Earnings Call: Q1 2016

May 4, 2016

Thank you, operator. Ladies and gentlemen, welcome to the Winebarger Earnings Call and our Q1 Results 2016. Thank you for dialing in today. Winebarger representatives on today's call are Jaime Scheuch, CEO Willy van Wiedt, CFO and Stefan Huber, Head of Corporate Reporting and Corporate Treasury. As usual, Jaime Scheuch will open the call with a summary of the key developments and the results of the first quarter twenty sixteen and will speak about our outlook and goals for the current business year. Following the opening statement, the line will be opened for questions. I now hand over to Mr. Schoich for the executive summary. Ladies and gentlemen, good afternoon from Vienna. In name of the whole Wiener Berger team, I may welcome you to our conference call regarding the Q1 results of our company. As you have seen, we are pleased to announce that we had a very good start into the New Year. Actually, if I go back in history, I do think and believe it's the best start since 2008 for Wienerberger the New Year, so a very good quarter. We feel confirmed that with our strategic action plan focusing on optimization, innovation and diversification, we are moving step by step ahead and in the right direction. You have seen also that in the markets that have performed differently, we'll come to this in a minute. We have a stable revenue flow with EUR $610,000,000 or nearly EUR $611,000,000 turnover and a strong increase in EBITDA with plus 18%, up to €40,000,000 of EBITDA at the beginning of this year. So a good development on the cost side on the earnings front from our company in the different businesses. If we look a little bit more into detail in the different segments of our company, The Clay Building Materials Europe division performed particularly well in the first three months of this year. We have a solid performance in Western Europe, especially in The Netherlands, a good running rate in France. You remember that we spoke about that a couple of months ago when we said we see here a turning point as far as one and two family house starts are concerned, and this is confirmed in the marketplace. We have also improvement in the German market, not only related to our own restructuring efforts and optimization efforts that we have put in place 2015, but also market wise, we see, first of all, a tendency of more construction in one and two family houses. And secondly, a trend towards our, I would call them, the high end products, highly insulating blocks, the infill blocks as far as these house constructions and low energy houses is concerned. Obviously, on the other hand, we had a very good growth momentum in Eastern And Central Europe, above all Hungary, Romania, Bulgaria and Poland with good developments in the first quarter as far as sales is concerned. We had obviously, as predicted, a further decline in Italy and also a weaker market in Switzerland and to some extent also in Belgium. So this all in all, can see that from a trend perspective, the stronger clay block sales and Rubber sales overcompensated lower volumes in facing bricks, especially due to lower sales obviously in Belgium and to a certain extent also in The UK. I think when I focus a little bit on The UK market, it's obviously clear to all of us that the upcoming referendum has caused a certain reservation in The U. K. Market as far as decisions are concerned. Decisions meaning that projects are implemented, projects are started. So some of these get delayed. And here we have obviously a certain decline in the market for newbuild. There's no underlying trend change as far as demand is concerned, but we see obviously here a certain reservation as far as the investment is concerned before the referendum. It is, I think, not appropriate on this call to make speculations about the outcome of the referendum. We as Wienerberg and I, above all, I hope that obviously all our English friends stay in the EU because I view the EU as a great project and has an enormous advantage, not only for the economy, but also for the whole European people living together. And the peace project is always a good thing to have. So I think here we have certainly for the next couple of months still up till to the referendum, which hopefully ends with a clear yes vote, a certain instability in the marketplace. Obviously, here, we will see from the next coming months also the lower volumes market as we have seen it at the beginning of the year, nothing to worry about at this stage. But I think the growth rates that we envisage was about 4%, look ambitious to me for this year 2016 as far as The UK market is concerned. The other good sign out of the Clay Building Materials division is that we have been able again to offset the inflationary cost increases by price increases in the market. So this about 1% we have achieved in the market and is confirmed also. So I think we look with optimism as far as the Brick division is concerned to the market in Europe. If we move on now to The United States. The United States or the North American division has seen compared to last year rather mild weather. So we had not this wet and cold weather as 2015, so a better start into the construction season in North America. And obviously, the housing starts for single and two family homes have been picking up considerably. We had also higher sales in Canada, especially in the Ontario region where we are obviously strong with our Aris Craft business. So good volume growth. The revenues have been up about 18% and we have more or less doubled the EBITDA contribution from this division. So a good overall running rate in The U. S, which I expect also to continue for the rest of the year. Coming back now to Europe for our Pipes and Paper division. Here, we have seen a somehow mixed picture, mixed in the sense that if I may start with Eastern Europe for the change, the Eastern European division for pipes have seen lower volumes, lower volumes especially due to lower investment and infrastructure spending from the public domain. We have here obviously the issue that a lower rate of subsidies coming into these countries from the EU at this very moment. So projects get delayed, especially when we talk about Poland, but also to a certain extent Romania and Bulgaria and Hungary. So this affects obviously the volume of our piping operation in these countries. And when we take the Pavers division here, SemiRock has seen also some weaker deliveries. That's due to some pockets of the area in Central And Eastern Europe as far as weather is concerned. Here we had some weather starts, which will impact a little wet. So the paving work couldn't be done at the same rate as it should have been. But here, I think over the next couple of months, this will ease out and we will see a good demand rate coming in on this business. The ceramic pipe business has done in Eastern Europe also a little weaker due to the same effect as for the pipes the plastic pipes that's due to the lack of subsidies, especially in bigger markets like Poland for the ceramic pipe business. If we then move back to the Western part of the Pipe business, here we have seen good running rates, especially in the Dutch market, good sales and pricing for the pipes in this area. The restructuring efforts in France that we undertook for our pipe operations are positive and impacting already positively the performance there. And obviously, the Nordic markets will then due to the normal sort of weather effect in the North will pick up the activity in the second quarter. And here, we think we are in good shape and the Pipe business here is doing well. On the important international projects business, we've told you that there is a sort of decline in activity compared to last year. Last year, you remember, been a record high activity in the business of international projects. We see that the pipeline of projects is there. However, we have not seen a substantial increase yet in materializing and getting the orders in. So I think we will see a better picture than in the second quarter as far as this part of the business is concerned, but nothing material to worry about. It's the logical way of doing international projects. When we move on, I think to the operations in general, we if you look at our cash flow, you see some increase in the working capital obviously in the first quarter, nothing to worry about. That's the usual, I would call it, development because we have good demand, especially in Eastern Europe, especially also in some of the Western European countries. So here, obviously, we have built up the necessary inventory in order to satisfy the future demand in these markets. So I don't see here something that we should be worried about. On the CapEx front, where you see the normal CapEx has been pretty much in line with last year. And on the gross CapEx, you've seen a slight increase due to the projects that we have realized. Just want to draw your attention again to the fact that we've taken over a sewage pipe company in Helsinki area in Finland. We have taken over a brick plant in the West Of Poland. We have taken over another brick plant in the area of Bucharest in Romania. And we are obviously finishing our paver plant for Semrog South East Of Vienna, which will come on stream in the second end of second quarter, beginning of third quarter of this year. So I think here as well on the growth project side, we are well on track as far as the project is concerned and the pipeline, as I said, is in good shape and good order. I think on the other front, a very good news is obviously that compared to the first quarter of last year to the good performance, the operational performance, we have been able to reduce our debt further with minus 7% compared to last year. So a good running rate here as well as far as the net debt development is concerned. Think if I move on a little bit to the markets and the outlook of the markets, the major ones that are important for our business. Let's start with Western Europe again. The Netherlands has seen a good trend as far as development of new housing is concerned. We foresee for the rest of the year the same trend. So as you have seen, good growth rates in The Netherlands in the new build segment, but also in the renovation segment. I talked about The UK, I talked about the destocking issue in the supply chain, I talked about the instability or this current situation with respect to the upcoming referendum. Think here, as I said, the underlying demand is there. It will take time to materialize. And obviously, depending on the outcome of the referendum, we will see here a further and then continuous growth again. I talked about Germany, the good trend there in the one and two family house that started at the beginning of this year that should continue throughout the year. And that France has to a certain extent in our market turned the corner and is improving again as far as housing new housing construction is concerned. On the Eastern European front, I see good trends continuing, especially Hungary, Romania, Bulgaria to a certain extent also the Czech Republic and Austria will have good trends. And certainly, our very important market Poland has seen also a positive trend as far as prices and volumes is concerned. So I think the only country that obviously I didn't talk about yet is Russia in the Eastern Hemisphere, where we see a further decline. The Russian market is certainly under a recession. It's a clear decline here in the double digit zone that we see there as far as housing construction and infrastructure spending is concerned. Just want to also address your attention to the fact that we have an exposure about 2% to the Russian market when I take turnover of Vina Berger in this segment. We have pipes and pavers, Western Europe, again, as I said, North The Nordic Hemingsworth, that means Norway, Sweden and Finland should have good and stable development for the rest of the year as we foresee it in all the different areas, housing, infrastructure where our products go to. We see the same trend also for the Dutch market as far as our products are concerned and also on the French market where we see a more positive trend too due to the fact that we have restructured our business. The ceramic pipes should have a rather good environment in the core market of Germany and the surrounding markets. The only market where we obviously due to the same effect that we've talked earlier about, the lack of infrastructure spending in Eastern Europe and especially for the ceramic pipes in Poland, we see here a decline in this market area. And finally, if we move to North America, the trend that I've described at the beginning, good growth rates as far as new residential housing is concerned, especially also the one and two family houses will continue. So therefore, brick intensity will be at a higher level than last year. And also on the pricing front, we see here better trends in the marketplace in The United States, especially Southeast And Mid Atlantic Region, where we are basically active with our businesses. All in all, I think Wienerberger will continue to focus successfully on the key elements, operational excellence and optimization. That's our main topic as far as cost and positioning of the company is concerned. We will certainly put the necessary efforts in innovation, so the new products. I'm glad that I can report that obviously the trend towards infill blocks, for example, in the Brick business is growing. The momentum, especially in the Germanic countries is growing. And therefore, obviously, we have here a much better development also in Germany currently. We have also our growth project, the diversification that we focus on as I put forward the smaller transaction that are highly profitable for us like the two big factories in Eastern And Central Europe and the sewage bioproducer in Finland that we add to our current industrial portfolio and successfully integrating it. All in all, we reconfirm our guidance for this year, the $4.00 €5,000,000 EBITDA. It's going to be a challenging environment, obviously, in the next coming months, but we are committed to it and we feel optimistic that we will and strongly committed to this target to realize it. On the non operational real estate, just one word on that. Obviously, have the CHF 15,000,000 that we have included as an EBITDA contribution in this CHF $4.00 5,000,000. We're on good track to realize that. When you look then at our numbers in the second quarter, please don't forget that we had last year a major transaction in The U. S, which a major distribution contribution on the EBITDA front. This obviously will not be the case in 2016, just to address this also in this context. On the pricing front, as I said, especially in the Brick segment on the side of European business and The U. S. Business, a good progression with about 1% of price increases. The depreciation should be about CHF 200,000,000 for the company. Interest result about CHF 35,000,000. The working capital all in all on the group level about 20% of net sales and on the normal CapEx around EUR 145,000,000 and the gross CapEx that we talked about, about EUR 40,000,000. One last word on the input cost side. Here we have obviously plastic granulate from the piping business. The plastic piping business slightly going up. I think the management does a tremendous good job in pipeline for managing these price developments. And as you have seen, we have also improved margins in the pipe business here as well. So they are working hard on this issue, but I don't see it as a major issue for our business for 2016. On the other front, the ceramic, meaning clay front, we have obviously the issue of energy, meaning especially gas. Here we have guided clearly for a cost improvement of CHF 6,000,000 for 2016. You will get and I appreciate your patience, more detailed update at midyear from us because we are buying forward obviously. And obviously, I can tell you the guidance that we'll give you at midyear will be one for 2016 and 2017 and gives you then a good indication of the future benefits that we get from the lower energy prices in this area. So I think I have hopefully in a nutshell covered very quickly the performance first half, given you an outlook both Will and myself are ready to take your questions. Thank you very much. Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. And our first question today comes from the line of Matthias Feifenbeck of Deutsche Bank. Please go ahead. Yes, good afternoon, gents. Thanks for taking my questions. Actually only one. It's regarding the sensitivity to the guidance. So you mentioned the 4% that you expect in U. K. Is actually ambitious. We also know that you kind of always outgrow your market. So my question is really, can the guidance digest another quarter of these reservations, which are actually, I guess, quite obvious? And what have you baked in terms of any buffers, any tailwinds from costs or pricing or energy costs or even the smaller M and A transactions you did that makes you optimistic you can meet the four zero five million euros Well, Matthias, I think from it's not about discussing if we have baked something or whatever. I think we see, obviously, with great interest to development in The UK, but I don't at all remain or am pessimistic about The UK. The UK operations are doing very well within Wienerberger. From a cost perspective, they have to make tremendous efforts again. And so I think we will have a very good contribution from these businesses. The lack of volume and what I referred to this obviously the market growth in The U. K. Seems ambitious, but we will certainly have as I said a very contribution. And on the other hand, if I look at the Continental European operations, especially on the Brick side, we see here obviously in the first quarter and hopefully these trends as I described them continue. There's some good trends coming through from Central Eastern Europe and also from Germany that will help us to compensate some of the lack of volumes that we might have on this front on The UK front. And in terms of what's coming through in France, is that a bit better than your initial expectations? Or have you been maybe a bit cautious there? And also on the Pipes business, this weakness, especially in Central Eastern Europe, is that really what you expected from beginning of the year? Or is that a little bit worse than you thought? I think we spoke about the slower progress in Eastern Europe. We touched upon even in our guidance when we talked about that in the beginning of the year. That's more or less what we expected. We will see now in the course of the next coming months, whether it develops still or whether it stalls for, say, half a year. And then of course, if it puts us over the summer, then of course, less of projects will come and then we'll have to The take other thing is what we, of course, have done the last couple of years is also we flexibilized our costs far more than in the past. So I think we are much quicker on our feet to react as well. And since this is mainly plastic pipes, the value the fixed cost there is relatively small. So we can react very quick there. We don't see really big issues arising, but I would be cautious at this moment still to shout too much about positives or negatives. But I think for time being, I can only reiterate what Jaime said, we can confirm our guidance to the $4.00 €5,000,000 which is $390,000,000 operating plus €15,000,000 out of real estate. Perfect. Thanks very much, James. Our next question comes from the line of Yves Bromhead of Exane BNP Paribas. Please go ahead. Yes, hi. Thank you for taking my questions. The first one is on The UK. I would like to know if you have seen ongoing destocking in April and also get a sense of the market growth rate in the facing bricks and roofing tiles. And to my understanding, roofing tiles growth was still pretty strong in Q1. And so should we expect some kind of weakening in the month ahead of us? And then secondly, could you also talk about the real estate gains that you booked in Q2 in The U. S. Last year? Thank you very much. Thank you for your questions. On the real estate side, it's $12,500,000 $12,500,000 EBITDA. Euros. Euros, sorry, euros. I apologize, contribution. And on your question regarding The UK, you have indeed a positive trend on the roofing front because of obviously, roof tiles is not only newbuild, but also renovation. So we have I think this trend will continue throughout the year. I don't see here major changes on the as far as the roofing front is concerned. And on the destocking, I think this destocking process will continue. And I think we have seen it also in April and it will continue. I think the what I referred to the I can only call it as this phase of uncertainty in The UK right now. It's not linked to the construction sector as you well know. It's overall sentiment that the industry, the economy is holding back right now because of the referendum coming up next month. So I think here we'll have another six to eight weeks of this situation. And then obviously, the things will get more active again. Okay. Thank you very much. Our next question comes from the line of Florent O'Donoghue from Davy. Please go ahead. Thank you. Just a couple for me. First is just going back to The UK, if I can. I'm just wondering on the housing side, have you much exposure to the public sector, social housing? Or is it mainly the private housing sector that your exposure is on? The second question then is just a brief comment on your gross margin, if that's okay. It was well up year on year in Q1. Just wondering, is that mix related? And then finally, to ask on Belgium. Your suggestion from your commentary and from the documentation this morning is that you're expecting, I guess, the worst to come there. Have you seen much yet? Or is it kind of more that you're more worried about the future in Belgium? Or is the business there already in decline? The exposure to the in The U. K. Is more to the private. I mean the public sector is not that important in The U. K. Willy will answer Belgium, the we are not in the doldrums yet, I would say. I think performance is still reasonably good in the first quarter of the year. And actually, we what we have done in our Belgian activities, if we made a bigger entry than probably in some of our other markets also into multifamily housing. So what we lose on the single family housing, we reckon we will take as a market share gain on the multifamily housing. So although I see the marketing decline, I don't see the same effect in our results for the year. And if you remember, we also took at the end of last year a measure to close one of our close a factory in the Belgian market. And of course, that will have its positive effects this year as well. Great. And sorry, just going back to gross margins in Q1, was it mix because they're well up on Q1 of It's more mix effect, yes. Mix effect, okay. Great. Thank you, gentlemen. Thanks very much. Thank you. Our next question comes from the line of Ami Galla of Citigroup. Please go ahead. Thank you. Just a couple for me. On the Pipes and Payover segment, you mentioned on the lower project tendering. And you also mentioned there are some new rules on the allocation of EU funding. Just to understand, has there been a change in the nature of projects that qualify for funding here? Or is it just a timing issue? And my second question is on the amount of the restructuring or the optimization gains that you've seen in Q1. Could you quantify that? And is that mainly on France and Germany? Thank you. Sure. The first question relating to the subsidies coming from the EU, no changes at all as far as procedure, etcetera, is concerned. I'll give you one example actually. We have in Poland, obviously, as you're well aware, a change in or had a change in government. So they are changing a lot of people in the structure as far as these people who are responsible for giving approval to these investments and infrastructure projects is concerned. So this is a certain delay. So I would call it a timing issue and no other issue. On the restructuring, if you remember, we said we're going to get about €5,000,000 out of this optimization in the closures of the factories. Not that much is yet already in Q1. What Raimo alluded to is that our French operations as a whole are getting a little bit better. But we're actually now in the process of closing this plant because it takes quite a long time. And also in Germany, although we still we have already accounted for the closure cost and we decided about the closure last year, we were still partially operating throughout the first quarter. So the bulk of the FX will come in, in the next three quarters. Okay. Thank you. Thank you. And our next question comes from the line of Daniel Porter of UBS. Just a couple from me today. Can we just dig into The U. K. A little bit further? Just in terms of your perception of the, I guess, the sales and channel profile that we've seen over Q4 'fifteen and then into Q1 'sixteen. Was it a case that there was a bit of, I guess, buying ahead of the year end as customers look to hit their rebate targets and there's just more inventory flowing through the system? Is that having a bigger impact in the market slowdown in terms of working capital position at the moment for yourself? Not really that much. You will usually have a bit of a forward buying, but not as much as we had between 2014 and 2015. And if you remember, 2014, we had a high forward buying really in anticipation of what was a perceived shortage at that moment also in the market. And now we've seen there's a little bit of course, what you allude to is some people want to get their bonuses in, but not really to the same extent. Okay. Okay. And then just in terms of the FX impact, I think you've noted that it's about EUR 8,000,000 on the sales line. Can you just give us a sense of the impact on the EBITDA level? Yes, 1,300,000 negative. 1,300,000 And then the property profits, they were sort of negligible in Q1, is that right? Yes, they are. But they were negligible in the Q1 twenty fourteen as well. Sure, sure. Got it. Understood. And then can I just ask just for clarity? There's an estimated cash flow about buyback in terms of the hybrid. Can you just clarify what happened there exactly? Well, we in 2000 when we split the hybrid in two, yes, we actually prepaid part of the coupon. And we prepaid that in 2014, so we had less cash out in 2015 basically. That means we typically coupon payout is in February. So we paid out less in 2015. Now in 2016, we're back to a normal coupon, I would say, without the advanced payment. So we have an effect there of we have a positive effect, plus we, of course, also have bought back CHF 6,000,000 of hybrid, yes, because when we look opportunistically at it and we had a hybrid quoting below 100%, so we bought it. Okay. Yes, understood. Thanks for that. Appreciate it. Our next question comes from the line of Tobias Luftkamp of HSBC. Please go ahead. Yes, good afternoon. First of all, I have a follow-up question on the working capital. Can you explain a bit more in detail what has driven the, let's say, the stronger seasonal increase? Is there any structural effect or any mix shift that has led to that increase? And then a second question, I mean, you have highlighted the FX effect, but can you also outline what contributions you got on top line from volume and from prices on a group level? Then I wanted to ask you on, let's say, if you can comment a bit on your backlog and the visibility that you have in the pipes business for the coming quarters? And finally, wanted to ask you if in Clay Building Materials, whether in the prior year EBITDA figures, if there were any, let's say, restructuring costs included or if all of the improvement is basically volume and cost efficiency driven? Thank you. Okay. There's no restructuring costs included in the comparatives of clay building materials in last year, neither in this year. Backlog of pipes, I think, is the usual visibility that we have up to six months, and that's what we comment upon. So there is not really something special there to remark. On the top line, I have to disappoint you a little bit at this moment. We only give a more detailed guidance in after six months because at this moment, will be not that meaningful. In general, I think it's in line with this 1% that we said that we want to do. And we mainly get a mix effect in this at this moment, we believe, yes. And then on the working capital, I'm happy with the way the stand of the working capital that we have now. We, of course, produce working capital beforehand, and we have produced throughout the full quarter as well because we had no bad weather circumstances. We did not shut down that much of capacity also in anticipation of a better performance and a better need of capacity also in the course of the year. So nothing really unusual or nothing really there. So if we compare it to last year, I mean, given that the weather was also quite good, so should we interpret the increase the overall working capital as an indication that you expect the business to pick up more strongly during the year than you expected it last year? I think it's logical because we were hinting towards a growth. We also have to produce the products beforehand before we can sell them. So we can still if we need to, to adjust working capital to capacity adjustments, we can still do that later into the year. But we'd rather have the stocks now at hand so that we can satisfy the demand. Makes sense. All right. Thank you. Ladies and gentlemen, are there any further questions? Excuse me, Mr. Wolfner, there are no further questions at this time. Thank you. Ladies and gentlemen, thank you again for dialing in today. We hope that you will join us again for the release of our H1 results for 2016 on August 17. What is left for me to say today is to thank you for your attention and to wish you a nice day. Goodbye.