Earnings Call: Q2 2019

Aug 13, 2019

Welcome, and thank you for joining the Vina Bega conference call on the first half year results of 2019. Throughout today's recorded presentation, all participants will be in listen only mode. The presentation will be followed by a question and answer I would now like to hand over the conference to Mr. Klaus Ofna, Head of Investor Relations. Please go ahead. Thank you, operator. Ladies and gentlemen, welcome also from our side to this conference call and our H1 results, 2019. Winnebago Representatives on today's call are Jaime O'Shoy, CEO Villif Van Wiet, CFO. And also for the first time, we welcome Solvayt Minhat Ghali, CPO. As always, we will open the call with an executive summary by Mr. Choi focusing on the key developments of the first half year and also on our outlook. Following the opening statement, we will take. I now hand over to Mr. Schoesch for the executive summary. Thank you, Claus. Ladies and gentlemen, the warm up, good afternoon from Vienna and Austria. And we would like to walk you very briefly through our set of results for the first half year of twenty 19. As already indicated by Claus, we have a record first half year result, a very strong set of results coming through from our business. We are glad to report an increase of 8% in our revenues to a record high of more than 1,700,000,000 the EBITDA like for like is also up 1,000,000,000, so a strong performance on the cost side and on the pricing side, the 2 major aspects. That we will focus on in a minute and very satisfactory and net profit is up more than 100% to 1,000,000 in the first half year. Ladies and gentlemen, we have made a huge progress huge progress in the number of fields that we were active in over the last couple of years. Clearly indicated that Vina Bagger is in a transition, in a transition from a production oriented company in a more service and this and customer oriented company. We have made enormous progress in our product portfolio, product portfolio with perfectly in line with the expectations of our customers, meeting the requirements of, on one side, climate change, having solutions for walls that meet all standards from energy efficiency to cooling in the summer to actually systems for rainwater management and management of water as such, sewage or drinking water. To the applications in housing when it comes to electrical supply or to data transfer. So a lot of are gaining momentum in the markets that we are active in. On top of it, and that's my second important point is that in our fast forward project, we are making great progress, great progress that we can report to you that 25,000,000 additional EBITDA to be added to the sort of activity in the first half. So a strong set of results also coming through from this performance enhancement project that obviously touches all our processes in the company from production to sales and admin. Again, when we look at the performance of Vina Burger, we have achieved this because we are focusing on our value enhancing strategy on organic growth on one side, on acquisitions that we have achieved also in the first half of this year, which are selective acquisitions that add to our product portfolio, deepen our value creation in the markets that we are active in by offering a broader range of products and offer more solutions to our clients. And obviously also by a self help program to improve our efficiencies in all fields of the activity of the company. When we look at the, sort of underlying markets that we are finding, they are perfectly in line with the the expectations that we had at the beginning of this year. So actually, a solid market that we found in Eastern Europe, especially where we have seen growth throughout the first half of the year. And we will see this growth throughout the whole of this year in Western Europe, also, markets that were perfectly in line with our expectations when we come to Belgium, the Netherlands, also Germany and to the UK, obviously, the weakest market in this region was obviously from which has remained on the level that we have estimated France at the beginning of this year, so no major change. And I think this is important to mention we will operate throughout the rest of the year in such a market environment. So again, I think you see that Vina Bagger has able to grow in these markets by a better product portfolio. You will draw your attention also on the overall volume perspective to be said. One thing in this context is that Vina Bagger deliberately focused also to exit some commodity markets, being in pipes, being in bricks in order to go into more value products and higher value added products. So this is obviously a deliberate choice to go in this market areas and therefore increase our margin. You have seen it strongly increasing our margin in the Piping Solutions side because we are focusing more on the solution business and the highly value added products in all the markets that we are active in and also in the billing solution side where we are in higher value added bricks, for example, four walls, but also in the facade systems. So On the back of this change in portfolio, we were able to increase our prices significantly in certain countries, obviously not only because we increase prices as such because we improve our portfolio and we add also service to it, in an increasing way. So we are able obviously to price our solutions better than in the past. And this will continue on the way forward in the years to come because this is the transition phase of Vena better that we are currently going through. All in all, as I said, we are operating in this market environment that we are confident with that provides us with the necessary growth for the rest of the year. That's why, at the end of my initial remarks, We are guiding you towards $5.70,000,000, $580,000,000 EBITDA towards the end of the year. You remember our original range, it was starting with 5 60. So we are guiding you towards the upper range of our guidance being more positive, more optimistic with the rest of the year and the performance in the respective markets. In Europe and the U. S. So all in all, a very strong set of results for the first half of the year. We are confident with the remaining part of the year. There's not sort of anxiety from us with respect to markets. It's a It's a market environment that we face. From a pilot's perspective, I can say, we didn't get in the first half year, a lot of tailwinds from the markets and won't get them from in the second half either. Wiena Berger is growing in these markets and we are set for the growth in the future as well because as I said, we have been successfully repositioning Vina Pega in the last couple of years. From my side, two words on the capital allocation, we have spent around 50,000,000 on M And A. So very successfully projects in the UK and on the continent in order to improve our portfolio. We are currently looking at the number of midsize and smaller deals also that improve our performance in the respective markets in Europe especially in Northern Eastern Europe. And you will see us move on these targets, as we said, very cautiously and in a way that we are sure to create the necessary value that we request from such transactions. And on the other hand, we will spend more or less about 1,000,000 of euros when it comes to CapEx. This includes obviously the classical maintenance CapEx, but to a quite a sizable degree, also a performance enhancement measures due to the fast forward on one side, but also debottlenecking and new products in our production lines be it in pipes be it in bricks or roof tiles. So it's a quite a substantial measure of investments that we foresee for this year. But this is necessary in order to improve our performance, especially when it comes to fast forward. And therefore, we are confident that we will reach the 40,000,000 target for this year. So this is something where we remain very confident. And also when we look at 60,000,000 year that we have, foreseen and guided for. These investments that we are currently doing and the improvements, especially in manufacturing make us optimistic that we will reach this target as well. So on the capital allocation side, on track, on the market side on track with respect to prices and the change of portfolio will obviously beef up our efforts also on the on other fronts like the M and A side, as I said, and get some very interesting projects also in the second half of the year. So, I would say from my side, this is the, a note of confidence with respect to the performance based on a very strong half year and a very optimistic outlook also for the next second half of this year. I think all my colleagues are now ready to take your questions. And please go ahead. Ladies and gentlemen, you. The first question comes from Yves Bormats, Exane. Please go ahead. Good afternoon gentlemen. I'll have three questions if I can. My first one, could you please provide a picture of the overall sales bridge in terms of volume versus price in H1 'nineteen? That would be really helpful. Second question is on the outlook where you mentioned that markets have become more volatile and you now expect many of your key markets to be readily stable versus positive on the maps that you provided in the presentation. Could you maybe help us to understand what you have identified in Q2 'nineteen that has the group sentiments on underlying market conditions? And my last question is on the EBITDA guidance, which you have now raised to a midpoint of If I look at what that implies for H2 2019, it suggests margin decline ex IFRS 16 So I'm just trying to understand the drivers of that and whether this implies some volume decline in H2 2019. Thank you very much. If we thank you for your question, it's really varied. If you look, at the sales bridge, we have, clearly, we have about a growth of 6% organic, and a majority part of that is on pricing. But if you look to the individual business units, you see clearly continue on our volume growth in building solutions. And we have a lesser we have a decrease in the volumes on the pipes, but that's something we have already, alluded to because that's because we're getting out of the commodity pipe business. And in the U. S, the decrease is due to the fact that as we have already indicated, the Canadian market was going down also there on the pipes, we see a shift into the second half of the year. And the rest is, the 2% is basically on consolidation, the majority. If to the midpoint, if you look to where we are going to, I believe it's not a deterioration, but it's a continuation the strong margins that we see in the first half of the year that we will continue into the second half of the year. Yes. If I may, on that point, I mean, that still implies margin decline versus last year. So how should we think about this? Is this that you believe that you have now reached levels of margin in Eastern Europe potentially which are at peak levels and you're seeing some cost pressure or the inability to pass on the costs? No, I think I clearly can say if that there's no pressure at all as far as cost is concerned, I don't see any margin erosion in the in our business, Northeast and Northern Western Europe, there is no sort of pressure coming from price as such, we have continuously been able to improve the pricing and this will continue. Obviously, we won't be able to make are steps that we have done at the beginning of the year. It's not the same, obviously, in the second half. But again, the trends the underlying trends are pretty much the same. So there's nothing to interpret it in the numbers as such think we are shooting for a very good and a very strong second half of the year. I can also confirm that when I look at the numbers July that we have already coming in. So it's a good underlying business. I think, and I just want to make clear for everybody. As I said in my initial statements, Lina Vega deliberately made the choice to go out of some commodity markets and low margin business. Because we did this step. But this is part of our strategy. And obviously, therefore, you see that margins are going up because we are focusing on these new segments that we want to build in there. Obviously, our growth rates in these segments are strong ones. To your EBITDA, I think when you look at the market as such, I think from a perspective of today to make a strong statement that we will reach the $5.70 to $5.80 shows clearly that we are confident in it that we are from a market perspective and from the self help perspective, we are making the necessary contributions. And your last question was on market sentiment. I said in my initial statement, I think Vina Bega had clearly the vision for the whole year that certain markets of ours in Europe and in North America, if I take Canada, for example, will be somehow weaker, weaker because of intervention from from governments, from state bodies when it comes to Canada or the, as in France, as you perfectly know, And we have not seen any different trends. We are not sort of, you shouldn't interpret from our way of saying that there is something dramatically that has changed. Now, the markets are, as they were and are continuing to be in some areas strong or very strong And let me just say one word, we are far away from any, whatever you call peak levels, speak levels for me were probably in the late 2007, 2008 whatever. But I think here, we are in a very call it solid and robust environment where we still see good demand levels in all the markets that we operating where we have actually very low interest rates when you see the financing for real estate, etcetera, And I think where we are operating in a fairly favorable environment when it comes to infrastructure to renovation and to new built. The next question is from the line of Paul Chevron of On Field Investment Research. Please go ahead. Good afternoon gentlemen. Thank you for the presentation. I have a couple of questions. First of all, I'd like to go back on pricing. So your comments. You just said pricing was up 4% to 5% in Q2. I was wondering if you are seeing this momentum moving forward in 2019. And if you see it moving forward, it suggests that there might be an EBITDA improvements beyond your guidance. So what are the key risks for you in H2 that will explain that the guidance was not raised further than that? And the second question, can you talk a bit more about the mix effect there seems to be a substantial acceleration in a share of value added product in your cells. So Could you maybe share some detail about what type of higher value added products you are selling? And do you see further room for improvement in the 2nd part of the year and in 2019 regarding this product? And last question regarding innovative product, in 2018, the share of, innovative products in your sales was around 30% of your sales. What level do you see in 2019? And maybe if you could share with us some type of outlook on the medium term for the innovative product. Thank you very much for your three questions. I think if I may start with your last one on the innovation side, we have focused a lot during the last years in bringing the share of these sort of solutions product systems up to a certain percent level. As we speak, we are developing new ones. We are working on new ones. We are rolling out existing ones in new markets. So I think a share around 30% is a very, very ambitious one for Vina Becker. Obviously, we won't shy away in the future if we see new potentials to improve it even further. I think it's too early to give you a new target. You remember that we had we had this target of 30% and we achieved it a little early. Obviously, it was originally planned for 2020. So we have moved very close from that. Think strategically, I can tell you that obviously we would like to have even a stronger share of these products in the next years to come. And so we'll clearly give you an update on this, on the capital markets day on 16th September in London when we are talking about this. On the mixed effect, again, let me be clear on that. I think, it is in a group like ours with thousands of products and thousands of different solutions that we offer from electrical components where installers to plumbers to, bricks and roof tiles and all sorts of excess risks. Here, I can only give you a very, very sort of, a strong overview saying that obviously, these new products that the 30 percent of turnover contributes obviously, to a stronger degree on margins and and profitability. And that's why we are driving this part of the business. And clearly, and I think this is when we talk about commercial excellence, when talk about new positioning of Vina Becker, we have taken the clear strategy to exit low margin businesses. And I think this is an important message to give to you that we are not going on with those businesses because they are not contributing what we want. Your last question on risk, yes, please. On pricing, remember, we said price increases in the market already in the last quarter of last year. We continue doing that in the first quarter of this year, and we are still holding on to those price increases, which we have put into the And we do not see any reason why that pricing increases should weaken. What we will see in the course of the year, of course, And we hinted to that in the first quarter as well is some of the inflationary cost increases will come through slightly, and that's about it. And we will also still endeavor to put also towards the end of the year to put further price increases into the market. So we are sure we are not losing our momentum on pricing on the back as high more instant on new products that we put into the market and also on our if you want to our pricing powers into the markets. The next question comes from the line of Amy Gala of Citi. Please go ahead. I have two questions here. The first one is on the optimization gains that you have delivered in the first half, which is 25,000,000 if you compare it to the level that you delivered in the second half, is it right to assume to assume that sequentially, optimization gains have increased by about 1,000,000 and there's a bigger step up that we should be expecting in the second half. My second question is, if you could give us a guidance on the structural cost that we should be expecting to be charged in in the second half, that would be quite helpful. And just one, one broader question on the guidance. I remember in the Capital Markets Day last year, in the broad bridge of the EBITDA from 2018 to 2020, you had assumed the step up in organic EBITDA growth of about 15,000,000 each year. Now at the end of H1 'nineteen, you have over exceeded that level. So given the sort of guidance that you're giving here, are we expecting a flat organic development for EBITDA in the second half? Thank you. I just want to make it clear that I got your second question. This was about structural costs. Restructuring, right? Yes, exactly. Okay, good. And now I'm sorry that I just wanted to clarify. Yes. I will, the first question will be answered by my colleague Solveig, our calling on the board. Hello, all the pleasure to be in the call this time for the first time. As you know, let me please briefly recap our optimization program called Fast Forward 2020 is a 3 year program that we set up based on speeding up our efficiency gains in our internal operational excellence. So we started this program based on 2017 baseline and we are going step by step through the whole program with the different streams as said before. It actually hits and covers all areas of the organization. And we made a clear plan what are the steps that we can take year over year. So we had already last year delivered SEK 20,000,000 on step change improvement on optimization. And for this year, the clear guidance is to reach 1,000,000. I want to explain to you once again that this is this is not a linear, stepping up and linear calculation because what we do here is a number quite a big number of single initiatives. And particularly in the manufacturing area, we do have a certain lead time for this project So you need to go, especially if you go into automation, you go in with the project team. And you have also some temporary upfront project costs that you need to cover before you can go to the structural step down of the cost base. And this is what we will be factor into our this year's result and this year contribution out of the program. Therefore, we speak and we are fully on track with the planning and all the projects are currently ongoing. To fully deliver the million improvement this year, but then also be ready for the next step because remember, we have a full year program, full program contribution of SEK 120,000,000 envisaged, which means it will deliver next year another 1,000,000 of structural improvements. And that's what we are working to So I hope that clarifies a little bit the approach that we take. I have two questions have in relation to restructuring costs. I can sort of allude to this in the following way that this will be a single digit million number at the year end. For the whole group. That's our prediction at this stage. And your last one was referring organic growth. If you take actually our upper range of the guidance that we provide you with for the whole year, you will see that there's some organic growth included in this. So you have already to answer your question, you will see some organic growth in the second half of this year. The next question is from the line of Gregor Kuglitsch of UBS. A few questions from my side. Can you just come back on this commodity and you kind of shrinking parts of the business? Can you just give us a sense when that started, perhaps it's a journey you've been on for a while and perhaps we haven't quite seen it because of the the overall market strength. But if you could just give us a sense kind of how much revenue you ultimately just want to exit, I appreciate this very low margin business, but for our purposes, so we don't have that in expectations. So we don't perhaps get disappointed by lower top line as you exit these businesses. That would be really helpful. The second question is just kind of a looking at Q2. So I think Q2 had a percent of organic growth. Obviously, it's sort of a shift from Q1 to Q2. What's your kind of sense for the underlying run rate? Because I appreciate this trading days that obviously went against you. There was probably winter effects flowing backwards in forward between Q1 and Q2. So, when I get a sense, what do you think the underlying growth is, kind of, and then you mentioned July there, if you're kind of tracking back on track, I guess, in July. And then in the slide pack, I don't think you talked to it, but you did a few slides on the UK, I believe. Would be interested to sort of get your summary thoughts there. Obviously, most of us sit in the UK. So kind of quite close to the market, but I'd be particularly interested in, how do you sort of trade flows matter for you and the foreign exchange? Because I think you're importing a meaningful amount into the UK. So it would be interested in how that how the economics change for you if sterling is 105 or 106, which is where it is now. Compared to maybe a year ago? Or does it kind of is it too small, to matter? That would be it for me. We will share the questions, Diego and myself. I would like to say one thing on the UK, if I may, before really intervenes, we remain confident on the UK as you have seen from our presentation. We just wanted to make 2 things clear. First of all, we are prepared to any sort of legal changes that might arise from it and the whole sort of Brexit situation. We have prepared and trained for this now a couple of times in the company. So everything is lined up. I think this is just that you can tick your box, Winneberger has done the homework from the logistics side to all sorts of other aspects of the business. The underlying business in the UK has been strong. In the first half, we have made again good progress, good progress in volumes and in margin. So I think this is a good news for you also that you can see that our business is developing very well in the UK, and we are making good inroads. And again, this is not only due to the fact that the market is supportive, but we have actually outperformed the market again with our solution approach and with different angles like the services that we provide to our clients, etcetera. On the logistical side, one thing, Gregor, is cleared most of our products are UK based and produced ones. The ones that we bring in from the continent namely Belgium and the Netherlands. We have optimized our logistical side. We have, obviously, from a cost side, very attractive cost prices and cost structures on the continent. So we are highly competitive. And on top of it, it's a unique product range that we have there, and it makes very good inroads and still does in the UK because we are continuously innovating it. And I think on the foreign exchange, really, if I may hand over to you? You will never hear me say that something is meaningless, yes? But it does not make a big difference in the total picture. We try to hedge first. That is one thing. Secondly, of course, when you see the pound getting weaker, We have something new now as well. We have a business that you acquired on the new K, which is on roof accessories, which will be exporting some of its products into the continent. So we get a little bit of a, a quality natural hedge there as well. And secondly, if you look at the total build cost of a house, bricks are still about 5% and that's typically what we talk about in the UK. And the bricks we import or we bring out of the continent to the UK market are in the higher end of the housing. So I think it doesn't matter. It may take up a few percentage points from our pricing, but not more than that So it's not really a big, meaningful thing. And mind you, we do have our improvements also in productivity on the fact that are producing those bricks. So I don't see a big issue in that. If I come to your question about, the underlying markets and markets turns, I think you described it very well. It shifts between the quarters, you can then start talking about, days in that you can number of days in activities. Yes, we saw like most of the industry, we saw a weakest month sometimes, and then you pick it up afterwards The underlying trend in the first half of the year is exactly as we expected for it. And it's continuing and it's giving us the full confidence also for the second half of the year. So that's a very clear statement on that one. Your first one, Gregor, was on the what we call the lower margin business and how we sort of structure this approach. It is obvious that this is something we started a couple of years back. This transition phase and this transfer, you can't do it in a month or 2. You need to prepare the market for it. I want to give you 2 examples basically. You remember that we indicated that we want to restructure our pipe operation in France. France has been very much centered on pure commodity pipes for infrastructure with very low margins a very low single digit margin EBITDA. So we clearly said this is not going to continue. We exited from a production perspective, we had the restructuring costs and therefore, we are now concentrating more on agricultural products and some sewage So here, it's a transition that we started 2 years ago and actually, which we see now kicking in. The same goes for the ceramic pipes where we had our closure in Germany and where we go out of some of this commodity type And there are some brick countries as well. We leave certain very standardized commodity bricks and move more in to high insulating infill blocks, etcetera. Prigger, if you don't mind, I take up your question and we will sort of give you a more color to this on the capital markets day in a month's time because I understand that it is important that you understand where the company has such the group as such is moving to, but I just wanted to give 2 examples to get the better view from acquisitions in the first half from your slides. Can you update us where that's supposed to be for the year based on the deals you've concluded so far? A little bit above 10,000,000. Excuse me, Mr. Ofner, there are no further questions at this time. Ladies and gentlemen, thank you for your questions and for dialing in today. At the end of this call, I would like to bring to your attention our upcoming the Markets Day, we will host the management presentation in London on 16th September and a follow-up, and we will follow-up with the presentation in the York on September 'seventeen. If you would like to obtain more information about these events or you would like to register at the location that's most convenient to you, please contact the IR team. So all that's left for today is to thank you again for your attention. Have a nice day, and goodbye. Ladies and gentlemen, this concludes the Vina Vega conference call. Thank you for joining and have a pleasant day. Goodbye.