Wendel SE

PAR:MF

Q3-2021 Earnings Call

[Operator]

Good morning and good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Wendel's 2021 Q3 Trading Update Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today.I would now like to hand the conference over to your speaker today, Mr. Jerome Michiels, Wendel's Executive Vice President and CFO. Please go ahead, sir.

[Jerome Michiels]

Hello, ladies and gentlemen, good afternoon. I'm here with the Investor Relations team to present our third quarter trading update. I'm going to go through a short presentation of the first 9 months key features to be followed by a Q&A session. [Operator Instructions]As a reminder, this presentation is recorded and will be available for 1 year on our website.So let's dive into the key highlights of Q3 2021 starting with Slide 2, and with the net asset value which stands at EUR 184.5 at the end of December. That's up 16% since the beginning of the year, and slightly down versus the end of June. I will give you more details about what has driven the changes in our net asset value later in the presentation.As you are aware, we have achieved 2 major milestones in our portfolio during the past quarter. IHS Towers got listed on the New York Stock Exchange on October 14, and Wendel has granted exclusivity to DuluxGroup for the sale of Cromology with net proceeds to Wendel of circa EUR 907 million. This valuation is EUR 369 million above the company's valuation in Wendel's net asset value of June 30, 2021, which is the most recent data points before the sale announcements.We have also continued the deployment of capital with EUR 270 million invested in total since the beginning of the year. The bulk of it relates to our investment in Tarkett, which represents EUR 222 million. On top of that, we committed an additional $45 million to our Wendel lab strategy. And lastly, we have bought back EUR 25 million worth of own shares year-to-date.The last 3 months have also been quite active in terms of further improving our extra financial ratings, and we have had the pleasure to receive 2 awards. The French 2021 Grand Prix de la Transparence which ranks Wendel #1 among all SBF 120 companies on the basis of the quality and transparency of our financial and non-financials communications practices. And the diversity in management bodies award from the French National Newspaper, L'Agefi. Lastly, Sustain Analytics upgraded Wendel from low risk to negligible risk in September 2021.Now moving on to consolidated sales on Slide 3. Our portfolio companies have continued to perform well during the last quarter. Please note that the figures shown on this slide, and in the press release exclude Cromology revenues as these companies has been reclassified as an asset held-for-sale in accordance with IFRS.Over the past 9 months, consolidated net sales reached EUR 5.5 billion, up 10% overall and up 12% organically year-on-year. 9 month sales levels are higher than 2019 levels on an organic basis for each consolidated company.Over the third quarter, net sales amounted to EUR 1.9 billion, up 11.1% of which plus 9% on an organic basis. The foreign exchange effect tended to ease a little bit in Q3, mostly as a result of the recent strengthening of the U.S. dollar.At the portfolio level now on Slide 4, starting with Constantia which has remained very resilient with an encouraging trend on Q3, posting a 3% organic growth above this quarter. The company also recently resumed its bottom acquisition strategy. I'll come back to that later.I will be brief on Bureau Veritas since they have published and extensively commented revenues earlier this week. In a nutshell, BV has seen strong growth in its activities again in Q3 with revenues growing by 7.5% organically and 8.5% on a reported basis. As a reminder, after posting an impressive H1 performance, Bureau Veritas revised upwards its outlook for the full year 2021. Stahl grew by plus 28.6% organically over the third quarter, an impressive performance which is shy of the first half growth rates given the stronger comparison base.Lastly, we are thrilled to see the efforts of the management team of CPI rewarded by an outstanding growth of more than 67% over the third quarter, confirming the strong potential of the business. As I said before, Cromology is not consolidated anymore in our financial statements or revenues. So we are not reporting the revenues of this company. And regarding IHS, a new financial calendar will apply since the company is now listed and they will report their Q3 later, so I invite you to refer to the company's financial communication.Now let's dive deeper into the trends of the top line of our consolidated unlisted companies. Let's start with Stahl. Stahl sales totaled EUR 624 million over the 9 months for the year, representing an increase of plus 31.6% over the same period in 2020. This good activity in the first 9 months is surpassing by 2.1% the 2019 sales level over the same period.Leather chemicals sales are in line with 2019 levels, while Performance Coatings reported growth of plus 8.2% versus 2019, driven by increases in volumes and average prices thanks to market rebound and market share gains. After a challenging 2020, Stahl continued its recovery which started in Q3 2020, and accelerated since Jan of 2020. This was driven by a strong order book and broad-based volume growth across almost all regions and end markets, in part due to a general restocking effect.Stahl's order book has slightly declined during Q3 2021, but remains high compared to pre-crisis levels, indicating that the rebound witnessed since the beginning of the year is as expected easing. The solid performance in sales is however unsurprisingly mitigated by an unprecedented increase in raw material prices due to tight supply markets, which is impacting margins. This impact is expecting -- is expected, sorry, to continue into 2022. To that -- to this growth in input costs, Stahl announced in October raising its price for all wet-end and leather-finishing chemicals worldwide. As a reminder, Maarten Heijbroek, Stahl's new CEO will share his views at our next Investor Day on December 2, 2021.Let's move to Crisis Prevention Institute, which registered a total growth of plus 68.6% compared to 2020, and plus 16.6% versus 2019. This trend is supported by the market recovery technology enablement and new programs development. This outperformance in activity is the result of increased customer engagement and training activity supported by reduction in travel and gathering restrictions, heightened stress environment for workers in the education and health care field.CPI also bears fruits from the successful new program launched recently, including specialty topics such as trauma, autism and advanced physical skills. Another factor is the continued mix shift toward digital solutions. Virtual learner material sales expanded in share with e-learning representing 34% of total learner material volumes. Tony Jace, CPI's CEO will provide more background on the market expansion of CPI at our Investor Day.It is worth mentioning that with the increased level of activity, combined with effective cost management, CPI is continuously deleveraged over the past few months, maintaining leverage level at 6.5x EBITDA, well below the 10.785x covenant for the end of Q3.Regarding Constantia now, the company registered encouraging first 9 months' performance with reported growth of plus 2.2% driven by an organic growth of plus 1.5% and the Propak acquisition for the remainder. The performance was driven by plus 3.8% organic growth in the consumer market with a good performance in coffee capsules and beverages.The pharma market was affected by lockdown induced mild flu and cold season and destocking from customers leading to minus 5.1% year-to-date organic decline in sales against the strong comparator in 2020. Encouragingly, the recent pharma market order intake has been improving. As a reminder, these growth figures are affected by an exceptional base of comparison in 2020 due to the pandemic as we can see very well on the chart that you have on the screen.More recently, Constantia benefited in Q3 from the integration of the acquisition of Propak in June but is also -- but has also been negatively impacted by unfavorable foreign exchange effects for minus 1.7%. As already mentioned in the first half year results, Constantia is facing an unprecedented increase of all raw material prices. It is impacting performance in 2021 as they're usually a temporary timeline between changes in raw material prices and adjusting selling prices to customers. Constantia intensified its efforts, including a new cost reduction initiatives program since the beginning of the year.Pim Vervaat, Constantia's CEO and his team have made a good progress in implementing the Vision 2025 strategy, aiming for return to organic growth and accelerating the internal performance improvement measures. The recent Propak acquisition is an example of that. Pim will also provide you with more color on Constantia's strategy during our next Investor Day.Let's now move to the net asset value on Slide 6. As of September 30, the net asset value stands at EUR 184.5 per share or roughly EUR 8.2 billion. The total value of our listed investments has considerably increased with the inclusion of Tarkett and the listing of IHS. Our stake in Bureau Veritas has a value of EUR 4.5 billion, whilst our stake in IHS has a spud valuation of EUR 928 million and our investment in Tarkett is of EUR 221 million.The value of our unlisted investments, which reflects the value of the offer received on Cromology is roughly EUR 3.44 billion. So as you can see, overall, our portfolio has been very resilient and our financial situation is very healthy, with the EUR 939 million net debt position at the end of September, translating into 10.2% loan to value ratio. We calculated the discount to net asset value at close to 34% at the end of September.Year-to-date on Slide 7, our NAV has increased by more than EUR 25 a share. And that is after having paid dividend of EUR 2.9 over the period. Bureau Veritas has been driving this performance as the share price reacted positively to the good performance of the company and has reached EUR 28 at the end of September, an all-time high.This has positively impacted our net asset value since the beginning of the year by EUR 21.5 in total. Once the value of our unlisted assets has also increased significantly since the beginning of the year, the combined effect of the listing of IHS and the offer received on Cromology translates into a net negative impact of EUR 9.2 in terms of net asset value at the end of September.Compared to June 30, our net asset value decreased by 2.4% mostly as the result of the valuation gap between the first trading days of IHS and the June 30 net asset value of this company, which has not been entirely offset by the DuluxGroup offer on Cromology and the performance of Bureau Veritas share price since June 30. Looking at the LTV evolution as of the end of September, we currently stand at 10.2%. Pro forma of the proceeds expected from the sale of Cromology, the ratio would be close to 0.Now let me give you a few words on IHS listing on Slide 8. As you will have noted IHS ordinary shares are now traded on the New York Stock Exchange since October 14, 2021. Wendel did not sell any shares, nor any other shareholder in the offering. As a result, Wendel owns 63 million shares of IHS Holding Limited, representing 19.2% of the share capital. Following the IPO, Mr. Frank Dangeard has been designated by Wendel to sit at the Board of IHS which comprise 10 directors in total.Moving now to Cromology, as you know we have received a firm bid offer from DuluxGroup to acquire 100% of the equity of Cromology. We decided to enter into an exclusivity period with them to finalize the transaction. DuluxGroup proposes to acquire 100% of the equity of the company with the natural price value of around EUR 1.262 billion, a multiple of 13.2 LTM EBITDA as of June 30, 2021.For Wendel, net proceeds would amount to EUR 907 million. This would represent a multiple of 1.6 times Wendel's total investments in Materis Group since 2006, and 7.3x Wendel's equity injection made early 2019. This was a difficult decision to take back then, but we are proud to have supported the company and backed the turnaround plan that has been perfectly executed by the management team over the past few years. The closing of the transaction is expected to take place during the first half of 2022 subject to customary regulatory approvals.Now is the time for wrapping up before opening it up to questions. Over the first 9 months, most of our companies continued to perform well with sales exceeding 2019 levels on a like-for-like basis. 2 major events have taken place in October, the IPO of IHS Towers on the New York Stock Exchange and the exclusivity which we granted to DuluxGroup for the sale of Cromology.In both cases Wendel demonstrated its ability to support companies at important time playing its role of long-term investor. In the current environment, our companies are facing some challenges regarding raw materials, logistics and labor costs. Some of our companies have suffered more than others, but overall our portfolio companies have demonstrated and again recently during the COVID crisis their ability to adapt to challenging market circumstances.We are further intensifying our efforts towards capital redeployment targeting higher growth companies directly and through the Wendel Lab. We recently expanded our investment teams in Paris and in New York, and we are now well equipped to pursue new investments in line with our 2024 road map.Thank you very much for your time. It's now time for Q&A.

[Operator]

[Operator Instructions] Our first question today is from the line of Geoffroy Michalet from ODDO.

[Geoffroy Michalet, Research Analyst]

First one on CPI, just wanted to clarify if there is a seasonality in Q4 because I noticed that in Q4, 2019 it was already declining even before COVID. Then second question on Tarkett, what kind of advantage do you see on keeping a company listed with less than 10% preferred? Is it because you expect all the profit warnings ahead of raw material pressure before buying more share? And then a third one, on Page 7 on the bridge, is it correct if I do the math to assume that you had IHS in your book for EUR 1.7 billion before -- in end of H1? And then the fourth one and quick one, how is the deal flow?

[Jerome Michiels]

Sorry, what was the last one, Geoffroy?

[Geoffroy Michalet, Research Analyst]

How is the deal flow?

[Jerome Michiels]

Okay, sure. Thank you very much for your questions, Geoffroy. Well, regarding CPI, I'm not aware of any massive seasonal pattern as I guess any company. Obviously, there are more bank holidays during Q4, especially in the U.S. with Thanksgiving, Christmas, Black Friday, et cetera. So maybe there is some little explanation in there, but I'm not aware of a major seasonality, as we will have seen the level of activity is very, very healthy. So the company is really growing very, very fast and has been improving month-over-month. So we are very pleased about the situation and the back to normal, which translates into massive growth at CPI, but that's -- what we like about this company is its ability to grow and to generate profitability.Regarding Tarkett, well, we have always said that we would be happy with Tarkett staying listed. We have launched this offer whereby we acquired certain amount of share and the squeeze that offer is at this time not on the table. It provides people with visibility, I guess on the share price and on the trading of the company. So we have no problem with leaving Tarkett listed as it is.Regarding your question on the valuation of IHS before it was listed, as you know we never disclose the individual values of unlisted companies within the unlisted bucket. So I'm not going to comment on that, but maybe the only thing I would say is that the calculation you are making does not take into account the evolution of the valuation of the other assets within the unlisted. You're making shortcuts. However, I can understand the logic and -- but I cannot confirm this EUR 1.7 billion although I understand the logic and what you are trying to do.Lastly in terms of deal flow, yes, we are seeing a lot of opportunities. The market is buoyant. There are a lot of competition -- there is a lot of competition as always. Private equity firms have a lot of cash that they want to invest. The financing conditions are benign. It's a very liquid market. So we are quite active, both in the U.S. and in Europe, we are pursuing right now as we speak several opportunities, and we hope that we'll be able to make attractive investments in the next few months or quarters, but multiples are elevated, competition is fierce, that's a given. So we really need to find the right assets and make the difference.So we're trying to building -- to build angles. We are trying to leverage our experience, sector expertise, but we need to move fast and be competitive in this current market. But yes, we do see a lot of opportunities right now, and very interesting opportunities for us.

[Operator]

The next question is from the line of Joren Van Aken from Degroof Petercam.

[Joren Van Aken, Equity Analyst]

I've got 2 questions. So with Cromology you've got EUR 900 million coming in. Could you explain to me a bit the reasoning behind the sale because timing wise of course, the performance of IHS might subdue a bit the nice gain that you've booked on Cromology. So should we therefore assume that you have another interesting opportunity available and that therefore you wanted to free up some cash. And then the second question is on Tarkett, because in your NAV, it is valued at EUR 221 million at the 30th of September. Now we also mentioned that you own 25.9% of Tarkett Participation, which owns 94% of Tarkett shares at the 26th of October. So indirectly, if my math is correct, you own 23.4% today with a value of around EUR 300 million. Could you confirm if this is the right way of thinking, please?

[Jerome Michiels]

Thank you, Joren, for your question. I mean, Cromology sale new asset IHS timing totally unrelated. We had the opportunity to sell Cromology to DuluxGroup. As I said, the decision to reinvest EUR 125 million in early 2019 was not an easy decision to take. We backed a new management team that had very credible turnaround plan. They perfectly executed this turnaround plan and it I guess attracted some interest from DuluxGroup.And they offered, I think, a good value for this company, and given the improvements that the management team achieved and that the company achieved in terms of profitability, we felt the timing to sell this company was right, but that's certainly not because we needed the cash or because we had the leasing of IHS. This is totally unrelated.There are times when you get approached by third parties with interesting proposals, and it's our fiduciary duty to look at them and potentially sell the company if we feel there is a value in there that has been -- this has been very much the case for Cromology again given the troubled history of this company and the outstanding performance over the past 2 years.Regarding Tarkett, you have to bear in mind that our investment in Tarkett is through a vehicle called Tarkett Participation which has some debt. So actually the stake that we have in Tarkett Participation and the value of this stake needs to be adjusted for the debt that sits at the level of Tarkett Participation.And the total is around EUR 340 million of debt at the Tarkett Participation. So if you take the stake that Tarkett Participation owns the company, call it 90% of Tarkett, you deduct EUR 340 million and then you take our share of Tarkett Participation which is I believe around 26%, you will end up with this value of EUR 221 million, which is the amount that we have invested in this company.

[Operator]

We have a follow-up question from Geoffroy Michalet from ODDO.

[Geoffroy Michalet, Research Analyst]

Just could you give us some color on your NAV, let's say headroom in 2022 given the fact that you will not take into account 2020, the year 2020 with COVID in your calculation, but that you will plug in 2022 with some assumptions on raw materials. Could you give us a hint on what are your assumptions on raw material?

[Jerome Michiels]

Thank you, Geoffroy, for the question. I would have loved to answer this question, but it's too early to tell. What I can give you is the technical answer, and I hope it will be a little help. So, currently as you rightly pointed, the net asset value takes into account 2020 results and 2021 estimated results, when we will switch to -- at the end of the year, we will switch to 2021 and 2022.So the net asset value will incorporate budget for 2022, and actual numbers for 2021 at the end of the year. For -- well, I mean, today as you know we in our unlisted assets, we only have 3 companies, Stahl, Constantia and CPI. So the magnitude is sort of limited by only 3 companies as Cromology is valued at the offer level and the other 3 are listed.But for these 3 companies we will replace 2020 which was not an exceptional year. Our companies resisted quite well during COVID, but nevertheless the level of profitability in absolute value has been impaired or affected. We replaced this 2020 by budget 2022.If you look at the trend in 2021, it has been very good. As I said, the portfolio performed quite well, including over Q3. But the inflation is very important and has been accelerating. So our companies are passing price increases. They have done so several times since the beginning of the year.We haven't looked at the details of the budget for 2022 yet, because these are not finalized, but I guess the #1 theme will be inflation and how we can mitigate that. Will in the end this 2022 numbers be higher than 2020? It's too early to tell. And yet there is also the question of the multiples. I mean the multiples to growth, which is when you switch from 2020 times -- 2020 multiple to 2022 times, 2022 multiple, there might be some slight difference even if your 2022 is better than your 2020 in terms of results.So it's too early to tell, but technically there would be a change, you're right at the end of the year which will incorporate a budget 2022 where we will pay a lot of attention to the assumptions in terms of raw material inflation, labor costs, and price assumptions.

[Operator]

The next question is from the line of Patrick Jousseaume from Societe Generale.

[Patrick Jousseaume, Head of Mid and Small caps Europe Research]

So 3 question on my side. My first question is on CPI. Are we back to at the end of September to the acquisition price in the net asset value? Second question, when you say for Stahl and Constantia Flexible, in particular that margin will be impacted, should we understand that margin in 2021 will be lower than in 2020? And finally, coming back to the question that was asked by Geoffroy Michalet, when I look at Slide 7 there is a minus 9.2 which is attributed to the combined effect of Cromology from IHS IPO is just attributed to this 2 element, these 2 items and when I do the math I obtain the same results as before. So could you come back a bit on that and well, I don't think it is 1.7, 1.6 or 1.8 is value you had for IHS Towers before, but maybe you could elaborate a bit on what you think about the churn value on the stock market and how you expect this to recover, please?

[Jerome Michiels]

Thank you, Patrick. On your first question, we are not yet back to the acquisition price of CPI at the end of September. But we are getting there. Results have been improving quite positively during the year. So let's see when we will again switch from 2020 to 2022 for the valuation exercise if we go back to the acquisition price.Regarding Stahl, Constantia's margins, I mean inflation is a general comment I made which certainly applies to these 2 companies. We are not providing any guidance in terms of EBITDA for portfolio companies. So I'm not able to comment on where the level of margins will be versus where it was at the end of the first half, but I should say that the first half has been very good in terms of volumes. Very good in terms of price, and with a lower inflationary pressure than what we have seen over Q3 and what we expect over Q4. Now as I said, some of our companies have raised prices again. So we'll see at the end of the year, where they end up in terms of margins.Regarding the calculation that Geoffroy suggested and which is shown on the Slide 7 of 9.2, again I'm not commenting on individual values of IHS. As I said, this is a shortcut. There are some roundings, but directionally you're making a good reasoning. That's all I can say actually.

[Patrick Jousseaume, Head of Mid and Small caps Europe Research]

But could you maybe on this topic elaborate on, let's say, what do you think about the valuation 2020 cost of change and all?

[Jerome Michiels]

Right. Yes, so difficult exercise because U.S. securities law provides any [ shareholder ] to make comments on the valuation of IHS. There are no broker reports out yet. These are going to be available 25 days post listing. So we're not there yet. What can I tell you, well, the IPO was a milestone -- is a milestone, so it's an important step for this company to become public as I guess all of you around this call are aware, this was something that the company was preparing working on, it was a long journey, but they made it, and they got public in the U.S., which I think is an important step for this company.The aftermarket has not been good so far. I mean this is not something I'm going to deny, but you know this is the largest IPO ever of a telco -- of an African telco in the U.S. This is -- I guess, it takes time, maybe for investors to put the right price on this company, if I can say so, and I'm afraid I cannot say anything else actually. So yes, the aftermarket has not been that good. It will potentially take a while before the market realizes what is the, the real, the fair price for this company.

[Operator]

I'll now pass the call over to Olivier Allot to take the questions from the webcast.

[Olivier Allot]

So we have a question from Samarth Agrawal from Citi. So 2 questions, one, what is the general time lag for passing on raw material price increase for Stahl and Constantia Flexibles? How much of this is due to prior contract requirements? Second question, can you update on the progress on Wendel Lab commitments and areas of new deployments since last quarter?

[Jerome Michiels]

The general time lag for passing on raw material price increases at Stahl and Constantia is certainly little bit different. I think maybe Constantia is more time lag potentially as they have larger contracts, and they are dealing with aluminum where you can have more visibility maybe on the price or some form of protection. But we are not talking 6 months, we are rather talking I guess from 1 month to maybe 3 months.How much of that is due to prior contract requirements? Not much. Prices are adjusted almost 3x. As I said, Stahl just announced price increase across the board for wet-end and leather chemicals with immediate effect. So there are no contractual arrangements or pass-through mechanisms that might be some at Constantia for large contracts, especially when it comes to aluminum, but there are no prior contract requirement.So far, customers have taken price increases. We are in an inflationary environment, everyone knows that. So we haven't seen any major issue with regards to passing on these price increases. We'll see whether this sticks in the coming month and going into 2022.Regarding the progress on Wendel Lab, we've increased our commitments by $45 million this year. It's now at EUR 108 million where we deployed, where we deployed in top tier U.S. venture capital firms such as Andreessen Horowitz, Excel Industries and we are very selective in the way we do that. We target the best managers or GPs, and we also select carefully the funds in which we invest. We have a mix of early stage and more late stage, but that's the very beginning, if you will.So I think around EUR 60 million, EUR 70 million has been called out of the EUR 108 million. So it's just been invested and deployed in very innovative fast-growing companies. We already had few successes that have resulted in our -- in the value of our portfolio being increased. We have for instance an exposure -- direct exposure in Tuya which has been listed and which resulted in a very good performance, but it's on the paper profit.We will see in the end how much we get back from these funds. But we are very early on in terms of our strategy of investing within this Wendel Lab, so you should not expect distribution. But you should expect some increase in terms of commitments, in terms of investments and I hope in terms of net asset value, that's as you know part of our road map 2024 to further increase our exposure to this category with said maybe 5% to 10% of net asset value by 2024, with EUR 100 million committed out of the EUR 8.2 billion of net asset value we're reporting today, and we are far from that. It's still the very beginning. But we intend to grow that.And we have hired a specialist to help us navigate into this universe, and we have -- also we are about to finalize the hiring of a -- of an investor for making more direct investments in growth situations. For the time being, it's mostly, mostly invested through funds. We have a few direct investments, but that's very, very little compared to what is invested through funds.

[Operator]

And we have a question...

[Jerome Michiels]

Yes, we have a question on the phone? Okay.

[Operator]

Yes, we have a follow-up question on the phone. This is from Joren Van Aken from Degroof Petercam.

[Joren Van Aken, Equity Analyst]

Just another question on IHS. What do you believe is actually the reasoning for the multiple discount versus peers? Have you heard some of the main push-backs from investors, and what do you believe will be needed for re-rating?

[Jerome Michiels]

Thank you, Joren. I'm afraid I can't comment on that. Again, broker research is not out yet. So I'm not able to give you any comments on the price, the level of discount or whatsoever. I'm afraid I can only refer to my previous comments on the aftermarket trends, but that's all.I see there are no other questions. So thank you very much for having taken the time and I will be -- we will be very glad to see you with Andre and David at the Investor Day on December 2 with the CEOs of our portfolio companies. Thank you very much, and have a good day.

[Operator]

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.