Earnings Call: Q3 2018

Nov 8, 2018

Ladies and gentlemen, welcome also from our side to this conference call on our results for the 1st 9 months 2018. Meenabego representatives on today's call are Jaime Schoig, CEO and Billy Finried, CFO. Mr. Shoyd will open the call with a summary of the key developments of the 1st 9 months, our strategic priorities, as well as our outlook for the rest of the year. Following the opening statement, we will take questions. I now hand over to Mr. Choi, 40 executives. Thank you, Flouse. A wonderful afternoon from all of us, from Vienna to you on the conference call. And let me just, sort of comment a little bit the third quarter. We have obviously seen a strong performance with respect to turnover plus 7% and the EBITDA like for like plus 13% So fully in line with our expectations. We have obviously, due to this strong operational performance, we continued the strong cash generation that we have seen already in the first half of the year. So fully in line with what we have been giving us a guidance Let me just make a couple of comments with respect to the general economic situation and the markets that we're operating in. So again, when we look at the different regions that Central Eastern Europe region is performing accordingly, markets are still in continue to be strong and sound markets as far as new housing is concerned and infrastructure. So there's no change and no foreseeable change in this region of the world. We move to Western Europe. Here again, we have seen the fairly the same and similar developments as we have seen in the first half of the year when it comes to the Benelux suite sound and good development. The UK has seen a very good trend also continuing in the third quarter. And Germany and Austria have been sort of stable and in some parts, slightly increasing. When we come to France and you have seen it in our map, which we have attached to this presentation, that's the only country in Western Europe where we have seen a decline. You remember, we talked about the fact that the legislation and fiscal policies has been changing and has sort of the change has occurred in France. And therefore, we have a drop in activity in the new residential housing segment. And therefore, obviously, we see this tendency to continue also in 2019 as far as France is concerned. Want to draw your attention to the fact that obviously this market is viewed as a declining market in our market perception. Also for next year. The Nordic markets are doing accordingly to expectations and also North America has performed with respect to the new residential housing and infrastructure, our small exposure and pipes accordingly. So no major changes as far as the markets are concerned. When we move to the operational performance, let me just draw your attention also that our fast forward program that we have implemented earlier this year is taking full effect. You see a contribution coming in already in quarter $3,000,000 of $8,000,000 from this program. So the whole fast forward contribution up till the 3rd quarter, including the 3rd quarter 16,000,000. So we foresee to achieve from this program, approximately 20,000,000 this year. So again, we have shown that we are clearly already in full mood mode mode of operation when it comes to the fast forward program. As you recollect. We have guided $120,000,000 efficiency improvement here. And as we walk you through a little bit and as we did at the Capital Markets Day, I think it's important to stress in that, especially when you talk about manufacturing excellence, procurement, supply chain management, general administration and turnaround, cases, all of these elements are internally based. That means we are in the driver's seat in order realize them and we, as Vina Bega are confident in order to realize such potential because obviously the project is already running and we see the fruits coming through. And we are confident as far as the 2 next years are concerned in 2019 2020 to realize such potential. Obviously, in this respect, we have also moved in a simplification of our organization We have, basically, in Europe, 2 major parts. Now, Vina Bega Billings Solutions and Vina Bega piping solutions to divisions that regroup this, and you will see this in full effect from next year onwards in order to make the organization more efficient and driven by obviously this aspect also to create more of a service and solution driven products offering for Vena Becker. When we, let me just also say two words about the general economical and political situation. We have added a slide in today's presentation on Slide 11. Because obviously there's a lot of questions coming in from you, shareholders and colleagues of yours with respect it is. Vienna Berger as a company and as our exposure to the different market is not affected by global trade wars or a potential global trade was because we produce locally and we sell locally. So this is important to note. Obviously, the political turmoil around this create some sort of stability instability and volatility on financial markets where we are also affected. But Generally speaking, from the real economy, we are not affected. 2nd big issue, politically speaking, is the Brexit. Lot of discussion about it. We have had it also in our conference calls throughout the year. We are confident and I always signaled to you that we remain confident as far as the housing market in the UK is concerned. We have a very sound good demand level there. And, as you all know, where the UK remains underbuilt. So there a lot of pent up demand still in the UK. And we remain confident that also through this political instability, there is this pent up demand for the years to come. Our operations are fully running in the UK. We have prepared our sales also for eventual hard Brexit events because it's for us important. We rely on spare parts from from the European continent as far as our operational entities, our factories are concerned. So we need obviously to have here stock available in case of the delivery, shortages or whatever sort of turmoil on potential border issues. We've all also lined up our operations as far as logistical issues are concerned bringing in some of the products from continent to the UK. So we have done our homework and are about to do it, but obviously, we always believe, and I still personally believe that they are reasonable people on both sides of the channel that will negotiate a deal that is not bringing us in such critical situations when it comes to logistics. Let me just touch upon also, subject, which is important to us also to grow subject when it comes to M and A activity. We have now up till now this year realized about roughly EUR 100,000,000 of this program. We already have indicated for this year, we will do up to $200,000,000. Obviously, there's a month or more left for this year. You won't see us spend so much money before Christmas, but obviously there are some projects and some very interesting projects in the pipeline And this will sort of come through probably this year and earlier next year. So just want to make clear here that we pursue our M and A activity and to that we have very good projects out there in the marketplace. Finally, to summarize, as far as the the other activities are concerned. I just want to draw your activities that we have successfully executed our share buyback program where we acquired 1,200,000 shares. This earlier this year, And obviously, when it comes to the outlook for this year, we fully confirm our outlook, which is in the range of 4 the median EBITDA for this year. So all in all, I think if I may summarize, we are continuing our growth paths. We focus obviously as we already did and will continue to do so with respect to the company. Innovation, you have seen us, by the way, already also indicating earlier this week that we launched the cooperation with the German, high-tech company in the field with respect to new products. It's a very innovative insulation material that we are testing right now. And that we will then step by step bring to the market. It's a very good one, easy to install, very healthy for the indoor air quality of the house. And above all this very important 100 percent recyclable. And in this circular economy that we see picking up in activity in the construction arena, a very important aspect for our future growth. So Vina Becker will focus on innovation, drive this, We'll focus obviously on the performance enhancement where we are confident in order to reach our targets that we have set. And we will also continue our growth path with respect to the M and A activity where we'll add this smaller companies or midsized companies to our platform and therefore improve the quality of our margins. And you have seen, by the way, in quarter 3, the strong market, the margin expansion already. So all in all, a positive outlook for this year, and I look also with optimism beyond that. So thank you very much for your attention and all of us are here ready to take your questions. Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. For questions. The first question is from the line of Pete from ahead of Exane. Please go ahead. Good afternoon, gentlemen. I'll have three questions. I may. The first one is on underlying trend in Europe. When we look at leading indicators in some of your markets in both Western and Eastern Europe, they have started to weaken recently. Do you think that this is rather a blip from a difficult base effect or have you seen something fundamentally changing. And then maybe just a follow-up on that one. In Germany, I think there has been a push towards some fiscal initiatives What is your view on this? And do you expect this to go forward given the current political environment? My second question is on gas costs. Could you give us a sense of how much of your gas as well electricity requirement in 2019 is hedged already? I would be interested to understand when those hedging contracts took place, if you can mention that. And my last question is on the pipe business, I was looking for an update on the training conditions on the international pipe business and the large diameter pipe business in terms of the conversion of those projects into your revenue base? Thank you very much. Thank you for your questions. Let me just answer the first one. We don't see any fundamental changes. The only change that I, sort of talked about in alert due to is the French 1, and I think your clear aware of the French situation, so I don't have to add to this. But the rest, we don't see any sort of signs of major fundamental changes. As far as the German situation is concerned, yes, there are discussions about some fiscal initiatives, let see and what it brings. But again, also here, I remain rather sort of optimistic that the German situation will sort of continue and hopefully with some fiscal initiatives and positive signals improve. And for the gas situation, I will hand over to Willie. But we have roughly, if, includes forward 80% of our gas and electricity for 2019. I can't give you the dates, but we've covered some of those contracts went out after the holiday period. So in an environment where prices were already increasing also the forward prices. So we are looking at an increased gas bill for 2019, but at this stage, not to an extent that I would say that this is a major headwind or not something that we can cover, through our pricing increases. I don't know by heart when they, but I know some of those coverage went out after the holiday period, basically. And on the buy business, on the project, the long length large diameter performed is performing rather well. And it's basically more or less on track on the expectations. What is still lagging a bit behind is the sorry for us, the reinforced pipe in the Middle East, where we are seeing, confirmations of orders coming in, but we're not having the deliveries yet. So there were a little bit lagging. So the growth you see in the Western European part is mainly in the long length tire meters. Okay, thanks. Just coming back on the gas costs, could you give us a sense of what variable cost inflation you'd be looking at in 2019 already? It's gonna be around At this stage, still having to cover some of the costs for the year, I would be cautious on giving something at this stage. However, it's, it's going to be a negative, not one that I would worry about too much at this moment. Okay. Thank you. The next question is from the line of Mateo Sveinberger of DB. Please go ahead. Yes. Good afternoon. Just a couple of questions from me. Firstly, on France, maybe you can still share some details. Is there rather rather quick reversal in fortunes because you're announcing it's minus 3 or or worse, for the year, and that's basically down from flattish and up prior to that. So it seems to be like falling off the cliff. Secondly, on winter, you had a very strong winter, I think, in the last 2 years. Now can you just remind us, November is very warm again in parts of Europe? But I think I recall you saying that it's really decisive about December, maybe just an update there. And then just housekeeping tax rate in Q3 quite low. Can you give us a guidance for the full year and also similarly for depreciation rates? Thank you, Matthias. France is not falling off a cliff, but obviously due to these measures, which can be qualified legislation and fiscal policy, we will see a sort of mid range, a single digit number of of decline in the marketplace. That's what my estimation is at this stage. From the winter perspective, Remember last year, we had also a very mild fall. We had obviously the possibility on our not our construction sites, but the customer's construction sites to work through till about Christmas. So, from our perspective, you're right. This the weather currently is also more or less the same and good from, I can also, everybody informed that also the month of October was in line with our expectations. So I think again, when we have the same running rates, we are set for reaching our guidance. And for the tax rate, I'll let you look out. Please don't think that we do redo every quarter of complete tax calculation. So what we're doing is actually, rolling forward of our tax position in various tax being environments where we are. And what you've seen in, in the third quarter is basically a little bit of an adjustment on what we already had in our books for the first half of the year because we are coming closer to the year end and our tax or estimates of our taxable income get better and also our deferred taxes. I can simply confirm that we still look at a 25% average tax rate for the full year. And that's why it is this, don't take really a guidance in a quarter as a guidance for the year. I think that would be not too good. Either on the other side or on the downside. Okay. And that would imply very high, like, 30% plus in the fourth quarter? And then maybe on depreciation, if you can. Depreciation for the year. I think roughly $180,000,000, $90,000,000, excluding any impairments and impairments we will still look at in the course of our usually we do that in the last quarter when we look at the impairment valuation of our balance sheet. Okay, thanks. And could you just remind us of the volume versus price in the 9 months or into Q3, if you can? Yes. We have, 6% on reported growth in the top line. We communicated, sorry, also 5% like on like. So that means that consolidation and Avix was 1%. And then on volume, I would say it's 1% than price 4. The next question is from the line of Gregor Kuglitsch of UBS. Hi, good afternoon. I want to explore a little bit the third quarter, in pipe in pavers. It's not perhaps that straightforward to calculate, but it looks like on an underlying basis, there was a little bit of margin pressure and reversing some of the gains in the first half. So I wanted to understand, A, if that conclusion is correct, I appreciate that not some of the one offs are not as easy to allocate although you do give some help for the 9 months. So if you could just comment if there's anything specific going on that impacted the 3rd quarter. Similarly, in the U. S, obviously, we're hearing about slowdown in housing starts and a lot of your kind of wider building product peers have started to see a reasonably substantial slowdown. So if you care to comment whether you're seeing that as well or whether that's not relevant for your particular end market? And then can you just come back to the energy cost point? Can you just remind us this year, since 2018, including kind of hedging and so on, will your gas and electricity cost be the what will be the change compared to 2017 I guess you already, you should have a pretty good picture of what it will be. I don't know if you kind of have a percentage inflation or deflation, that would be helpful. Thanks. Can I just comment before really jumps in? I think on the U. S, obviously, we monitor also the market, our relevant market, please keep in mind, we are not a Penn U. S. Player. Yeah. So we are in smaller markets of the U. S. And regional ones. We have never sort of took into the consideration a booming U. S. Environment as slight growth in the market and obviously we with our products and how we operate in the in the U. S, we see obviously in line with our expectations to market development. It's too early to see what will happen in the next coming years, but obviously, as I said, we are operating in this in this environment and we continue to see our trends and our demand volume coming through. The energy, I think when you compare 17 to 18, it's a flattish scenario with no major increases. And then we have the pipes for Village. On the pipes, we've seen a little bit of, I would say, flattening out around us in the third quarter, especially in some of the orders in East Europe. And that's, I think, just a reaction to the fact that the beginning of the year, on the first two quarters, there was a very big a high demand. And then it seems to be normalizing more or less, but still a growth, still positive, but if you remember, the beginning of the year, we had a bit of a winter. And then all of a sudden, everything took place at the same time. So we had a very strong expansion all of a sudden and this is just a counter reaction to this. Okay. But nothing that indicates that the market is weakening or the demand is there actually to the contrary. Projects are still coming in, but it's bit on the other side. I guess I was looking at the EBITDA. It looks like it's down, but maybe my math isn't right. It's sort of excluding the one off, so I don't know if that's correct. In the third quarter? No, Mark, EBITDA is up actually. There are no further questions at this time. I hand back to Mr. Oster. Thank you, operator, ladies and gentlemen. Thanks again for your interest. For dialing in today. Actually, all this is left for today is to thank you for attention. We wish you a nice day. Bye.