Earnings Call: H1 2017

Aug 17, 2017

Ladies and gentlemen, a cordial welcome also to all those who are listening via a webcast, a cordial welcome to our midyear press conference. Let me give you a brief summary. Wienerberger delivered a good performance in the 2017. We are on track. We took advantage of the growth opportunities which we saw in a challenging market environment. We were able to provide evidence of our earnings strength by consistently implementing our strategy: organic growth, process optimization, cost optimization, launching innovative products and, of course, selective growth projects. That was our strategy, and we will continue to focus on this strategy. We were able to increase our net profit significantly also due to the fact that we redeemed part of the hybrid bond. So we confirm our growth targets. When we look at the individual operating segments in detail, let's start with Clay Building Materials Europe, that is bricks for wall, facade and roof applications. You can see that in all segments, roof, wall and facade, growth was generated, volume growth. Another point is also important to underline. We were able to benefit from a livelier residential construction activity, particularly in Central And Eastern Europe, to increase our average prices. That led to an increase in EBITDA by 19%, which is profitable growth. As regards to the markets, we saw a diverging picture. Eastern Europe was doing very well during the first six months of the year, good growth rates in all Central And Eastern European countries. Western Europe, there were diverging developments, and therefore, the picture is slightly different. The U. K. Market is still very strong, both in roof tiles and facing bricks. In France, we had a good market before and also after the elections and lively residential construction activities. Germany is slightly weaker. There is a downturn in the number of building permits granted for single and two family homes. And what's interesting about Germany is that there is a shortage of skilled labor at the construction sites, and that slows down construction progress. That applies to all of Germany. And of course, with elections coming up, there is a certain degree of unrest and a bit of uncertainty, but this is a temporary development. And I would expect the situation to stabilize after the elections. In the Benelux countries, we do see a continuation of a positive development in The Netherlands. Belgium, slightly weaker in the second quarter. There was a shortage of insulating material, particularly PUR insulating material was in short supply, and many construction sites, therefore, couldn't be completed on schedule. So there was a slight decline there as well. But in principle, the activities overall were strong. The second important segment in Europe is Pipes and Pavers. Our plastic pipe activities were carried on in a sound market environment in Sweden, Norway and Finland, but also in Austria. So the basic business was going well. The Eastern European market also showed. And you will remember, we mentioned that already at the press conference at the beginning of the year. We said that Central And Eastern Europe would be picking up again, that EU funding is being taken up again for infrastructure projects. Now this is materializing, and we see a positive trend in infrastructure in Central And Eastern Europe. As regards plastic pipes, our project business was not going so well. Our international project business, We had a low order intake in this specific but highly profitable segment of Pipe Life. Those are this is business which is being managed from The Netherlands and from Norway. And unfortunately, we saw a slowdown in the market, a rather quiet market as far as demand is concerned, and it probably will not change for the rest of the year. So demand is low, and that has a strong impact on our earnings because this is, in general, highly profitable business. Raw material prices also increased fast. And in Western And Northern Europe, we were not able to pass on these added costs immediately to our customers, but we will succeed in doing so over the summer. And we take it that this was a temporary effect. You will remember that we always said that in plastic in the plastic pipe business, price increases can be passed on within three to six months. France is another issue for plastic pipes, a very difficult market environment and an unsatisfactory performance of our activities in France. So that too depressed the result of plastic pipe business. Ceramic pipes were doing well, and Steinzag is back on a growth course. And in Central And Eastern Europe, demand is picking up in the infrastructure sector. But that was not enough yet to offset the shortfall in international project business. North America, that is The United States and Canada, we saw a good development in residential construction. We generated significant growth in our brick business, and we also saw positive signals as far as average prices are concerned, which were increased slightly. So it's a step in the right direction. In the South Of The United States, our plastic pipe business was doing better than in the past. And this means that our result our earnings increased significantly in this segment. Revenues, euros 1,500,000,000.0, plus 4% EBITDA, euros 190,000,000, plus 7% EBIT, plus 22% to €69,000,000 and the net result, highly satisfactory, up by 54% to €41,700,000 And now I hand over to Willy for the detailed results. Good morning, ladies and gentlemen. Revenue growth in the first half of the year was accounted for by plus 3% in sales volumes, plus 2% in sales prices. That means we succeeded in increasing our prices in all segments, in bricks, roof tiles and pipes. And also in The United States, where things are taking on a new dimension, prices used to be flat in The United States, but we have succeeded in increasing our prices. We had no consolidation effect, and we had a negative FX effect, minus 1%. That corresponds to approximately 10% of revenues and is mainly due to the British pound and the Turkish lira and slight movements in the U. S. Dollar. But it was the British pound which had the strongest impact. When you look at EBITDA, we can see an increase from €178,000,000 to €190,000,000 as reported. If that is presented in a slightly different way and if you adjust it for currency translation differences and for proceeds from the sale of noncore assets, then you can see that the like for like increase is still plus 5% from €176,000,000 last year to €185,000,000 this year. So here, again, strong organic growth. The income statement as a whole shows plus 4% in revenues from €1,400,000,000 to €1,500,000,000 EBITDA, euros 190,000,000 reported depreciation and amortization slightly below the previous year's level because we invested very well and reasonably, but less. So that means a slight decline in depreciation and amortization. Operating EBIT plus 22%. And then a purely technical issue. We had to book an impairment charge to Steinzeich Kerramo. This is not based on operational business but rather on a technical conversion because the long term interest rate has gone up slightly. WACC has also gone up slightly as a result, and we booked a repair impairment already last year. So we had no more headroom. And any negative movement leads to an impairment, which is a purely technical issue. EBIT plus 13%, that is €10,000,000 better than last year. The financial result, there are two things to be considered: an organic improvement, I would say, because we are drawing more on lines and not on bonds. And as Jaime Schoich said, at the beginning of the year, we called the hybrid bond, one of the two hybrid bonds in circulation, euros $213,000,000, which was converted into debt. And what we were paying on the hybrid as coupon for the first two months, We refinanced at 1.2%, and that gave us a slight increase in the negative financial result despite the positive cash flow development. Profit before tax, 72,000,000. Income tax is more or less the same as last year. Profit after tax, 15%. And you can see the effect of the hybrid bond. One was redeemed, the older one. And the new the pricing of the new hybrid, the 2021 hybrid, has gone from a coupon of 6.5% fixed to 5% fixed. So that means €7,200,000 instead of 16,000,000 and that has an impact on the net profit. So we had a positive development of the net results through improved operational performance and reclassification and redemptions. Cash flow development, the gross cash flow, the difference against the previous year is mainly due to taxes paid. We are highly profitable in a number of countries, but those countries are the ones worth high taxation. That is Western Europe and Northern Europe. And we're paying tax, a lot of tax there. And there is a time lag between the booking and the result and the actual payment. So the difference in gross cash flow is due to that effect. So basically, it's a positive effect because it means that we utilized our losses, and we're now paying taxes on our profits. Working capital has gone on gone up slightly from the previous year, but that is in line with increasing revenues. If you remember, we started the year with low inventories. We had to build up inventories because you haven't got inventories, you can't sell anything. So we have a slight increase in working capital. Normal CapEx, almost the same as last year. And divestments and others, those are the sales we made, the disposals. Free cash flow, slightly below last year because we paid tax on the previous year's profit, and we have a slight increase in working capital by EUR 20,000,000. Growth CapEx, very low. And the dividend and the hybrid coupon, of course, we paid out a higher dividend, and that is offset by the lower hybrid coupon and the buyback of the hybrid bond last year. So all in all, very satisfactory net cash flow, although it has a minus sign, but that is due to the seasonal buildup of working capital, which will be used up in the course of the second half of the year. Development of net debt, completely in line with what I said about the cash gross cash flow, positive contribution from gross cash flow, then the dividend and the hybrid coupon dividend paid in May, hybrid coupon paid in February. Total investments, 58,000,000 and €160,000,000 from working capital and other €790,000,000 is our net debt. This is net debt to EBITDA, which compared with the 06/30/2016. In 2016, we still had the full hybrid coupon on the balance sheet as equity. It wasn't contained in debt. So our cash flow was much better this year during the first six months. So the increase in net debt is due to the buildup of working capital, 200,000,000, which I'm sure we will bring down to a very good level. We said net debt to EBITDA should be 2x at the end of the year or even less than that. And this is being underlined by a strong liquidity reserve, which we have on our balance sheet and undrawn credit lines and also the maturity profile, which is quite flat. Ladies and gentlemen, as you can see, we have a very sound financial basis. So we are quite optimistic for the remainder of the year. When you look at the map, you can clearly see that Central And Eastern Europe is green. Here, we have a positive development in the single family and two family homes. This is also due to the fact that in some of these countries, there have been positive signals regarding residential construction, regarding taxes or possibility of write offs. And this is going to remain like this until the end of the year. In Western Europe, as I've already indicated, the picture is more divergent. In The United Kingdom, construction activity is slightly above the level of the previous year. There was we could reduce the pent up or brought up supply chain. So here, demands have slightly increased over the previous year when it comes to new housing and also in the roof segment. The situation in The Netherlands is similar. We've briefly talked about Belgium. I mentioned that there is a shortage of or there has been a shortage of insulating material, but the situation should become stable in the course of the year. The macro effect for France is not yet shown here. There is strong activity in the residential construction segment, which is going to continue for the remainder of the year. Germany, as I've already indicated, there has been a slowdown of building permits for single and two family homes. And I've already mentioned that this is linked with the upcoming elections in autumn of this year. In some parts of Germany, there's still a lack of housing, and we do see a positive trend towards bricks in Germany, which we are very happy about. So much on clay building materials in Europe. Pipes and pavers, again, a similar trend. Central And Eastern Europe, as already indicated, has now made use of regional EU funds, so there will be a positive market development. Regarding infrastructure, the demands in The Netherlands and Belgium are good. And this is also true for Northern Europe, which are important markets for pipes. So we expect a positive development in the second half of the year. France still will remain a very challenging market, as I've already mentioned. As already indicated, the international projects here, we are clearly below the values of last year. The outlook for North America, including Canada, a positive development as compared with the previous year in the new construction of residential buildings. So we are expecting a significant growth in sales volumes. As a result, our ambitious goal is something that we should be able to achieve. It's not going to be a home run, to use a metaphor, from football. It's a very challenging goal. So when we look at the organic growth, this is going to be continued in the second half of the year, operational excellence, another €10,000,000 savings. We are working hard to achieve this goal. And of course, we will also try to make sure to develop our business in all the segments. What is not included here are foreign exchange effects, consolidation effects, sale of noncore assets and also the sale of noncore assets. As we've seen in the first half of the year, foreign exchange effects are negative as a result of the sale of but they can be compensated by the sale of noncore assets. Altogether, we expect that this ambitious goal, an EBITDA of €415,000,000 can be achieved. We want to continue growth in the second half of the year. Depreciation will be around €190,000,000 The net result is already known. Working capital was mentioned by Willy van der Ite, a buildup in the first half of the year, decrease in the second half. So we should achieve about 20%. Investments CapEx about 144,000,045 million euros and maintenance and small projects growth, we are optimistic as regards bolt on projects and smaller acquisitions. So we are expecting about €25,000,000 We are working intensively on a number of projects. You are aware, of course, that Wienerberger, in all its geographical markets, looks at all the possibilities of achieving further developments, particularly when they fit into our strategy. So there may be one or the other acquisition in the coming months. So much for a brief outlook for 2017. Our goals for the second half of the year are ambitious, but we are optimistic for the second half of twenty seventeen. So thank you very much for your attention, and we are now available for questions. Thank you. So are there any questions? My question concerns the outlook for Germany, in particular. Competitors in the construction segment are dreaming of their best years because Germany has a lot to catch up. In your strategy and your outlook, Germany seems to expect a stable development. That is a bit disappointing considering the environment. Why is that so? I think we have to distinguish two things there. When we look at the various markets in Germany and statistics have shown that in recent years, we see a declining market in renovation because there are no government incentives for renovation. And renovation is an important market Germany, and that concerns us as far as roof tile business goes. Then there is the infrastructure market, and Wienerbegger is almost nonexistent in infrastructure business in Germany. Infrastructure is a very small market for us because we have very little market presence in pipes and pavers. And growth is stable, if not declining. And when we look at our ceramic pipes, that is the classic sewage pipe business, we can see in Germany that pipes are being repaired or sewage systems are being repaired but not newly built. Municipalities are trying to save money. So all that remains for us is housing construction. Housing construction was the basis of our business in recent year. We have multistory residential construction in towns and single and two family homes in the surroundings. We do expect a positive environment, and growth rates for clay blocks are good. The market is growing slightly. It's not double digit growth, but it's sound solid growth. And we are also growing because we have new products such as infill bricks because there is a trend towards higher value product. So I'm not my mood is not negative about Germany, but perhaps I'm a bit more realistic than others because others are dreaming about figures which may not materialize. And there is another very important point. There is a shortage of skilled labor in Germany. Germany will not be able to build as much as it should because it doesn't have the skilled labor for work on roofs, facades and walls. It's a problem which the industry as a whole will have to take up. It's also an issue for political decision makers in Europe as a whole because Germany is always a good indicator of what's going to happen elsewhere. When Eastern Europe opened up, we had a luxury situation, so many people moving from the East to the West, but this is not going to go on forever. And when you look at The UK, the Brexit debate is an illusion because The UK needs people to work at construction sites, people that don't exist in The UK. And the same goes for The Netherlands, Belgium and Austria. So that is a very important issue indeed. When you are talking about Europe, Europe as a location for business and industry, a lot will have to be invested in infrastructure, and we need skilled labor for that. We need people working in our industry. A technical question. Concrete construction is getting more and more important. I think that's to do with new technologies in concrete construction, three d printing, molded components, cast components. Isn't this a reason for you to think about the business model? Bricks, will you have to communicate that more to the outside world? Well, I agree with you. In urban construction, concrete is getting more and more important because of prefabrication. Bricks in urban sorry, in rural regions are getting more important again. I at the press conference earlier, I showed examples of many applications of brick construction. We are working on the issue of prefabrication, brick walls, assemblies of brick components. This is something we don't have yet. We want to create value by supplying such components. Austria is not always a pioneering country, but we are very active in the Benelux countries, in prefabrication and also in Germany. When you look at the large developers, only in Austria but also in Germany, we are supplying components, prefabricated components, including insulation. Concrete is fast in application, but concrete has no insulating effect. You need additional insulating material. And this is not sustainable because this is something you when the building gets torn down, you have hazardous waste. And this is not sustainable. Any more questions? Thank you very much. An outlook into the future. On ninth November, we will publish our results for the third quarter. Again, there will be an international conference call. And I would also like to invite you to the Capital Markets Day on the September in Sweden in Porras near Gothenburg. You will get an update on our group strategy with focus on our core business. So we will take a look at activities in the Nordic countries, Norway, Sweden and Finland. So you will have an opportunity to meet with local managers and decision makers. If you have any questions, please contact our team. And finally, let me thank you very much. The meeting is closed.