Earnings Call: Q1 2017

May 10, 2017

Ladies and gentlemen, welcome to the Winebagger Earnings Call on First Quarter Results twenty seventeen. Thank you for dialing in. Winebagger representatives on today's call are: Jaime Schoich, CEO Willi van Ried, CFO and Stefan Huber, Head of Corporate Reporting and Treasury. Jaime Schoich will open the call with a summary of the key developments of the first three months and speak about our outlook for the remaining three quarters of the year. Following the opening statement, the line will be opened for questions. I now hand over to Mr. Schoich for the executive summary. Thank you, Claus. A warm welcome from all of us from Vienna, Austria. I would like to briefly present our set of results of the first quarter. As you all are very much aware, the first quarter for us is sort of a very small one. It's not a significant part of the year as far as construction business is concerned and the building material business is concerned. However, we have seen obviously some good indications in Europe and in The U. S. Now more in detail to our what we would call a strong set of results. We have been able to improve our turnover by roughly 8% to EUR660 million in the first quarter. This comes actually in light of a rather weak start into the year, weak because we had a severe and harsh and cold winter in Continental Europe, especially. So January and February have been slow months as far as building activity is concerned. Obviously, we have seen a good pickup and a good underlying business in March, and all of this has led us to a strong increase in turnover, as I said earlier, by 8% growth. The EBITDA also was very satisfactory with 15% growth coming in at roughly €46,000,000 So good contribution from all the businesses of our portfolio. The net debt level rose a little bit due to the stronger business. Obviously, working capital went up. We had stronger activity. And as you are aware, we have this working capital swing of more roughly about CHF 200,000,000 anyway in the first part of the year when we start our business. So financially speaking, a very satisfactory performance in the first three months of this year. If we look a little bit more in detail to our different businesses, let's start with the clay billing material Europe business. We have seen here mostly through all of our geographies, a good underlying trend in new residential housing. Let's start with the Eastern part here. Good growth rates in all the countries concerned where we are active in our portfolio. Good growth rates in new residential housing, Central Europe or Western part like Germany also, the Dutch market saw a good trend. The Belgium after this stabilization in the last part of last year, we've seen here also a good trend forward. The French market developed nicely. And also The UK market has shown strong signal of good activity in the first three months of this year. Pricing has been also on track. It took a little longer obviously to get up prices in the Central And Eastern Part of Europe, because obviously as I explained earlier, the weak start due to the weather conditions. But we remain positive as far as the inflationary cost increases that we get this through to our customers in the whole business of clay milling materials in Europe. When we look to the renovation part here, it's obviously the roof tiles that is very important to look at. Here we see the same trend as in 2016. So the market is somehow a little sort of weaker, because obviously there's less renovation businesses throughout Europe due to the issues that we have discussed extensively already last year, the lack of tax incentivization and also the lower energy prices that influence this activity when you talk about renovation. If we move on to the Pipe and Paper business Europe, here we have seen a somehow mixed picture, mixed picture because we have seen a very good underlying trend in business activities in the pipeline for our plastic pipe operations in the Northern Part of Europe. Here, I refer to markets like Norway, Finland and Sweden, also the Dutch and Austrian market performed nicely. We have seen also some sort of indications. You remember, we indicated Eastern Europe should see a better trend towards the later part of this year as far as infrastructure spending is concerned. And indeed, we see some sort of light, I would call it, at the end of the tunnel that we start to quote projects in infrastructure business. And here, a slight pickup should be possible in during the later part of this year. In the international projects business, however, and this is basically our long length pipe business and high diameter business where we do international projects and also our fiber reinforced business, we suffered a sort of lack of projects that we have seen also in 2016 has continued in the first part of this year. And there is obviously a weaker trend. As it is a very high margin business, you see obviously a strong impact on our results in the Pipe business in Europe. In the ceramic Pipe business, we have obviously also as far as the export business to The Middle East is concerned, basically it came to a standstill. So we had to adjust our whole business and the whole cost structure of this and we suffer obviously of the lack of volume in this part as well. However, again here, we see also a better trend coming through in the Central And Eastern Part Of Europe as far as infrastructure spending is concerned. The last part of this division, Pipe and Papers Europe, is the paper business. Here, we have seen a very good development on the cost side and also in from March on, I think here the volumes are picking up after the bad weather at the beginning of the year. So we should see as we have foreseen a good trend in trading for this business for the rest of 2017. Moving on to North America. North America has had compared to last year a rather mild winter. That means that in all of our areas where we are active, billing was possible. And therefore, we have seen also good trading in all the areas where we are active, Canada and The U. S. With respect to our phasing products for facade. Also here volume wise, we have seen as we predicted a good increase in activity. The Pipe business has also recovered slightly. And here also we see also a better trend moving forward into this year. On the pricing side in The U. S, we have seen in some areas a little bit of improvement. In others, it's still sort of a rather strong competitive environment when it comes to prices. But generally speaking, also a good trend in The U. S. Business. And I think for the rest of the year, if I might come to the outlook very quickly, we stick to the overall guidance for the group. So an organic volume increase of about 9% and turnover increase of about 9%. And from the EBITDA front also, I think we are moving in the right direction to achieve this sort of EBITDA guidance that we have given of EUR $415,000,000. From this stage, mean, as I said, it's a small quarter. We'll see the confirmation of the trends that I talk about more in detail in the second quarter, obviously, and then moving forward to our half year's results. But we remain confident that we will be able to achieve our guidance as far as the whole overall year performance is concerned. I think in a nutshell, this has been the sort of overview of the first quarter. We are ready to answer your questions as far as the first quarter is concerned. Thank you very much for your attention. Anyone who wishes to ask a question may press star followed by 1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by 2. If you are using speaker equipment today, Please go ahead. Hi. Just a few questions. The first one is on The UK. Given the strong start of the year in terms of brake deliveries in The UK and your unchanged outlook for the full year, I think you're guiding for slight growth. Does that imply that you're expecting volumes to be flat to slightly down for the remainder of the year? And does that mean that you've seen trends changing recently? And also I wanted to get an idea of the pricing side. You commented on U. K. Pricing being up. Is that enough to cover cost inflation? And do you expect further price increases in the region? First, obviously, commenting on The U. K. As you've seen in our market outlook, when you look at our chart, we have clearly indicated that the market growth will be above 2%. The overall growth were roughly around 2%. So we predict obviously growth in The UK and have so for already the last couple of months. Please keep in mind also that again, I'm not trying to be pessimistic. Please, nobody should misunderstand me, but we have come upcoming elections again in June. We don't nobody knows actually the accurate outcome and what this might create. We all take our assumptions. But let's remain for the at this stage of the year, especially, let's remain with this sort of growth in the marketplace that we are predicting. And on the pricing front, obviously, we have tried and are confident that we can pass through the inflationary cost increases that we see in The UK. Well, everything that we produce in The UK, we can offset that. We of course, we will see how also the pound sterling evolves in the course of the year because part of our imported goods we need to compensate there. But that's minus in the total picture that we have. And as Jaime said, we remain on our, I would say, cautious stance on The UK. That's what it is. Okay. I guess my question is also that, I mean, even with 2% growth for the full year, given the big deliveries, the statistics are out and it's double digit up. So it does imply that you're being rather cautious and it implies that slightly down volumes, which I want to get your sense on basically. So are you able to comment maybe on April? What you see have the trend continued to be positive? But watch out on also, we are restoring inventories also in the chain again. So there's a lot of good activity in the beginning of the year because everybody started, everybody started positively in the year continues actually also up to now. So we will see how it further evolves and we'll take it from there. We do as you know, we do not do our micro guidance on And just to what Willy has added, I mean, of you follow obviously our competitors listed on the stock exchange in The UK. I appreciate very much their comments as well. I also want to add, we had a very mild winter in The UK on as far as building is concerned compared to last year. So everybody is very enthusiastic. It doesn't mean that we as Wienerberg are losing out on any opportunities. We have enough capacity and also can deliver from the continent. So any upswing in the market, if there is one, we'll be able to address it and improve our even our performance there. So I think the I call it not a cautious, I call it a realistic market view at this stage for the whole of the year. Okay. Can I have two follow-up questions on Netherlands and Germany? The first one on Netherlands. Could you maybe give us more color in terms of what you're seeing in this market? And have the demand environment changed recently? Because I noticed that you're being again a bit more cautious in the market ahead of the elections. Is that really the underlying reason, the elections? Or is there something moving in the market? On the German one? On The Netherlands, sorry. I think in the Dutch one, we are not cautious at all. I think here, we see the trend is progressing. And we have after the first quarter, we have actually confirmation from what we have been predicting as far as the overall performance of the Dutch market is concerned. And maybe And one the as well. Yes. Just as in Strong growth in the family housing construction, one and two family housing construction, so very favorable for everything which has to do with the facade and the wall. And we still see an ongoing weakness in the markets. And that's the same thing for Germany, Benelux basically and France, a weakness in the renovation. Okay. It's just that on Germany, when we look at the single family permits, I mean, they've been going down for the past six months. I'm just trying to get a sense of are you seeing I said single and multiple family housing. So it's on the housing part we see Are you gaining share in the multi Yes. Okay. So are you gaining share in the multi family? Yes. This is also to be said, obviously, I think we spoke with you continuously about the trend towards bricks and the highly insulating products that we put into the marketplace. And here we see a good underlying trend here as well. Okay, great. Thank you very much. Thank you. The next question comes from the line of Miguel Borrego with UBS. Please go ahead. Hi, good afternoon everyone. I have two questions please. The first one is on Pipes Western Europe. The €8,000,000 that you're missing on EBITDA versus last year, is this only attributable to the international projects business? Is this a specific project that wasn't extended? Or is it just pricing pressure on new orders coming in? If you could give us a little bit more visibility on that, please. Okay. No, it's essentially on the volume because volumes and we are not lacking here something, but the projects are not there, yes. We are seeing projects out there, but actually they are not materializing. So here we have clearly, as you would call, a volume issue and not a pricing issue. Yes. Q1 twenty fifteen actually was the end of a number of projects that we finalized and finished. And typically in a situation like that, you keep on invoicing a number of additional services, not 15. And now in 2016, of course, what you see is we have virtually nothing. So that makes a big difference. We have a smaller extent, we have this volume loss in the clay pipes, which we highlighted also in our comments. And we have seen in France a little a weak start into the year and that's it. But nothing else really which is alarming to that extent. The major part is really on the large international, as Jaime said, a lack of volume, no projects. And given your 5% margin in Q1, could you give us a sense of your expectations for the full year? In that market segment, we've always achieved around 8% to 9%, let's say, the normal business would be a good return. Okay. And my last question is whether you already have any feasibility that volumes in pipes Eastern Europe can improve in the second part of the year. Any evidence that can support this view? Maybe if you could comment on your order book trend? Yes. As I tried to indicate in my opening remarks, we see obviously in the countries of Central And Eastern Europe a trend towards more activity in public spending and in infrastructure. And our businesses are already quoting projects. So actually, we are in the phase of a situation where the public spending is probably sort of taking place. And we foresee, obviously, in the second half some sort of growth. They are smaller ones. These are not big projects. These are local community sewage and water projects that are to be installed in these countries. But generally, yes, we see a confirmation of this trend. Thank you. The next question comes from the line of Amy Gala with Citi. Please go ahead. Thank you. I have two questions please. The first one is on optimization gains. Have you booked any in Q1? Also, you give us some color as to the nature of the projects on the optimization gains that you're talking about for the full year and the businesses that you're going to you will be delivering those optimization gains? My second question is really on the pricing pressure in North America. Can you give us some color which regions, which markets in North America do you see more pricing pressure because of competition? First of all, if I may take your second question first, I'm not referring to pricing pressure in The U. S. I'm just saying obviously that the pricing is not moving upwards, yes? Have here no downward trends or so. There's no global pricing pressure. You have some as our biggest competitor now is a merged company from the biggest and the second biggest producer in The U. S, the new company is called Meridian. So they're establishing themselves in the marketplace. And from time to time, you see here some stronger activity on pricing. But it's not a price pressure. It's not global and it's not something very worrying. I think here, we don't see yet the trend upwards in the pricing as we should have as I would say at this stage. On the optimization projects, for the yes, go ahead. For the time being, in the first quarter, we have none because typically they come in because this is a startup of the operations and not a year again. Typically, realize most of our optimizations in Q2, Q3 and then Q4 continuing with the time of production that we have. And we see a good production, I would say, leverage and optimization throughout the year. But in Q1, not yet because that's then diminished by the start ups that we have. In general, where we do we see the optimizations, we do not have big programs earning, we have individual smaller programs earning, but we are very much on in track to realize the €10,000,000 that we have put forward that I can see from what I see on the tracking instruments that we have. As my colleague really pointed out, it is all our business areas that where we are active in with our projects. So all of them will contribute to this CHF 10,000,000 of optimization gains for the whole year. Okay. Thank you. The next question comes from the line of Tobias Loschkamp with HSBC. Please go ahead. Yes, good afternoon. I would like to ask four questions. I'll keep them short. Firstly, can you give us some color of the net effect that you've expected to be to seen to that you've expected to have seen in the first quarter from the negatives from the harsher winter and the positives from the working day effect, whether you can give us a feel for that? Then secondly, the I mean, you mentioned in Pipes and Papers Western Europe that the Q1 had a particularly tough comp. When would you expect the comps to ease more towards Q3 or already fully in Q2? Then if you could give us an update on your growth projects planned in 2017 if something has already started in the first quarter? And finally, a financial question. The income from associates was might be negative this year, whereas you had last year a small positive figure. Is it has it something to do with the winter? Or is there something else that we should read into that? Okay. Let me start with your last one. You answered it yourself. Our associates sit in Germany. We had a harsh winter in the beginning in the quarter in Bavaria. So that's only related to that. We expect that to pick up. And of course, that will be fully in line again by the end of the year. On the pipes and papers comps, they will improve as of the second quarter because we will see there the effect of at least no large activities anymore in the international pipe business. So that effect we should see. I'm now twenty years in the business and trying every year to calculate the effect of winter or summer or whatever. I have not succeeded yet in that. The only thing I can say is the effect of the working days is basically 2% to 3% on volume on the full quarter. I think that is fair to say. And what we have gained on working days compared to last year, we will lose them again in the second quarter because the number of days has not changed. So that's more or less there. On growth projects On the projects, just one word on that. We have, I think, a good pipeline for potential growth projects for the year. As you will appreciate, we are discussing with certain potential sellers of interesting projects that sit within our current portfolio. It's nothing that I can report about in detail today. Nothing has affected the first quarter. If it will if something comes through, I wouldn't overestimate it anyway for the second quarter either. So I think here we will probably see some of these projects materializing in the upcoming months, but no major impact on our results or our figures. All right. Thank you. The next question comes from the line of Markus Remis with RBC. Please go ahead. Yes, good morning. Just good afternoon. Just two questions left from my side. First of all, regarding the price increases. I think you indicated in your opening remarks that there has been a kind of momentum building up over the course of the first quarter into March. If you could elaborate a bit on the markets where you see best momentum and how that developed into April? That will be the first question. And then secondly, regarding The U. S. And potential tax reform, I would be interested to hear your thoughts on, yes, to which extent you could be impacted positively from the lower corporate tax rate or whether you pay the taxes locally or in some sort of group tax scheme, Groupebenstejerung? You. I'll take the last question first. Think well, know our history in The U. S, and we've been building up some tax losses. So we have sufficient tax losses available for not paying taxes in The U. S. We also do not have never capitalized those on the balance sheet. So there's no effect basically on it. Okay, very clear. The only thing is that our tax losses will because they are unlimited in time, they will we can utilize them very long now. Okay. When you say long, it means for the next, what, five years? It depends. Well, it depends. So far, the profit increases again in The U. S. And how I that think we have enough what Willy was trying to indicate there's enough availability there in order to offset potential profits as far as taxes. Take it at least for the next five years. Okay. And on the price increases, I think what I was trying to say that as we indicated at the beginning of the year, our major goal is to offset all inflationary cost increases. I'm talking now about the clay building side, first of all, in The U. S. And in Europe. I think here we are on good track, We are confident in Eastern Europe, in Western Europe and in The U. S. To offset this. And so the momentum is good, it's okay. And we are confident obviously that this holds also in the upcoming months. In the Piping business, I think it's a little different because we have seen here some trends as far as raw material is concerned that we see some increasing prices here on the raw material front, which we have still to put through in the market. You remember, we indicated always that with a time lag of depending on the market to three to six months, we'll put these prices through. And I think here, management, as it has done in the past, will try its utmost to do that. In some markets, it will be quicker, faster or more successful in the on the short time. But I would say, in others, it will take a little longer this year in order to get it to the customers. But what's the scope for raising prices beyond input cost inflation? I mean that's your normal wording. So no margin squeeze But for cost I mean shouldn't we kind of look for more pricing power, I I think let us say the following at this stage. I think when we look at the overall picture, and you will appreciate if you look at our outlook and what the markets are doing, I would say, let's have a look how this whole picture then materializes in the first half of the year. Please don't misunderstand me. If we see a stronger momentum in one or the other region or country, we'll certainly not shy away from an additional increase of pricing. But on the other hand, if it holds out like it is as of today, I wouldn't overestimate the potential to put stronger or additional price increases through. Very clear. Thank you. We have a follow-up question by Tobias Loshkamp with HSBC. Please go ahead. Yes. Just want to ask you, you're also mentioning in the report that France has been weaker for the pipes business. And if I recall correctly, already restructured here last year. Is there, let's say, a risk that you need more restructuring in the French market? And in that regard, could you also give us a feel for the extraordinary write down that you have taken in the P and L for what this was for? Okay. Listen, on France, we will look at the and evaluate the situation and see how it is. This was a we had of course, what we had in France is we had two bad months on the weather like as well, which is not to be neglected in a big market. We have a bit of, I would say, instability in the market as well. We will evaluate it and then see and then report on that later on. But I think up to now, we take the factories as we have them, but we are slow in getting the results out of it. And that's also why we said we were slightly ourselves disappointed about our own performance there. So it's a question of beefing that up. Second question? Write down. The write down is on we have some purchased CO2 rights, which we value at the lower of the cost of the purchase price and we adjusted therefore the market value. Think roughly we had a value of EUR 6 per tonne last year. We're now at EUR 4.5, it's EUR 4 point something. That's something that will fluctuate. So this is a noncash item basically in the amortization. Yes. All right. Okay. Thank you. Thank you. We have another follow-up question from the line of Yves Bromhead with Exane. Please go ahead. Hi, Just a quick question. Could you maybe give us the what is the level of utilization rates in your clay business in across Europe? And just to follow-up on that, are you able also to tell us where volumes are right now in your main markets? So looking at France, Germany, Netherlands and Poland, where they are in terms of rig deliveries now versus pre crisis? Are you able to give us a sense of where we are? Thanks. I think I don't want to sort of frustrate you, but after the first quarter, it's a little it wouldn't be we are in some countries and some businesses, we have maintenance during the winter, then we start up our factories in either in January or in February or even in March. So utilization rates in after the first quarter doesn't do not make sense. We need to be a little bit further down the road into the year to give you here a better indication. Generally speaking, you remember that we said for the clay business, we are moving up to about roughly 70, I think, or even in areas a bit higher than that, the 70% utilization rates for this year. So I think we're, again, confident that we'll come to this utilization rate. And when we talk about your second question, which is levels of volumes of rigs pre crisis, we are still in all of the countries that we are talking about rather significantly under the high volumes before the crisis. So we are talking here up to 30% in certain areas and markets. So but still in the double digit zones when you talk about volumes. Great. Thank you are no further questions at this time. I hand back to Mr. Oefner. Ladies and gentlemen, thank you for your questions and for dialing in today. We hope that you will join us again for the release of our half year results on the August 17. Additionally, I would like to remind you of our upcoming Annual General Meeting, which is scheduled for the May 19. We invite all of you to participate and to make use of your voting rights. The meeting agenda as well as the comprehensive information material is available on our company website, wienerberger.com. So all that is left for today is to thank you for your attention and to wish you a nice day. Goodbye.