WESSANEN

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Transcript : Koninklijke Wessanen N.V., Q1 2019 Sales/ Trading Statement Call, Apr 10, 2019

10/04/2019 | 16:00

Presentation Operator Message
Operator (Operator)

Good afternoon, ladies and gentlemen. Thank you for holding, and welcome to the Wessanen conference call. [Operator Instructions] I'd like to hand over the conference to Mr. Christophe Barnouin. Please go ahead, sir.

Presenter Speech
Christophe Barnouin (Executives)

Good afternoon. Many thanks for accepting our invitation to this call. I am here today with Ronald Merckx, our CFO. We are making today two announcements. The first is about the fact that we have reached an agreement on the recommended public offer made by the Consortium consisting of our long-term shareholder, Mr. Jobson, and the French investment company called PAI. The other is that we are publishing as well our Q1 trading update that we have brought forward by 1 week in light of this agreement with the Consortium. So while we didn't seek this offer, we believe that we did a good strategic rationale for it. So in the past weeks, as you have seen, since the 14th of March announcement, we are engaged with the Consortium to talk about the condition, the covenants and to final agreement that is in interest of all stakeholders. We believe that this offer represents a fair valuation of the company. So we have been advised, Executive Board by Lazard, Supervisory Board received a fairness opinion by ABN AMRO, and both advisers state that the share price of this is indeed fair.

Fundamentally, strategically, the vision of the company has not changed. We want long term to build a European champion in organic and sustainable food, which requires long-term commitment. So we are observing that there is much more interest from the consumer these days about product, but as well as the competition, which requires serious level of investment for the years to come. So in that context, for a large part, we recommended the offer we received because we have with PAI and Mr. Jobson strong commitment on the long term to support us in the execution of the strategy. So that's very clear.

You have every detail you can see in the press release. We do recommend this offer to our shareholder. Our Supervisory Board recommend as well this offer to the shareholder. We believe we will be in good hands.

Before taking into questions, we would like to have a short comment of the Q1 trading update to give everyone a clear understanding of our trading update. So I am referring to a presentation which is on the website. And if I go to Page 2, what you see in our trading update, revenue development in Q1, we had a negative development of minus 3% of our own brands and 12% of what we call other, if you recall is basically the private label and the third-party brand.

If you go to Page 3, on the right side, you can see that we have good EBITE margin development at 12.8%, which is mostly due to a phasing of A&P, which is due to more Q2 than Q1 in addition to gross margin development.

The fundamental thing, which is the brand revenue development that you will find in Page 4, is that we -- which explains why we have a decline in Q1. First, we have a decline in Q1 in the light of a decent Q1 a year ago, if you remember, but still we have an [ advance return ] on Bjorg and Bonneterre, our key brands in France. For Bjorg, it's mainly a phasing and promotion and innovation plan and phasing of A&P, so which is going to be more in Q2, and as well we tried a year ago chilled activities on yogurts and meals, but we stopped it, okay, so we have some phasing of activities. Gayelord Hauser continued to trend negatively. And as well, we have poor performance of Bonneterre in Q1 with slow market development in organic shops and as well some internal restructuring issues. We changed basically the warehouse, and we changed team operating that from Paris to Lyon. And we have unfortunately a defective chiller in the distribution center causing product quality and supply issues. So that's on the negative part.

On the positive end, Page 5. We had good recovery in the U.K. Thanks to Kallø, which is doing very well. Thanks to Clipper all over Europe, which is doing very well. We have good results in France for Destination as well as the international market all out. And Abbot Kinney is doing very well. We have very good start at Abbot Kinney as integrated by us.

I think if you go to Page 6, despite, let's say, a less reliable quarter in sales in Q1, we confirm our full year assumption of low-to-moderate growth of own brands for the full year, and we expect EBITE to be in the range of 8% to 9% for the full year. That's, in a nutshell, my introduction and the quick presentation. And I wanted to give you the opportunity to ask questions as of now.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] There's a question coming in.

Question
Alan Vandenberghe (Analysts)

Hello? Can you hear me?

Answer
Christophe Barnouin (Executives)

We do.

Question
Alan Vandenberghe (Analysts)

Okay, perfect. So this is Alan from KBC Securities in Brussels. I have 3 questions. The first one is on the evolution of top line and margin. I was -- I would appreciate if you could give a bit more color on how that you explain the top line evolution in combination with a margin? Was this the result of an action of you to reduce the investment in A&P during the quarter? The second question is, if you could update us on the negotiations with the French retailers? And then the third question is related to the offer. In the event that there would be a competing offer from another party, could you maybe explain a bit how Jobson is linked or would be affected, or what his position would be towards PAI?

Answer
Christophe Barnouin (Executives)

Thank you, Alan. I'll start and Ronald steps in on your first question. The top line as I would still detail is we have good momentum in the U.K., which is a turnaround. We have good momentum in Germany. We continue to grow well in Spain. We have an issue in France. So our baseline is slightly less good than it used to be plus we had some retail operational issues. So we didn't plan to phase the A&P like this. So it is -- we have plan to spend more A&P in the Q1 and then after it's basically promotional slot that

[Technical Difficulty]

the media campaign that can move from 1 month in the April-May instead March. When we do a budget, we do budget in October for the -- from the previous year and we phase the quarters like this. And we knew that the Q1 budget was meant to be lower than the full year view that we have announced, but we have a phased quarter -- phased budget like this.

On the retailer negotiation, we have closed deal with a retailer in France. And we are at the stage that -- first, we have closed the deal with everyone. So we are working with everyone. There's no [ dimensioning ]. There are even some development of assortment, but we have no visibility on what the competition did yet. This, you had before the end of Q2, that doesn't mean that you have a view on your full year outlook, that's not what it means. It means that, to your question, your negotiation is originally a relation to what the others have negotiated.

And then on the competing offer, again, understand, I don't know the point -- the things about Mr. Jobson.

Answer
Ronald Merckx (Executives)

Alan, I think -- Alan, it's Ronald here. I think that's all speculation. There is the offer that there is and there is no other offer. And I think it's -- there's nothing really else for us to comment on that.

Question and Answer Operator Message
Operator (Operator)

The next question.

Question
Robert Vos (Analysts)

Yes, can you hear me?

Answer
Christophe Barnouin (Executives)

Yes.

Question
Robert Vos (Analysts)

Hello. This is Robert Jan Vos, ABN AMRO. I have a couple of questions on the offer and a few on the Q1 results. Let's start with the offer. In the press release, you talk about additional investments by the Consortium, but your balance sheet provides quite a bit of leeway to do more investments yourselves. So my first question is, what is it you think you can do better or more under the ownership of the Consortium compared with your current public listing? And related to that, can you remind me what is meant by the upgrade of Wessanen's operations? That's my first question. I have a few others.

Answer
Christophe Barnouin (Executives)

Robert Jan, what we mean by investment is very simple and you have seen that in our exchanges for the past year is that my competitive role has changed. I am in an interesting market, but many more people have noticed it. So to defend my, let's say, even my share of voice, my share of promotion, I need much more investment that has an impact on my P&L on a ready-forward basis and I need that on the long term. So that's what we mean by adding more investment directly related to balance sheet, to be honest. And upgrading operation is pushing more and more into CapEx, if need be, but mostly what we believe we can do there can be an acceleration on the M&A track as well, which we have difficulty to realize today.

Question
Robert Vos (Analysts)

Okay. Then my other question on the offer is, we only know the -- let's say, the press release of 14th of March and what came out today, in those 2 press releases, there was one number mentioned that has not changed, the EUR 11.5. However, it also read on the 14th of March that you were approached early February and that after several revised proposals, the Consortium came up with this EUR 11.5. Can you maybe share with us how this process went? So in other words, what negotiation have you done for the other shareholders that are outside the Consortium, or where did the negotiations start, at what offer? I would be very interested to hear that.

And then my last question is on the Q1, maybe for Ronald. You have an EBITE of EUR 20 million. Your CapEx depreciation guidance has not changed. We also know what you pay in interest and taxes roughly. Can you explain why your net debt increased actually versus Q4? Or in other words, what happened with the working capital in first quarter and why was there such a big swing?

Answer
Ronald Merckx (Executives)

Robert Jan, there is an impact of something called IFRS 16, which is actually in a little note, but I understand that you guys have had very little time to read that. So without the impact of IFRS 16, the net debt would have been EUR 31.7 million. So under IFRS 16, we now have to put about EUR 22 million of lease liabilities as debt on the balance sheet and that's included under the definitions in the net debt calculation. So actually, the net debt went down from -- on a like-for-like basis from EUR 49.5 million to EUR 31.7 million.

Question
Robert Vos (Analysts)

Yes, you're right. I had only focused on the cash generation. So you're right there. Apologies for that.

Answer
Ronald Merckx (Executives)

But we didn't give you much time, Robert Jan.

Question
Robert Vos (Analysts)

And then the other maybe more important question.

Answer
Christophe Barnouin (Executives)

No, no, I understand the question. So I am not sure I can comment on the starting point, on the pricing that came in. The process we have followed has been basically for all stakeholders to negotiate financial covenants as well as nonfinancial covenants. So financial covenants is the price and the quality of the financing as 2 major items. Nonfinancial covenants had been mostly in the support of the strategy, which is on the goals part. On the operations part, on the people's side of it, the commitment to sustainability and pickup and the M&A attractiveness, okay. So that's what we pursue over the past months before releasing. We wanted to have security and we've pushed and negotiated in couple of rounds, the pricing part as well.

Question
Robert Vos (Analysts)

But you cannot comment in any way on what you have gained for the shareholders? Let's say, what you have...

Answer
Christophe Barnouin (Executives)

I don't think I can, not especially, but I don't think I can comment on it.

Question and Answer Operator Message
Operator (Operator)

The next question.

Question
Karel Zoete (Analysts)

Hello, can you hear me?

Answer
Christophe Barnouin (Executives)

Yes.

Question
Karel Zoete (Analysts)

This is Karel Zoete, Kepler Cheuvreux. I have only one question left. Can you update us what's the process from here onwards in terms of the acquisition? Looking for bit of time lines and key points in here, like antitrust or AGM, those kind of things?

Answer
Christophe Barnouin (Executives)

Good afternoon, Karel. The fundamental is that we are aiming at an approval of an Offer Memorandum submitted -- the Consortium will submit a request for review and approval of its Offer Memorandum by the AFM no later than early June, after that we will publish the Offer Memorandum. So you -- basically, people -- we will propose to people tender their share in the course of Q3. That's what we would do. We will hold an AGM 6 days before the closing of the offer period. We don't have yet the full timing of the offer period for the moment.

Question
Karel Zoete (Analysts)

Okay, clear. And in terms of antitrust, I don't think that will be a problem, but just to check...

Answer
Christophe Barnouin (Executives)

I -- so I don't have the technical answer, but we don't anticipate a major antitrust issue, of course.

Question and Answer Operator Message
Operator (Operator)

The next question.

Question
Reginald Watson (Analysts)

Hello?

Answer
Christophe Barnouin (Executives)

Yes.

Question
Reginald Watson (Analysts)

So I guess we'll just play by trial and error. Just a couple of questions here Christophe. One, in terms of competing offers, has anybody else seen the data room? Or is it just PAI and Jobson?

Answer
Christophe Barnouin (Executives)

Can you repeat your name, please?

Question
Reginald Watson (Analysts)

It's Reg -- sorry, it's Reg Watson with ING.

Answer
Christophe Barnouin (Executives)

Reg, there is no other offer than the one that we have received.

Question
Reginald Watson (Analysts)

Okay, okay. Fine. And then secondly, on the comments you made both in the written statement and also in your opening prepared remarks about the serious level of investment for years to come required to participate in the organic food growth. I think Robert Jan touched on that earlier and you said your competitive environment has changed. Could you give us sort of more quantification, please, of what the serious level of investment is? I mean, you talked about a P&L impact as opposed to a balance sheet impact?

Answer
Christophe Barnouin (Executives)

I'll give you an example. I'll give you -- I understand the question. I'll give you an example. In France, my mid-year share of voice with -- in '18 has been divided by 2 versus '17 partly because I had a little, of course, selling to ensure my finish line, but mostly because by the arrival of many more people advertising.

We'll give you another example. In our world, the promotion -- if you're in food, the promotional pressure, so the volume sold on deals -- the percentage of volume sold on deals, in my world, in organic food, if it goes to 10%, it's the max. When conventional models come into organic food, they put 25% of promo pressure. So that's basically, which all of the gain that are recognized and formalized, by which means that I have -- that's why -- that's what I meant. It's the precise example of...

Question
Reginald Watson (Analysts)

Okay. No. I thought -- yes, that's very helpful. I appreciate that the world is changing and you have to change with it. So -- no, I totally get that.

Question and Answer Operator Message
Operator (Operator)

Your next question. Please state your name.

Question
Fernand de Boer (Analysts)

It's Fernand de Boer from Degroof Petercam. Can you hear me?

Answer
Ronald Merckx (Executives)

Yes, Fernand, we can hear you.

Question
Fernand de Boer (Analysts)

Actually, more or less, the same question because you're now saying the world has changed, but we had several discussions also in the past and you were never willing Chris to give, let's say, the A&P spending, et cetera, and now the world has changed, now there is an offer on the table. So for me, it's still the question mark, why do you accept this offer or actually you recommend? Well, you're going to be leveraged, let's say, 6x, if I make the quick and dirty calculation. So I think you either got limited in the future than you had the room where in the past, I think, you have never had shareholders, I think, blocking your way of moving into organic, making acquisition, et cetera, on the contrary, everybody was plotting that. So now there is an offer on the table and now you say, okay, we have to step up. So I am a little bit puzzled why this then has -- I understand the world has changed, but when we specifically asked you in February, that was not really the case. So that's one question.

And then in the press release, there is also something mentioned about the -- on the standards opinion, which will be included in something of the Wessanen's position statement. When will that be published? That's another question.

Answer
Christophe Barnouin (Executives)

Fernand, on the investment, we can continue to try that as we tried, okay? The concern is that if I increase significantly for a significant period of time each consecutive year for a couple of consecutive years my A&P to this new reality, I have a degradation of my P&L. So that's the fact. It has nothing to do with -- there's no change in term of -- there's no difference there between what we do. What we do today is we operate under certain constraints is when attacked, I can issue 1 or 2 bond, no more, but I have a larger portfolio. So that's one.

Now on the fairness opinion, I have no idea. We can come back to you later on that specific topic. If it's a public information, we'll give that to you. I don't have that information with me now.

Question
Fernand de Boer (Analysts)

But I still remain puzzled about why the board is recommending this. Because even if you look back at your guidance for this year, in which you gave in February, which we waited today, yes, I think you have never discussed. And also when you gave the guidance, you were actually saying this is more or less kind of flat A&P included. And now -- and then if you take this guidance, and if you look at the first 2, 3 quarters of this year with minus 3.5%, if you then have to come, let's say, at your guidance for the full year, it already means that your growth in the coming 3 quarters will be turned to around 4% because that's baked in actually in your full year guidance, yes. Then I don't understand what is going to be so much different, yes, in your plans than today? And also if I look at that, that you're going to give up to go to a leverage of 6x, you actually are stating to us, your markets are going to be down. So how can you then maneuver within your new constellation within the new company with lower margins with leverage of 6x, so having much more financial flexibility to invest and say to us to -- to your shareholders who also stepped in last year maybe at EUR 11, EUR 12 or even higher at EUR 18, so on, this is the best way to move forward? I cannot match that.

Answer
Ronald Merckx (Executives)

Fernand, I think -- it's Ronald here. I think when we talked about the world -- when Christophe says the world has changed, I think, you know, we -- as he said, there's different channel dynamics, different competitive dynamics. And from time to time, we will need to invest maybe a little bit more in terms of the P&L. This is not a balance sheet management. I think, we can all make that distinction. And then you can also see how sometimes the short-term reaction has been to the performance relative to what we want to do in the longer term. And I think, therefore, it is in the interest of the company to have some shareholders that will support a long-term view in terms of the development of that business and coming back to sort of higher growth levels, again, in the medium term. And if that requires to maybe invest more in terms of the P&L and reduce profitability for a while, then in this constellation, the business will have that sort of breathing space.

Question
Fernand de Boer (Analysts)

Yes. Maybe and we can go on discussing for a long time. If I look at your shareholders' base and certainly in the last year, insurance companies stepping in, they are there for the long term, but, okay, it's...

Answer
Ronald Merckx (Executives)

Yes, the last time I looked at it, our free float turned 1.5x in the year. So...

Question
Fernand de Boer (Analysts)

But, okay. There was also more going on than the last time. That's okay.

Answer
Ronald Merckx (Executives)

No, but that -- and that's exactly the point to some extent, Fernand. That's exactly the point.

Question
Fernand de Boer (Analysts)

Okay.

Answer
Christophe Barnouin (Executives)

And Fernand, another part of your question, which is on the next 3 quarters. One part is phasing. So my -- why -- how are we going to realize the performance in the year to go partly because if you look at the phasing quarter-by-quarter, we had quite a positive phasing in Q1 a year ago, which we -- that becomes an adverse back data, strike data and we had more favorable opportunity to grow automatically in Q2 and Q3, specifically.

Question and Answer Operator Message
Operator (Operator)

The next question. Please state your name.

Question
Unknown Analyst (Analysts)

Hello? Hello?

Answer
Christophe Barnouin (Executives)

Yes, we hear you.

Question
Unknown Analyst (Analysts)

[ Carla Fugo from Brussella Gavigdon ]. So you said that you got no competing offer. This is the best and only offer you will have to your shareholders. So wanted to know if once you granted access to due diligence to PIA, whether you run a full and transparent auction process to defend all shareholders? And if you didn't, why so?

Answer
Christophe Barnouin (Executives)

Why would I didn't? I mean, the -- no, I don't understand the question. Why would I didn't run the full and transparent process in the first place?

Question
Unknown Analyst (Analysts)

No, because you -- at some point, you decided or you said it's fine, we're fine to become private, becoming private will enable us to do more investment that the public shareholders probably wouldn't let us or wouldn't support us. So wanted to understand why, once you engaged with PIA, why you didn't decide to roll a full transparent process in order to make sure you would defend the best interest of all shareholders?

Answer
Christophe Barnouin (Executives)

So I...

Question
Unknown Analyst (Analysts)

This is typical, right? Often, this is what you see, you get an approach and you decide to...

Answer
Christophe Barnouin (Executives)

No, no. I decide what? I don't understand your question exactly.

Question
Unknown Analyst (Analysts)

Sir, the question is whether you run an auction process to sell the company? Have you done a competitive process? You didn't. Okay, that's what we want to know.

Answer
Christophe Barnouin (Executives)

Yes, well we stop here, okay. So what we did is that -- can I answer your question, okay?

Question
Unknown Analyst (Analysts)

Yes, yes, that's exactly the question.

Answer
Christophe Barnouin (Executives)

Thank you very much. So what we did is that we received an offer combined by our main shareholder, Mr. Jobson, and PAI. We didn't put the company for sale, okay? Based on that offer, we looked at the offer that we received, and we looked at the merit of this offer. And based on different thing, strategy or stakeholder management, sustainability and price, we have decided to engage with them. That's what we did. That's the process we went. It was a very fair process. I cannot let you imply...

Question
Unknown Analyst (Analysts)

Why in that process -- I mean, why in that process you did not decided to open -- to attract other bidders to make it competitive? If you're selling your apartment, I imagine you're trying to do that. Or when PAI buys the company and they sell it, usually, that's what they do when they sell. They don't like to do it when they buy, but they do it when they sell.

Answer
Christophe Barnouin (Executives)

Excuse me. Can I reply to you? On the 14th of March, we early on came with a full transparent press release of what it was, okay? Which means that in case of any other bidder would be open to come over, they would have -- they had the full transparency of what it was. There has been no other offer.

Question
Unknown Analyst (Analysts)

Okay. But you didn't try to solicit anybody, okay, but nobody came. Thank you, that's the answer. That's what we wanted to know.

Answer
Christophe Barnouin (Executives)

I have no more comment than that.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] There's another question.

Question
Thijs Hoste (Analysts)

This is Thijs Hoste from Kempen. Can you hear me?

Answer
Christophe Barnouin (Executives)

Yes, we can.

Question
Thijs Hoste (Analysts)

Okay. Perfect. I just have one question because, I think 2 statements are a bit contradictory. I would like to know your reason? So on the one hand, you say for the longer term, we need to improve growth, we need to increase A&P and this will go easier in -- but when you look at the last 2 quarters, what we have seen actually in terms of A&P spend and in terms of margin has been rather the opposite, I think. So how do you explain two competing philosophies?

Answer
Ronald Merckx (Executives)

Thijs, it's Ronald here. I don't think they are competing because I think if you look at the guidance for the full year, I think it's very clear and unchanged from what we said in February. And this is exactly the point that from quarter-to-quarter, there are phasing and, therefore, margin discrepancies, but quarterly changes in the margin is not relevant for the longer term. So I understand where you're coming from, but that takes a very quarter-by-quarter view.

Question and Answer Operator Message
Operator (Operator)

Our next question.

Question
Reginald Watson (Analysts)

It's Reg, again, from ING. Just a couple of housekeeping questions, if I may. I was thinking by your time lines in terms of offer that is submitted early June and expect share close in Q3. Do you expect to report first half results as well before the end of this process? Or will that not be necessary?

Answer
Christophe Barnouin (Executives)

Yes. No, yes, yes. There is no...

Question
Reginald Watson (Analysts)

Okay.

Answer
Christophe Barnouin (Executives)

We will.

Question
Reginald Watson (Analysts)

And is there any further -- anything else you can share with us on Ronald's replacement, because I believe he's due to leave the company in the next week or so?

Answer
Christophe Barnouin (Executives)

Absolutely. We have launched a search for the replacement of Ronald. This is going -- this is progressing, that's what I can say. But, of course, no one can replace Ronald.

Question and Answer Operator Message
Operator (Operator)

Gentlemen, there are no further questions.

Answer
Christophe Barnouin (Executives)

Okay. Thank you. Then, we will thank you for accepting our invitation, again, and we are closing the call. Thank you very much.

Question and Answer Operator Message
Operator (Operator)

Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for your participation, and have a very nice day.

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