CFO and Executive Vice President; as well as with our Investor Relations team, Olivier Allot and [ Lucy Lock ]. Welcome to this call. We'll present our half year trading update and go through a short presentation of the main items for the first 6 months of the year and then engage in the Q&A session that we've just described. If you'd 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, again, this is recorded, available for 1 year on our website. So here we go. Now moving to Slide 2, half year results, key highlights. First half has been a good one for our portfolio companies with consolidated sales up by 16.3% and up 10.3% organically. Our net asset value at the end of June '22 stands at EUR 165.6 per share, down 10.4% from the high point of last December, driven by the impact of the Ukraine crisis on financial markets. But when compared to the end of the first quarter 2022, it is quite resilient. Restated from the EUR 3 per share dividend, which we paid in June, our NAV actually would have been up 1.7% quarter-on-quarter. This first half has been busy, as you know, in terms of portfolio rotation with the disposal of Cromology, which we closed early in the year, generating almost EUR 900 million of proceeds for the firm and a significant capital gain and the closing of the acquisition of ACAMS in the U.S. for an equity investment of roughly EUR 300 million. In addition, we further committed capital to the Wendel Lab, adding EUR 49 million in new commitments, increasing the total to EUR 165 million. Lastly, we bought back EUR 25 million worth of our own shares during the first half. So we returned capital through this purchase of shares EUR 3 of dividends. We canceled 377,000 shares on April 27, which generated a pro forma positive impact of EUR 0.70 per share on our net asset value. I will now leave the floor to David, who's going to take you through the performance of our portfolio companies, and then I'll make a short conclusion.

Thank you, Andre, and good afternoon, everyone. You will find the usual slide that we prepare company by company in the appendices. We know that you're currently overwhelmed by listed companies publication. That's why we'll go straight to the point and leave you some time for questions shortly. As you can see on this table, our portfolio companies did exhibit solid organic growth and profits in the first half of the year, in some cases despite very challenging conditions. They confirmed that they have some pricing power, which is particularly important in a inflationary environment like the one we are currently living. Regarding Bureau Veritas, it did publish its half year results yesterday with a solid H1 2022 operating and financial performance. It makes sense as Bureau Veritas management is delivering a very strong performance, which is better than its peers. Revenue in the first half of 2022 were up 11.4%, benefiting from solid market trends across most businesses despite the global environment. In addition, Bureau Veritas confirms its outlook for 2022. As you can see, Constantia Flexibles delivered a plus 22.6% organic growth with strong performances across both markets in consumer and in pharma, plus 23.3% in consumer and plus 20.4% in pharma. Sales are globally up plus 131% in total over the period, driven mostly by price increases necessary to compensate for the inflationary input of its cost base. Despite raw material shortages, Constantia has experienced an encouraging return to organic volume growth. Stahl posted total sales of EUR 470.9 million, representing an increase of plus 12.2% versus H1 2021. Organic growth stood at 9.1%. The activity over the first half of the year was above expectation at group level with a strong growth, both in coatings and leather in both quarters. And growth was largely led by price and mix effects. Regarding CPI, as you can see, the company did post a plus 19.8% growth over H1 2021, of which 21.2% was organic. The success of the new program launches is now confirmed as you can see. They now account for over 20% of the initial certifications for H1. The initial -- the international expansion strategy, notably in English-speaking countries, generated growth rate above 20% as well. CPI continues to enjoy a mix shift towards digital solutions and virtual learner materials continue to represent a strong share of delivery, and they do now account for 42% of learner material sales. ACAMS acquisition was closed on March 10. Today is the first time we published half year financial information regarding the company. I'll go into more details later on this presentation. But in short, it did deliver a very strong growth with total revenue up plus 21% compared to last semester in 2021. Regarding Tarkett, which published its results on July 25, you can see that net revenues were up by 24% compared to the first half of 2021 with the total effect of the price increases implemented across all segments being plus 12.7% on average. As you can see, our company has delivered a very good first half in terms of revenues. Let's go through the profitability now and turn to Slide 5. This table gives a clear view of our company's profitability in H1 2022. Bureau Veritas adjusted operating profit increased by 8.7% in H1. The adjusted operating margin declined 38 basis points to 15.3%, mainly attributed to the impact from the lockdowns which took place in China in Q2. Regarding Constantia Flexibles, EBITDA was up plus 34.8% with a 13.5% margin, up 40 bps above last year. This is the result of Constantia's efforts towards profitability measures to mitigate the impact of raw material cost increases, a continuous cost reduction program, a positive volume and mix effects and [ Propak ] acquisition, which took place last June. Stahl posted EBITDA margin of 22.2%, in line with Stahl's historical standards. Comparison with last year has to be done cautiously because as you remember, last year, Stahl did benefit in H1 from a very positive effect with a strong rebound of sales and an exceptionally low cost base at that point in time. Across all segments, price increases were implemented since the beginning of the year to mitigate the strong impact of rising input costs. The company has taken and is ready to take additional measures to protect its margins where needed. Stahl's management continues to closely monitor the inflationary environment as well as the supply chain and potential energy disruptions. CPI EBITDA increased by plus 27.8% year-on-year. This corresponds to a strong margin of 49.7% over the period, which is plus 312 basis points compared to H1 2021. H1 EBITDA did benefit primarily from the flow-through of higher sales to earnings as well as from effective cost management. It did benefit to a lesser extent from temporary timing differences related to marketing spend and delayed new hires. H2 EBITDA margins are projected to return to budgeted levels. ACAMS' EBITDA pro forma for the carve-out was $8.9 million, and the resulting pro forma margin stands at 18.4%. I will come back with more details on ACAM later in this presentation. Last, regarding Tarkett, you can see that adjusted EBITDA margin represented 8.1% of revenue to be compared to 8.9% of revenue last year. In absolute value, the adjusted EBITDA is up plus 12% year-over-year. Growth in volumes sold contributed positively to EBITDA in the amount of EUR 10 million. Inflation in raw materials, energy and transportation was unprecedented at EUR 161 million against the backdrop of rising oil and other energy prices and ongoing tension on procurement of certain raw materials. As you can see, our companies delivered good or strong profitability, in some cases despite very challenging conditions regarding raw material, availability and cost. We have the benefits of having experienced management teams running this company and they proved again their strong ability to adapt to circumstances. I'm now moving to Slide 6 to talk about the leverage of our portfolio companies. The cash flow generation of our portfolio companies and the strong level of activity have resulted overall in an improvement in leverage ratios, which are down to record low levels for several companies with some exceptions, of course. The leverage ratio of Bureau Veritas is down to 1.1x, which is the lowest level on record since the company was listed. Constantia did further reduce its leverage ratio to 1.6x, which is well below its covenant of 4x, thanks to a strong performance despite a very volatile environment. Stahl did report leverage of 0.8x at the end of June. Stahl did remain cash generative despite a very off time market environment, notably thanks to the good EBITDA level, but the reduction in the net debt level was partially offset by the impact of a stronger U.S. dollar as Stahl's borrowings are mostly denominated in U.S. dollars. CPI leverage is now down 5.3x, which is quite an impressive achievement considering where the company was last year. And this is largely below its acquisition level. ACAMS presents a leverage of 5.7x, which is already down compared to the leverage ratio at acquisition only 3 months ago. Tarkett's leverage was increased due to the usual seasonality of the business, which was accentuated by inflation and the need to replenish stocks. The FX impact on debt is due to the dollar, and it's -- it did contribute to this increased leverage as well. As a conclusion, our companies have overall quite a strong financial structure. I'm now turning to Slide 7 to talk about ACAMS. We acquired ACAMS in March 2022. ACAMS is the global leader in training and certification for anti-financial crime prevention professionals. Over the course of the first half, ACAMS generated total revenue of $48.4 million, up 21% compared to H1 2021. Memberships and training sales each grew at double-digit rates in part to greater sales to large existing customers. Conferences generated the highest growth of any segment as a result of both the return to in-person events with growing attendance and sponsorship. ACAMS grew at double-digit rates across each of the 3 geographic regions, Americas, EMEA and APAC, although APAC continues to be negatively impacted by COVID-related lockdowns. At the end of June 2022, the EBITDA pro forma for the carve-out was $8.9 million, and the resulting pro forma margin stands at 18.4%, which is in line with our expectations given the ongoing carve-out process. This process is well-managed, and we are quite confident that we are going to go through by the end of the year without much interruption. All senior positions have been filled now and the migration of key IT systems has begun and is on track to be completed in the second half of 2022. As of June 30, net debt totaled $144.5 million or 5.7x EBITDA as per ACAMS' credit agreements. I now leave the floor to Jerome to comment on the Wendel Lab and on the financials.

Thank you, David. Good afternoon, ladies and gentlemen. So let's start with the update on Wendel Lab. Over the first half, we have continued our progressive capital deployment in funds with EUR 49 million additional commitments to new funds. As a result, we have now EUR 165 million of total commitments in top-tier U.S. and European funds, consistent with our strategy. This amount represents just over 2% of our net asset value, still below the 5% to 10% we are targeting. Note that we don't see this level as the ultimate goal. We will carefully manage the level of our commitments and direct investments in the coming months given the radical change of environment, which is taking place for tech sector. We are currently pursuing direct investment opportunities in very exciting scale-ups, covering very diverse types of technologies and customers. Our deal pipeline remains pretty healthy at the moment, and we are trying to find our way into interesting situations through our differentiated long-term approach. I hope I will be able to tell you more about it in the coming months. Let's now switch to the financial results of Wendel for the first half. As detailed by David, the performance of the portfolio has been strong overall, resulting in consolidated revenues of EUR 4.2 billion, up 10.3% organically. The organic growth has been quite consistent over the first 2 quarters at around 10% for both. As a result, contribution from subsidiaries currently in scope has increased materially, although this has been subdued by the exits of Cromology and IHS, resulting into a modest EUR 12.6 million net increase on this line. Financial and operating expenses have slightly increased to EUR 59 million, mostly as a result of the intense bidding activity that we have had in recent months, change in scope and noncash items. Altogether, net income from operations has increased by EUR 8 million to EUR 345.9 million. Below the line, we have a very positive contribution in terms of nonrecurring items, which results from the capital gain of EUR 590 million generated on Cromology, net of the impairment of EUR 159 million of our investment in Tarkett to reflect the decrease in its share price as of the end of June. Other items relate to the portfolio and are less significant when taken individually. At portfolio level, asset impairments have been a net positive at EUR 5 million, whilst the impact of goodwill allocation has increased to EUR 62 million following the acquisition of ACAMS. As a result, the net income for the first half stands at EUR 672.6 million and EUR 479.8 million group share, about EUR 350 million higher than last year. In terms of net asset value now we are reporting a value of EUR 165.6 per share as of June 30, 2022. Listed equity investments represents EUR 4.85 billion out of EUR 8.75 billion of gross asset value, whilst the sum of our unlisted investments and Wendel Lab represents a value which is slightly north of EUR 3 billion. The level of discount we have calculated is quite wide, close to 50%, an abnormally high level when compared to historical average. More importantly, I would like to walk you through the main changes in terms of net asset value since the beginning of the year. Actually, our net asset value is down 12% or 10.4% when restating for the EUR 3 dividend paid in June, that's the year-to-date evolution. But looking back, the first half is a tale of 2 different stories. During the first quarter, the decrease in market multiples affected the value of our portfolio on a broad basis, resulting in minus 11.9% in total, whereas the second quarter has been much more muted in terms of changes. Whilst market multiples continue to decrease, some of our private companies have improved their expectations for the current year, which mitigated the decrease in multiples, which with regards -- sorry, to listed companies, it happens that the share price of IHS actually slightly increased by a dollar between March and June and the value of the dollar increased as well, whereas the share price of Bureau Veritas slightly decreased from EUR 25.9 to EUR 25.4 resulting in a net nil effect for listed investments altogether. As a result, our net asset value stands at EUR 168.6 when adjusting for the dividend paid in June, a level which is 1.7% higher than as of the end of March. Let's now double-click on our financing, which is stronger than ever as a result of our active and opportunistic liability management policy. Let's look at the asset side first, where we have EUR 789 million of cash readily available, and that was before having received the dividend from Bureau Veritas and the proceeds of the sale of our building retail book in Paris completed this week. And remember that we could also complement this cash balance by drawing on our credit facility of EUR 750 million, which is currently fully available and has just been reconfirmed with the maturity extended to July 2027. On the bond side of things, we have repurchased mid-term maturities and issued smaller longer-term maturities, the most recent issue being a 12-year bond with a 1 and 3/8 coupon. The result of this is the following: no maturity before 2026, a weighted average cost of debt of 1.7% and an average maturity of 6.9 years. We feel very good to have tapped the market before the rise in interest rates and spreads that is currently in motion, and I would like to congratulate my team for having done that. Lastly, our loan-to-value ratio is at a low level, calculated at 7.8% as of the end of June or 5.3% when adjusted for the dividend received from Bureau Veritas early July and the proceeds from the sale of our buildings received on July 27. Accordingly, the pro forma level of net debt is low at around EUR 400 million. Thank you very much for your attention. I will be happy to take your questions at the end, and I will now leave the floor to Andre for conclusion.

Okay. So I'm on Slide 16, conclusion, to wrap up before we take your questions. So in summary, we're happy with the performance of our companies in the first half of 2022. We've continued to execute our road map of capital redeployment with the acquisition of ACAMS, which is going well at the moment and further capital committed to the Wendel Lab. Some uncertainties on raw materials prices, shortages, inflationary pressures, COVID-related lockdowns in Asia, geopolitical turmoil are obviously out there. We are very acutely aware of the various risks in the system at the moment. But our companies have shown the very good ability to adapt and to deliver a strong profitability, which is very much a function of their competitive positions. We have robust balance sheet. We have little corporate and portfolio company leverage, which should provide the firm with a sound foundation to execute the road map in the current environment to create the volatility and uncertainty, there should be attractive opportunities in due course. Thank you for your time. And now we switch to Q&A. Operator, could you please start with questions by phone? Thank you very much.

[Operator Instructions] Our first question comes from Joren Van Aken from Degroof Petercam.

2 questions from my side. So first, in the other assets and liabilities line in NAV, you mentioned EUR 151 million, which would be based on the treasury shares. However, if I made the calculation, I arrived at EUR 90 million. So what is the EUR 60 million that I'm missing there? And then the second question is, could you tell us the covenant approvals for CPI and ACAMS?

Sorry, could you repeat the...

The covenant levels.

Covenant levels. Okay. So on your first question, actually, in the other assets and liabilities, you're right in saying we have these treasury shares for roughly EUR 60 million. The remainder is actually various assets that Wendel has, and this includes the building that we just sold, but which was still in this line as of the end of June.

Okay. CPI, we don't have the covenants as the rollover is not shown to 40%. So as of today, there is no covenant and on ACAMS, we'll...

We will give it to you in a minute, but we're miles in covenant.

Yes, yes. On ACAMS, levers come out at 12x. And the first test is in September.

Was it 12x?

Twelve, 12.

12, yes. September -- starting from September.

Our next question is from Alexandre Gerard of CIC.

So 4 quick questions on my side. The first question is related to your flow. Can we have some comments regarding the level of intensity of the bidding process and realting prices? And also, I mean, can you start to feel some maybe lower expectations from sellers regarding prices? Or are they still rather high? Second question is related to IHS, which stock price has continued to slip recently below $10 per share, while the U.S. markets have rebounded. Any specific reasons behind that according to you? The third question is related to ACAMS. Can we have some idea of your -- what would be the long-term, I would say, main operating metrics on ACAMS in terms of average annual growth rate and also medium-term EBITDA margin target? And the last question, the fourth question is related to the Wendel Lab, the EUR 49 million that you committed over the first half. Are we talking about firms or co-investments?

I will take number 2 and 4 and leave 1 and 3 to Andre and David. So about your second question on IHS share price. Why is it still decreasing or at least stable over the few days once U.S. stocks have rebounded? Well, that's not a U.S. company. As you are well aware, this is an emerging market company with 70% exposure to Nigeria. And we think that the stronger dollar, the interest rate hikes are hurting actually the attractiveness of this business or this equity story to be more specific. There are very thin levels of trading. So it's not helping as well, which is why you see the share price a little unchanged over the past few weeks. There might be some selling interest as well from smaller shareholders, which also might have affected the share price. But as we speak, it is pretty much stable hovering around $8 and change. On your question number 4 on the Wendel Lab, the EUR 49 million that we've committed in H1 are solely in funds. There are no co-investments or nor direct investments. So on question number 1, which is the deal flow and how prices -- to which extent prices have adapted or adjusted to the current environment.

Yes. Well, I think it's fair to say that sellers and buyers are not on the same page as of today. Sellers have seen on yesterday's price and buyers hopefully are looking for today's price or tomorrow's price. So there is a bit of mismatch. We faced that very recently on a transaction where we were actually putting a binding offer, but the seller was having expectations which was [indiscernible]. So it is fair to say that it's -- we are not in an environment today where we have find a new equilibrium and new balance and we can price transactions properly. So you [indiscernible] question regarding deal flow. I will say the deal flow is actually low over the summer. All the large assets have been pulled off the market because that is not available. All assets which have some kind of cyclicality have been withdrawn and pooled as well. So the volumes are actually down. But beyond volumes, it's a question that you ask about the sales expectations, which are probably too high at this stage, at this point of time. Regarding ACAMS, the loan -- so we published a plus 21.1% growth over the first semester. This is a particularly high level of growth, which is not the growth we expect long term in no circumstances, it would be a guidance. I think we -- when we presented the transaction, we mentioned a high single-digit, low double-digit type of growth. This is still what we have in mind. We did benefit during this first half of some one-off positive momentum with a large customer signing up for big contracts. We had also a big conference accounted for during the first part of the year. So this plus 21% is not representative of what we feel is the sustainable long-term growth, but this is still a high single-digit, double-digit type of company. So high growth, but probably not to the current level you're seeing.

And regarding margins...

For the margin, we did -- yes, we posted an 18.4% margin. It's what we call pro forma because, as you know, the company is in the process of doing its carve-out. So we are still actually deploying the long-term sustainable cost basis. We still have a few hires to do. And so it's a bit premature for us to communicate on a long-term goal until we have stabilized this cost base. But it should be in this area of 18% or 20%, which is where they are today. We don't expect major changes to come.

[Operator Instructions] I shall now hand back to Olivier Allot to answer web questions.

Thank you. So yes, we have questions from the web. So I will start with the first one, which is the following. Could you please give some more info on your relative large impairment of Tarkett of EUR 159 million in relation to the amount you invested in this company, EUR 280 million in March? And continue with the question. I remember some analysts being surprised with this investment as did investors. Well, first, we invested EUR 230 million and EUR 280 million. And actually, the impairment of EUR 160 million is the difference between the carrying value, which actually increased slightly because of accounting effects related to foreign exchange, change in interest rates, et cetera, which actually lifted a little bit our carrying value. And the difference between discounting value and the closing price as of June 30, which was of EUR 12.4 results into this EUR 159 million depreciation, which is the result of IFRS being applied to this equity accounted investment. Second question and regarding your question on -- sorry, your comments on analysts being surprised with this investment. I think this investment is what you could call a value investment, and we have the opportunity to invest alongside the [indiscernible] in this company, which we felt was an attractive investment series. And you have seen the -- I guess, the results of Tarkett for the first half, which shows that this company is navigating in a high inflation environment as we speak. We believe the share price is not very representative, obviously, of what is happening given the very limited float following the offer, which closed last year.

So basically, we said we were going to go for growth investments. Tarkett was a value investment. So it surprised people. It was an exception to what we were trying to do. I think in retrospect, it wasn't the cleverest thing that I did during my years to date at Wendel to start with an exception in terms of a new road map. So you should not expect other exceptions of this type. And as to the investment itself, we will see how it goes. The world obviously is taking the turn with the invasion of Russia and what's happened to raw materials turn which has not been very favorable, but only time will tell how the investments will turn out. There was potential when we bought it, there still should be potential depending on how things evolve.

Question from Patrick Jousseaume. Cash as of June 30, EUR 789 million, does that include dividend from BV? Should we add EUR 2 to NAV per share? You're right, Patrick. It doesn't include the dividend, but I would not add it to the NAV because the day actually the share of BV traded ex-dividend, we actually got it back on the cash side. So it's neutral in terms of net asset value, but it represents about EUR 1 per share, a little bit more in terms of net debt improvement. Another question from Samarth Agrawal is on the NAV resilience in Q2, 2 parts to this. What was the benefit from FX impact to NAV? What drives the strong outlook for unlisted portfolio assets, especially against the backdrop of increasing recession risk? Second question on investment pipeline. Are you looking to diversify into newer subsectors in the current changing environment? Any color you can provide on current pipeline would be very helpful. I will leave the second part of the question with David. On your first question, yes, we've had a little bit of help from foreign exchange in the NAV between Q1 and Q2. We've calculated that roughly EUR 50-ish million. So we are talking a little bit more than EUR 1 per share. That's certainly something which is there. And given where the dollar is today, we expect it at least to carry on for July. What drives the strong outlook for our unlisted portfolio assets? Well, some companies have had a very strong H1, as you have seen, with organic growth around 20%. Some have -- some are actually ahead of their project, and they have updated their views taking into account this advance with regards to the first half budget, which doesn't mean that there are not uncertainties for H2, but some of our companies have revised upwards given the strong current trading in H1.

And regarding pipeline, we are always looking forward to see if we can find attractive new assets similar to companies like ACAMS and -- or CPI, like leading companies with high growth and good margin and good pricing power. But the current environment is not very favorable to buy those assets at attractive valuations. So back to the comment I made earlier, the pipeline is pretty low for those type of companies that achieve pricing.

Question from [ Benjamin Heisler ]. Can you explain in more detail how Constantia was able to increase EBITDA margins in H1? And do you see this level 13.5% as sustainable?

I mentioned earlier during the presentation, it's a combination of a certain number of factors, cost containment, mix increase in volumes pro back. So they -- all this contribute to those levels. And we do believe that this type of profitability is sustainable for the company, yes.

We should add that we are very happy with the management team at Constantia. We have a first grade management team. They are executed -- they are executing impeccably and I think there has been a profound turnaround in the performance of Constantia over the course of the last few years, which goes back to the initial thesis that it's a very resilient business in a fragmented sector with leading market positions and the ability to deliver significant value. So a big change and a big change in, I'd say, in energy and dynamism under [indiscernible] the course of the last 1.5 years.

Yes. And the success of the Propak acquisition is giving us a lot of confidence to go back on the M&A path.

Question from [ Jean-Claude Twilah ] on IHS, you initially valued this business at around $21 a share. Do you still stand by this? And if so why not buy more shares with it currently trading at around $8? $21 was the IPO price. And since then, yes, it has decreased pretty significantly, which is not totally uncommon for IPO having been done during the second half of 2021. We feel we have enough exposure to Africa through our investment in IHS. We are happy with our position and have no intention to buy more, even if we think that at this price, there is a strong rationale when looking at the discounts in terms to valuation to African peers, and obviously, with European and U.S. peers, but that's obviously a pretty different business. Question from Mourad Lahmidi. Have you reviewed the value of CPI of [indiscernible]? Thank you, Mourad, for the question. I would take this opportunity to remind you that our net asset value is very mechanical and it's very formulaic, if you allow me the expression. So we did review the value of CPI, but that was at the end of December when we took into account year 2022 in addition to year 2021. And actually, at the end of '21, we swapped year 2020 for year 2022 in our calculations. So when we included a good '21 year and fairly good '22 year expected in the budget, it translated into an upward revision of CPI, but there is no significant change between Q1 and Q2. It's -- the value is pretty comparable from one quarter to the other.

I'm very happy with the performance of CPI. We're very happy with the CEO, Tony Jace, who is a fantastic leader, and the company is delivering on all cylinders. So we've a very pleasing partnership with management.

End of the Q&A.

If you don't have any more questions, I think we will conclude our call here, and thanks to all of you.

Have a good summer.

Thank you very much. Thank you. Thank you, everyone.

That concludes today's conference call. Thank you for participating. You may now disconnect.