THNRF - Vantiva S.A (TCLRY) Q2 2023 Earnings Call Transcript
2023-07-29 11:14:05 ET
Vantiva S.A. (TCLRY)
Q2 2023 Earnings Conference Call
July 27, 2023, 12:30 PM ET
Company Participants
Thierry Huon - Head of Investor Relations
Luis Martinez-Amago - CEO
Lars Ihlen - CFO
Conference Call Participants
David Cerdan - Kepler Cheuvreux
Yannick Liatis - Bryan Garnier
Presentation
Operator
Thierry Huon
Okay. Sorry for the delay. Good evening, ladies and gentlemen. Welcome to Vantiva H1 2023 Results Conference Call, chaired by Luis Martinez-Amago, CEO; and Luis -- Lars Ihlen, CFO. [Operator Instructions]. Just to remind you all, this conference is being recorded. We would like to inform you that this event is also available live on Vantiva’s website with synchronized slide show.
During this conference call, statements could be made that constitute forward-looking statements based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the future results expressed, forecasted or implied by such forward-looking statements.
For a more complete list and description of such risks and uncertainties refer to Vantiva’s filing with the French authority aftermarket -- financial markets. I would now like to hand over the call to Luis. Please go ahead.
Luis Martinez-Amago
Thanks, Thierry. Good afternoon, good evening to everyone, and welcome to the first half results of 2023. Let me start by the Slide number 3 -- 4, sorry. Let me start by saying that the results that we are going to present are in line with our plans, the plans that we prepare. And as I shared with you in previous occasions, we are in a year in which the demand is proving weaker than in previous years. It is not a surprise.
I think we’ve been commenting that the global electronic industry and the consumer is having a slowdown compared to previous year. And this is reflected in our results, as you can -- you will see in a minute, but that was part of our plan.
In the Connected Home area, in addition to this slow demand or a bit lower demand, we have the effect of our -- some of our customers, they have more inventory than normal with the results of the exit of the previous year crisis with chips in which all of us and our customers were trying to get as much equipment as possible.
And now with this a bit lower demand, they are trying to deplete. And they are delaying a little bit the demand to us. But as you will see, we are managing as planned. In the DVD business in addition to the natural decline of the business that is part of our plan, the same happened. Our customers, they were having additional inventory to serve the demand of the previous year, and we are hitted by this depletion of the inventory.
And as you will see, there is a certain lower result than the last year. And the situation is a bit weaker than what we were expecting. This situation, and we have analyzed the business moving forward has triggered a review on the long-term business plan for this division.
As I said, all this was taken into account, and we already launched a number of strict cost controls and operational efficiencies in both divisions. And this is helping materially in limiting the EBITDA impact of this soft market. The most important thing is what we shared also in previous occasions. The new generation of solutions that we are developing and all the diversification plans that we are executing are going as planned, and we have very encouraging response from some of our key customers.
As we will see, we expect a stronger business in the second half, which is typical in our type of business, but we expect the year, as I was also commenting in previous occasion, weaker than previous year.
Let’s go to the next slide. The next slide is confirming what we told you. This is our plan. This is our guidance that we were guiding, not only from the beginning of the year, but for -- it means last year.
So with all the measures that we have taken into account, we are confirming and maintaining our guidance for the year in the 3 KPIs that you see in this slide.
So let me now have a look to the figures in a bit more detail of first half. So you have here the revenues. The revenues went down by 12.9% and stood at €1.038 billion.
Connected Home lost €90 million in revenues we were down 10% compared to last year. And this year revenues receded by 21.9% and finished at €231 million. These weaker revenues impacted EBITDA, which amounted for €49 million in the first half versus €73 million a year ago. Connected Home has limited the drop in its margin by 80 basis points, but the strong negative volume impact of SCS led to a 220 basis point reduction of its margin despite the immediate measures taken to mitigate this impact.
The corporate negative impact increased by €2 million in the semester, largely because the new allocation rules and some cost increases in this scope. The operational cash flow free cash flow before interest and tax was negative by €74 million versus minus €21 million a year ago, and Lars will give you more explanation to this for these changes.
To conclude this part, the first half has been weak, but in line with our forecast and plan. If we move to the next slide, let’s focus now on the Connected Home activity. Our customers have been very tight in managing their demand under inventory depletion, as I commented. We are working very closely with them in making sure that we follow their needs.
I am sure that you have seen the results and sometimes the profit warning of some of the main providers to the telco industry. And I would say that we are a bit better than the average, but it’s proving a difficult year in terms of demand from this industry. And it is not consistent across the industries, but it’s different depending on production and regions.
You see here that the weaker demand in Americas is mostly doing the cable industry where the customers are depleting inventory and in video devices that is in decline in LatAm, as you can see in the satellite segment. But there are other segments like fiber that are performing very well, mostly in Europe or in Europe, Middle East and Africa and some positive development in the 5G Fixed Wireless Access.
Important to say that this weakening consumption doesn’t mean that the industry is not very active and customers and as we are preparing the new technologies that will boost the market moving forward. And as you can see in this slide, we are leading the market in DOCSIS 4 that is the next technology in the DOCSIS space. We have the first wins, and we expect the first deployments in volume very soon.
So this is very encouraging. Also, this technology combined to Wi-Fi 7, which is the new technology in the Wi-Fi. As you know, we have plenty of developments with Wi-Fi 6 and 6E. And now we are also leading in Wi-Fi 7, and you will see how this will develop over time.
And a comment on the chipset supply conditions. I think this has been improved significantly, but we are still in a certain longer lead times and the prices remain high compared to the normal prices that we were experiencing in previous year before that crisis. On the right-hand side, you have some notes about the technologies.
Again, important to keep the emphasis in evolving the technologies. Market is very dynamic, and we are planning to be in the key technological evolution for our customers. And at the bottom right, again, a very important topic, which is all the eco-sustainability aspects of our business, extremely important for our customers.
And it’s an area of innovation. We have been renewing our Ecovadis Platinum rating, which we are leading in our industry in this aspect it’s the second consecutive year. And as you know, in this aspect, the demand is increasing and the requests are increasing, but we are following this, and we are very satisfied with all our KPIs in this space.
If we move to the next one, the revenues of the division declined by 10% and reached €807 million. The Broadband activity supported by the fiber demand, resisted better than the video that was penalized with the drop that I mentioned already in the satellite business in Latin America. The decrease in revenue for the first one was 6.8%, but 20% for the video part.
The EBITDA decreased by €70 million to €56 million, representing a decline of 80 basis points, but the strict cost control that we have applied has mitigated the directly negative impact that we could had. And we are expecting the activity to be better in the second half. But year-on-year, we still expect a certain decline compared to last year.
We move to the next one. Okay. Vantiva remains by far the leading operator in the optical disk business, okay? We are now in the supply chain business. But as you know, there is a gradual demand fall that we are planning for this because this is being the leader of this market. We know this very well. But in the first part of the year, and we commented a bit in the -- when we gave you an update on the first half, we were seeing a weaker market normally because the customers are depleting their inventories.
And there were some delays also on some titles moving to quarter 2 from quarter 1. But we expect these volumes to be a bit stronger in the second half in order to deliver, as you know, the guidance that we are commenting.
The distribution and fulfillment. This is part of our diversification, which is not related to optical disk, continue to show significant growth. And the vinyl production increased significantly, thanks to the ramp-up of the production capacity in place. We told you that last year, we were suffering some of limitation of getting the presses that we needed to cover the demand that we have. We’re happy to report that we have already 22 presses already in operation and already creating a significant ramp-up of this business.
But all in all, the weaker demand in the optical disk forced us to do an impairment test that -- to align a little bit the expectation with the value in the business. And you will see later that we impair the business by €133 million of SCS goodwill. The division continues to implement cost cutting and efficiency measures.
And to expand the business outside the optical deals, as I commented in the areas that you see at the bottom of the slide, and we are very optimistic that, that will contribute for global growth in the years to come, compensated the decline of the disk business.
If we go a little bit on the details of the business, the revenue in the slide [Ph] 11, revenues of the division fell 21.9%, showing a better resistant than the disk volume, down 40%.
This came with price actions and diversification activity performance. The EBITDA came in at €7 million versus the €15 million of the last year, and it was not possible to offset in full due to the volume impact. An improvement of EBITDA is expected in the second half, thanks primarily to the cost-cutting measure and some normalization of the level of demand, which will be higher volumes.
I now leave the floor to Lars for going a little bit more on the details of the results.
Lars Ihlen
Thanks, Luis. So let me start by commenting on Page 13. So as Luis already presented, the group’s EBITDA amounted to €49 million, a €24 million reduction over the previous year, explained mostly by negative volume impacts not fully compensated by cost cutting measures.
Depreciation and reserves had a positive impact of €11 million, thanks to lower depreciations, notably for R&D at Connected Home and a decrease in the warranty reserves.
Consequently, the EBITDA -- EBITA stood at €9 million versus €22 million in H1 2022. EPA amortization decreased by €3 million as expected. Non-recurring items amounted to minus €146 million mainly driven by the goodwill impairment in SCS of €132 million that Luis just mentioned.
Restructuring costs reached €8 million in the semester and other noncurrent amounted to €4 million. You can find the details year-over-year on these variances on Slide 14.
Continuing the P&L. EBIT was negative with €150 million compared to €11 million in H1 2022. I’ll give you more details on the net profit in a minute. The free cash flow before interest and tax stood at minus €74 million, showing a €44 million degradation explained notably by the weaker EBITDA and a change in the working capital. Free cash flow after interest and tax was negative by €104 million, and the net IFRS debt amounted to €439 million.
On Slide 14, you can see the walk from the EBITDA down to the EBIT. And I think this is clear, and it does not call for more details.
On Slide 15, you see the details from the EBIT down to the net result. Despite the rise in the interest rate in the period, net interest expenses for H1 showed an improvement of €34 million. This is explained by the fact that in 2022, Vantiva was still carrying the debt of Technicolor prior to the spin-off. In contrast, the other financials was more negative with €29 million, mainly driven by the fair value adjustment of our stake in TCS from the deconsolidate date of the 8th of June to the end of the semester.
Therefore, the net financial result stood at €55 million negative versus negative €61 million last year. Tax was positive of €4 million, thanks to a deferred tax asset in Mexico. Share of loss from associates amounted to €25 million due to the depreciation of the TCS stake from the 1st of January to the deconsolidated date of the 8th of June.
Net results from discounted operations was a negative €2 million, and it was positive of €62 million in H1 2022. As a result of all of the above, the net result of the group share stood at minus €229 million for H1 2023 versus negative €14 million in H1 2022.
On Slide 16, illustrates changes in the free cash flow before interest and tax versus H1 last year. As already mentioned, the main driver for the deterioration has been the weaker EBITDA, higher CapEx and less favorable change in the working capital.
Finally, on Slide 17, you have the liquidity and debt situation at the end of the half year. Liquidity stood at €39 million, and we had the possibility to draw down €27 million additional from our credited credit line with Wells Fargo.
You see from this slide that the liquidity position at the end of the first half is quite different from the year end of 2022. You should keep in mind that there are significant seasonality impacts between the first and the second semesters and that a comparison between the two is not very meaningful.
Unfortunately, we don’t have comparable figures for H1 2022 because of the carve-out from Technicolor done later in the year. The net debt totaled €448 million. We are working on new sources of financing to reinforce our financial situation and to be able to deal with the strong seasonality of our business. We will tell you more about these when they will be done.
This terminates my presentation, and Luis and I will now take, happily, any of your questions.
Thierry Huon
Thank you Lars, for this presentation. And now I hand it over to the operator for the Q&A session.
Question-and-Answer Session
Operator
Thank you.[Operator Instructions]. Your first question comes from the line of David Cerdan from Kepler Cheuvreux. Please go ahead, your line is open.
David Cerdan
Yes, good evening gentlemen. I would like just to come back on your expectation for the second part of the year. Can you explain the driver for better performance in H2 versus H1? And do you think that you will be able to achieve what has been achieved in H2 last year? This is my first question.
And secondly, my second question is related to financial charges. If I’m right, in H1, it was like minus €29 million for financials. Do you expect this number to double for 2023, so roughly €60 million of financial charges for 2023? Thank you.
Luis Martinez-Amago
Okay. Thank you, David. I’ll take the first question and Lars will take the second one. So the seasonality of our business is normally this first half is traditionally weaker than the second half in both businesses in and is related mostly from the seasonality of the campaigns of our customers, okay? You know that in the Connected Home space, there are different peaks in the year that people change homes, and they call it back to school or they have Thanksgiving or they have Christmas campaign when the operators launch normally campaigns. And this is where first, they tend to consume more and buy more vehicles to feed all these campaigns.
So this is seasonality, quarter 4, so we are not going to report quarters, but second half and quarter 4, in particular, normally are stronger than the rest of the year. And we expect this to happen in this year, even in, as I mentioned, in a lower overall demand, that will be the case.
In the DVD case as well and even a bit more situated because the DVDs are very much oriented to Thanksgiving and Christmas, and we are very much present in State. And normally, all the most of the sales are happening in the second part of the year. And we have a very solid view of how the demand will be happening over the next quarters.
So we are very confident that, that will be the case this year. And the incidence of the first half in terms of depleting inventory will disappear, and we will be enjoying a regular year for the second half. However, what you say the same results last year, we are guiding and you know our guidance, you can compare it to the guidance of last year. So we are expecting and we are saying this already for the last, I would say, six to nine months, we expect this year to be a bit weaker in top line, a bit weaker in profitability in absolute value.
But as you can see, we are resisting pretty well in percentage points in the Connected Home business, a 7% EBITDA on sales profitability. I would characterize it in the high end of our industry. And this is proving that even in this a bit weaker market, our performance and our productivity is staying at a significant high level due to all the efficiencies that we are implementing. And on the second question...
Lars Ihlen
And excuse me did you refer to the net interest expense or the other financials?
David Cerdan
No. Sorry, because the reserves are new. If I look at -- sorry, the net interest expense were €29 million in H1. So do we have to anticipate roughly €60 million of net interest expenses for the full year?
Lars Ihlen
Yes, you can roughly do that. I mean this is our -- the debt -- this is the interest in our current running debt on our working capital instrument and the calculated debt on the leases, okay? So you can assume that will be pretty stable in the second semester.
David Cerdan
And how much is leasing charges in H1? So €29 million is net interest expenses, but if you separate what is financial and leasing?
Lars Ihlen
Roughly €4 million.
David Cerdan
€4 million. Okay. And if I may have another question is regarding the liquidity, so are you comfortable with your current liquidity? And do you think that you need some additional financing to -- for this year?
Lars Ihlen
So far, we are okay. But we are, of course, working on finding new sources of liquidity to help us offset the very strong seasonality we have in this business. So we are looking for some additional working capital instruments that we are close to the finalizing, but we are okay.
David Cerdan
Thank you very much.
Lars Ihlen
Thank you David.
Operator
Thank you. [Operator Instructions] Your next question comes from the line of Yannick Liatis from Bryan Garnier. Please go ahead, your line is open.
Yannick Liatis
Yes, good evening. I had a question on the cost side. You’re saying I was reading the press release that the chipset supply has improved with the prices remaining high relative to the historical norm. Can you tell us what gap you have in price -- in cost level there still is for normalization?
And the second question is on SCS, if you could give us a little bit of comments on the microfluidics and how it’s going?
Luis Martinez-Amago
Okay. On the first thank you Jannick for the two questions. So on the first question, the prices, as we commented in the past, we normally are adjusting prices related to the increase of the chip, okay? So if we go to last year, we have transferred all the increase of price to our customers, which normally is what is happening in the industry.
This year, these prices went up not at the same level of what they did the previous year, and we adjusted the prices. So we don’t have any impact on the cost the small cost increase that we suffered this year in our margins, okay? Because as we are commenting normally, our customers are really collaborating in this. So there is no impact.
So we remain in -- net impact is the same. And on your second question that was related to...
Lars Ihlen
Microfluidic.
Luis Martinez-Amago
Microfluidics. Okay. We keep investing in this technology. As you know, we are still working with a number of pharma industry. And what we are doing, and you see some comments in the slides, we are opening other avenues additional to the pharma industry in using the same type of technology for people that need this very precise type of molding, okay?
And we are opening a kind of promotion and a pipeline building in people that are attracted by these things that they are doing. And I hope in the next occasion, we can be more in detail, okay? But still, this business, we are still in exploratory way. We have very nice engagement with potential customers.
We expect this to grow over the next years. But today, we’re still in the business development approach with some revenues, but not material for the size of the company, okay? But still with optimistic plans that could contribute in the foreseeable future.
Yannick Liatis
Great. So on the first question on the Connected Home on the cost side, I was under the impression that not all the costs have been passed through, maybe 70%, but you’re saying 100% were passed through last year.
Luis Martinez-Amago
It was okay. We don’t want to give an exact figure. In the previous crisis was a percentage, maybe this is where you have the meaning that it was a certain percentage. And we explained overall that when the price goes up, it takes some time to start linking with customers and agreeing on this transfer.
So even if in a moment on time, they cover the 100%, you may have a time in which we buy more expensive, and we sell at the old price. But overall, if you want to say, yes, we transfer the cost of the chips 100% to our customers. And the increase this year has been not very high, has been minimal, and it was very quickly transferred to all our customers. So you can pay this as an assumption.
Yannick Liatis
Okay. And in terms of diversification of the Connected Home business, are you seeing avenues where you could increase your critical mass with your clients, which will be convergent with the existing products that you’re selling? I was thinking about IoT.
Luis Martinez-Amago
Yes. That -- as you know in the Capital Day 1 year ago already, we presented this initiative. We are executing on that is the IoT for verticals in just one minute. So we are using the competence we have complemented with some new competence in solution building.
We are already engaging with some customers in really putting the solution in place. We are running proof of concept already with some key customers that can scale in the foreseeable future in the coming years. So we are very optimistic. So we are investing.
We are limiting the investment, and we are very focused on a couple of solutions that we want to become operational soon, maybe in the course of late this year, beginning of next year and to build the growth from there. So all the plans are executed as we expected, but we need to bring this business to a materiality out of the exploration Phase 2 reality, and that should happen between the end of this year and next year moving forward.
Yannick Liatis
Thank you very much.
Luis Martinez-Amago
Thank you Yannick.
Operator
[Operator Instructions]. There seems to be no further questions at this time. Please continue.
Luis Martinez-Amago
Okay. So thank you very much for everyone to attending and hope that we have given you enough information to understand our business attraction. And looking forward to talk to you at the next business update. Thank you very much.
Thierry Huon
Thank you, Luis. And if you have further questions, feel free to contact me whenever you want. Have a good evening. Bye-bye.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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Vantiva S.A (TCLRY) Q2 2023 Earnings Call Transcript