Vantiva S.A. (OTCPK:THNRF) Q2 2024 Earnings Conference Call July 24, 2024 12:00 PM ET
Company Participants
Thierry Huon - IR
Luis Martinez-Amago - CEO
Lars Ihlen - CFO
Conference Call Participants
Antoine Lebourgeois - Bryan Garnier
Thierry Huon
Hello, ladies and gentlemen. Welcome to Vantiva's First Half 2024 Results Conference Call shared by Luis Martinez-Amago, our CEO; and Lars Ihlen, our CFO. At this time, all participants are in listen mode only. Later we’ll conduct the Q&A session. [Operator Instructions] Just to remind you all, this conference is being recorded.
We'd like to inform you that this event is also available live on our Vantiva's website with synchronized slide show.
During this conference, 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 Autorité des marchés financiers.
I would like now to hand over the call to Luis. Please go ahead.
Luis Martinez-Amago
Thank you, Thierry, and hello, everyone, and thank you for joining us today for this first half results presentation. Before going to the results, I would like to communicate that after 9 years of service to this company, I have decided to retire and therefore step down from my position as Chief Executive Officer and Director of Vantiva with effective date of August 15, 2024.
The board has decided to nominate Lars Ihlen, our current CFO and who has agreed to step as an interim CEO while remaining Chief Financial Officer of Vantiva until the board's Governance and Social Responsibility Committee and the Remuneration and Talent Committee finalized the appointment of Vantiva next Chief Executive Officer.
Lars brings extensive experience and a deep understanding of Vantiva's operations, having served as CFO of the Connected Home division for the last 11 years and after having served in various financial positions in Alcatel-Lucent in Norway, France and China for more than 10 years. Smooth transition plan is in place, and I will continue to work closely with Lars over the coming weeks to ensure continuity and stability of Vantiva business operations and the realization of the synergies plan.
It has been a tremendous honor to lead the Vantiva over the past years. I'm incredibly proud of what we have achieved together and grateful for the dedication and hard work on Vantiva's talented team. I'm confident that Vantiva will continue to thrive and succeed in the years to come.
Okay. And with this, let's go to the presentation of the results of the first half. As you can see in this Slide 4, I'm pleased to report that our performance in the first half has met all our plans and expectations. As we anticipated and as we communicated to you back in April, the Connected Home business is still facing a low demand period where service providers are very cautious and tried to minimize their spending as much as possible.
Regarding Supply Chain Services, the DVD business continued its natural decline, but it is stabilizing compared to previous years. The decreased rate is slowing down and we expect this decrease to remain lower than expected. The diversification activities in this division are growing well and have offset part of the impact of the DVD decline. And I will explain more in the following slides about it.
Our EBITDA margin reflects the lower volumes and the temporary duplication of our structural costs in the first half due to the Home Networks integration, but you will see that shortly that this is no longer an issue. As a positive sign, quarter two has shown some improvements compared to quarter one, and we anticipate this trend to persist and even intensify in the second half. But the most important achievement in the first half is the speed and the efficiency of the Home Networks integration process in Vantiva.
Now I want to share with you some details on how we are integrating home networks into Vantiva. I am proud to say that our teams have been working with competence and excellence to make this integration as fast and as smooth as possible. We are ahead of schedule on many fronts. We have almost finished the transition service agreements. The migration of our EPR systems is completely done and the consolidation of the size and headcount reductions will be achieved by the end of the year. Putting this into perspective and comparing this performance to the U.S. industrial metrics, these results are simply outstanding.
In addition, the acquisition and the integration process received very positive feedback from our customers, and we have no commercial dis-synergies. What does it mean for us? It means that we are able to deliver a stronger benefit from this integration and sooner than what we were expecting initially.
Thus, despite this slow start to the year, I'm happy to share with you that we are confirming with confidence our full guidance for the year.
Let me give you a quick overview on the key figures for the first half. Revenues decreased by 3.4% and reached about €1 billion. Connected Home had a stable revenue performance, while SCS revenues dropped 10.6% to €206 million. These lower revenues, along with the highest cost structure due to the Home Networks own cost had a negative impact on the EBITDA. It was €23 million in first half '21, down from €49 million a year ago.
Connected Home margin was 4.3% compared to the 7% a year ago. EBITDA margin also suffered and was €2 million, down from €7 million at the end of June 2023. So the decline is due to lower volumes and part of it due to the provision reversal that has boosted last year's results. However, we are confident that the division will achieve the budgeted performance on the full year.
Corporate and Others contribution to group results improved by €3 million in the semester at minus €11 million, thanks to our strict cost management. Operational free cash flow before interest and tax was positive of €30 million, a significant improvement from minus €74 million in the first half of 2023. Lars will explain this in more detail shortly. To sum up, this first half was weak, but in line with our expectations, and we anticipate a strong recovery of our performance in the second half.
Let's move now to the business update. Let me talk about Connected Home activity. We faced some challenges as our customers were very careful in their demand. They wanted to reduce their excess inventories in a competitive market with lower CapEx. The Americas region suffered the most, while Eurasia did slightly better. Our broadband activities were driven by fiber and our video business performed well, especially in the APAC region.
We kept innovating and investing in our technology to support our offer. As a result, we won new contracts with our Wi-Fi 7 technology and for Android TV with devices that includes AI chips. We also maintain our focus on sustainability policy and received a Platinum rating by EcoVadis for the second year in a row. Moreover, we made a strong commitment to SBTi targets.
Let’s have a look now to the financial performance of Connected Home. Revenue was almost flat with a significant decline in broadband business, offset by the strong growth in the video area. Note that, that new contributor to revenues has shown up with diversification units that groups our own activities.
We are pleased to show that that our initiatives in the IoT for verticals, added value services and retail are now representing several tens of millions of euros in revenues. And this is only the beginning. We expect this part to continue to grow at a significant pace to get some materiality in the coming years.
EBITDA decreased from €56 million to €33 million. This is due to the additional cost structure coming from Home Networks before the implementation of the synergies. But as I already mentioned, we forecast a significant improvement in the second half based on higher revenues and a better cost structure from the transformation plans that are being executed.
Optical discs activity has continued to decline, but at lower rate than in previous year. This normalization led to a 15% decrease in volume production. Revenue registered better, thanks to price actions.
Distribution and fulfillment non-related to optical discs continue to expand quickly besides the freight brokerage is still suffering from overcapacity. Vinyl records demand is very solid and the production continued to increase significantly, thanks to additional capacity in place. We have now 38 presses in operation compared to 22% a year ago. The division continues to implement efficiency measures and to expand its business outside of the optical activity to improve its growth perspective and consequently the margin.
Revenues of the division fell 10.9%, showing a better resistance than the disc production, down 15%. This came from price actions and diversification activities performance.
EBITDA came in at €2 million versus €7 million in first half 2023, which had benefited from a positive one-off impact of a provision reversal not repeated this year. This performance is in line with our expectations, and we expect an improvement in the second part of the year.
And I now leave the floor to Lars for explaining the results.
Lars Ihlen
Thank you very much, Luis. If we move to Page 14, we will explain how some of our main financial indicators compared to H1 last year. As Luis just mentioned, our EBITDA was down by €26 million due to lower activity and duplications applications in our cost structure following the Home Networks acquisition.
The D&A and reserves increased by €6 million versus last year, mainly driven by higher depreciation from a larger asset base and some additional warranty costs. This gives an EBITDA of a negative €23 million versus a positive €9 million last year. The PPA amortization increased by €1 million with the additional assets activated by the Home Networks acquisition and a following onetime write-off of €5 million.
This offset the decrease we normally would have seen as we reached the end of most of the amortizations of the 2015 acquisitions of CWU and Cinram in H2 last year. So on a going-forward basis, this number should be lower.
The non-recurring costs decreased by €85 million to a negative €61 million despite the set of restructuring costs to cover for the integration activity in Connected Home. Last year, was, as you may remember, impacted by €135 million depreciation of the goodwill in Supply Chain Solutions. This gives an EBIT for the semester of minus €98 million versus a negative €150 million for the same period next year -- last year. The net result of the group was minus €167 million versus a negative €229 million last year, and we will explain how we go from EBIT to the net results on a later page.
The bottom of this table shows how we go from EBITDA to free cash flow. The CapEx at EUR 26 million is €18 million lower than last year, and this amount is impacted by the sale of a manufacturing building in Poland and tight control on CapEx in general. The non-recurring items reached minus €58 million, which is €32 million higher than last year, and this is mainly driven by the cash out for the restructuring activities in Connected Home.
The working capital variance this semester was an improvement of €91 million versus a reduction of €54 million last year. This improvement is driven by our efforts to renegotiate terms for both customers and suppliers after the integration of Home Networks. This resulted in a free cash flow before interest and tax of a positive €30 million versus a negative €74 million last year. After financial and tax, the free cash flow was negative €19 million versus a negative €104 million last year. The net debt without leases stands at €424 million according to IFRS versus €368 million in 2023.
On Page 15, you can find the move from adjusted EBITDA to EBIT and we explained all of these items on the previous slide. However, this gives a bit more detailed breakdown of the non-recurring items. So the impairments and write-offs improved by €131 million following the write-off of goodwill last year in Supply Chain Solutions. The restructuring cost is the cost of all the restructuring plans approved so far for the Connected Home integration, and this amounts to €69 million. The other non-current items of a positive €12 million is impacted by a bad will posting of €24 million booked following the Home Networks acquisition.
Page 16 explains the walk from EBIT to the group net results. Interest expense increased by €12 million this semester, mainly driven by the interest on the bridge loan. This loan was almost fully paid back during March and June, and the remaining €10 million will be paid by the end of Q3. Other financial decreased by €8 million versus last year to a negative €17 million. This gives a net financial result of a negative €58 million and a profit before tax of negative €157 million versus a negative €205 million last year.
The tax charges reached €9 million this semester, linked to additional taxes in the U.S. following the Home Networks integration versus a positive €3 million last year that was driven by a positive adjustment in Brazil. The gain from associates improved by €25 million this semester, as we last year brought down most of the remaining values of the technical or creative studios. This gives a net result at group level of a negative €167 million, which is an improvement of €62 million versus this time last year.
On Page 17, we explain how we improved the free cash flow this year. So last year, the cash burn was €74 million, which was further negatively impacted by the negative change in EBITDA of €26 million. This was partly offset by the lower CapEx of €18 million and the cash out for restructuring increased by €23 million, mostly from the cost of realizing the synergies in Home Networks.
The working capital improvement was an impressive €144 million. And as earlier explained, this is measured as the change in working capital in H1 '23 versus the change in working capital in H1 '24. This year, we had a positive impact of €91 million, while we had a negative impact of €54 million for the same period last year. And this is how we get to the improvement of €144 million.
Finally, we had a negative impact of €9 million in pensions and other, which was mainly driven by one-off time costs following the acquisition. All in all, this gives us a positive free cash flow before interest of tax of €30 million.
Finally, on Page 18, we can see our liquidity position at the end of H1. We landed with cash on hand at €39 million and an unused credit line with Wells Fargo for €66 million. Combined, this gives total liquidity of €105 million compared to €66 million for the same period last year. Including operational leases, our total debt reached €516 million, while the cash on hand reduced to a net debt of €477 million.
Before we conclude this session and open up the floor for questions and answers, I think I would like to thank Luis for his contribution to Vantiva for the past nine years. I mean we have seven years together in Connected Home before we did the Vantiva at the group level the last two years. Thanks a lot for everything you have taught, it has been amazing to work with you for this period. And I'm sure I speak for not just me, but for the whole management team as well, and I hope that you will be greatly missed after 15th of August.
Luis Martinez-Amago
Thank you. Thank you very much, Lars. So with this, Thierry, maybe we can move to the Q&A.
Question-and-Answer Session
A - Thierry Huon
Yeah, absolutely. So thank you, both of you. And now I propose that we open the Q&A session. [Operator Instructions] Operator, do we have questions in the list?
Operator
We have Mr. Antoine Lebourgeois from Bryan Garnier, who is the next -- the first question. Please go ahead.
Antoine Lebourgeois
Good morning, everyone. So first, Luis, I wish you all the best in this new chapter of your life. And I have three questions for today. Firstly, could you provide an update on the restructuring cash costs related to the integration of Home Network?
And secondly, I would just like to have your views on the timing of the recovery for Connected Home. Do you still expect a significant recovery starting as soon as H2 2024? Or will most of the recovery be in 2025 in your view?
And last question, do you also expect working capital to contribute positively to free cash flow in H2 like in H1.
Luis Martinez-Amago
Okay. I will take the second question, and I will let Lars to take the other two. So timing of recovery. We are seeing signs of market recovery already in the second half and into next year. But as you know, Antoine, this is our business takes long lead times of execution. So we have still only type of components. And even if customers are insisting us to deliver more this year we need to buy components.
We need to produce and we need to deliver. So we will have some effect in the second half, but most of the recovery, even if the market may be recover in the second half, we will see this in revenues late in the year and maybe the last months of the year and into 2025.But the good thing is that we are starting to see the market recover.
And by the way, thank you, Antoine, for your nice words. And with this, Lars, can you cover the other two?
Lars Ihlen
Yes. So I think we can cover the two at the same time, more or less. So okay, as you know, Antoine, we have guided the year that we will be positive in working capital after interest and tax, but before restructuring charges. So as you can see from the press release, what we are saying for H1 is that yes, despite the fact that we are reporting a net -- or free cash flow after interest and tax at minus €19 million. When you correct for the restructuring cost, we are at plus €14 million. So there is roughly €35 million of restructuring costs has burdened the group result in the first quarter.
This means that we are ahead of our target for this parameter. And even if we cannot expect to see the same level of positive improvements on the working capital going forward. We maintained our guidance, which means that we are not expecting to see this materially worse either for the second half.
Antoine Lebourgeois
Okay. Thank you.
Operator
[Operator Instructions] Gentlemen, there are no more questions registered at this time.
Luis Martinez-Amago
Okay. Thank you very much to all of you. And thank you for Theirry and Lars as well. Thank you very much.
Lars Ihlen
Okay. Thank you, everybody. Good evening. Have a nice summer. Bye-bye.
Operator
Ladies and gentlemen, this concludes the conference call and webcast. Thank you all for your participation. You may now disconnect. Thank you.