Koninklijke Wessanen NV (OTC:KJWNF) Q1 2017 Earnings Conference Call April 21, 2017 5:00 PM ET
Ronald Merckx – CFO and Member of Executive Board
Alan Vandenberghe – KBC Securities
Karel Zoete – Kepler Cheuvreux
Anna Patrice – Berenberg
Robert Jan Vos – ABN AMRO Bank
Reginald Watson – ING Groep
Ladies and gentlemen, thank you for holding, and welcome to the Wessanen Q1 Results Webcast and Events Call. [Operator Instructions]. I would like to hand over the conference to Mr. Ronald Merckx. Go head, please, sir.
Hello. Good morning to you all, and welcome to the trading update for the Q1 results of Wessanen. I will just take you through a brief presentation. And as mentioned, we will open up the floor for questions.
So I think if we go to the next or the first page, if you like, of the presentation. I think you know in total we’ve seen strong growth, 15.2%. And particularly, I think the growth of — the autonomous growth of our own brands at just over 9%, I think, was another strong performance. Good growth in most of our brands.
And I think if we go to the next page, we can see how the revenue basically is broken down in its various constituents. Acquisitions added 13% in total. And then the autonomous growth of our own brands, as I said, was 9%. And as we guided it at Q4, we continue to see reduction of private label sales and the distribution brand sales. The private label sales, mainly linked to the fact that as part of our restructuring and closing a number of lines in our German factories, we’ve also said goodbye to some of the connected private label brands. And with regards to distribution, that’s basically driven by the fact that as per January 1, we actually lost the Dr. Schär contract for Distribution in France and that has had another significant impact. And then the third element is the currency element with continuous of weakness compared to Q1 2016, of course, of the pound. That had another 1.5% impact, giving the total of 15.2% for the quarter.
Then I think in terms of the next slide, so which is all about the profit delivery, 11.5% of revenue as EBITE percentage. I think on the right-hand side, you can see that like last year, the first quarter results were a little bit higher than they were for the full year. And when we talk about guidance later on, I expect we will see the same trend. It’s a good performance, I think. About 50 to 60 basis points of that performance is linked to the fact that we have done some acquisitions with slightly higher than average EBIT percentages. And the other part is partially due to underlying performance of the business. And as we said in the press announcement, the phasing of A&P also had an impact. We did spend a little bit less than what we expected to spend in quarter 1, so that’s basically a rephasing to the rest of the year. And that had another 70 or 80 basis points impact.
I think what’s been driving that growth, if we go to the next chart, we’ve basically seen a lot of good developments on Bjorg. Bjorg grew at strong double-digit growth again in the first quarter. I mean, the upside for losing the Dr. Schär gluten-free products is that we’ve now been able to actually launch our first gluten-free and organic range under Bjorg in the French market. It’s early days, but so far, has been well received by the trade. And we’ve got good expectations that this business will help to offset some of the loss of the turnover from Dr. Schär, of course.
We’ve also launched a whole new range of biscuits with lots of added benefits. And that again has helped to drive some of the growth that we’ve seen.
On the next page, I think a number of other things was mentioned already in the press announcement as well. I mean, we’re making good inroads into the German drugstore channels like dm, Rossmann and more regional Budnikowsky, for instance. We’re seeing good growth there with the Cupper or the Clipper brand in Germany. And we also are now using the Tartex brand more and more to drive growth in that channel. And again, we’ve seen Tartex returning to growth in the first quarter, so that’s a good early sign. The restructuring that we announced for our German business is also progressing in line with expectations and the plan, so that’s also a positive.
At Clipper, in general, continues to do very well for us with again showing double-digit growth across the business.
Finally, a brief slide on — an update on the acquisitions that we’ve made in 2016. I think all of those are progressing well. Piramide, basically, we’ve completed the integration. The growth is ahead of the business plan that we had developed on the acquisition. And we are also as part some of the operating projects that we’ve got in the business. We are preparing to basically integrate that as part of our supply chain. And that’s also why, as we said at the full year results, we’re seeing a big step-up in CapEx as we are investing some additional tin sheet.
Destination, again, same story, good growth, ahead of the business plan. The integration is also proceeding. And there again have both for coffee and tea, we are looking at the future supply chain footprint and how we can drive value-creation opportunities from that.
Mrs Crimbles, basically, integration is completed. And in fact, on Wednesday, they went live with our SAP platform, so that’s been done very quickly and very well, I must say. Synergies are actually ahead of the business plan in terms of the savings that we are seeing. And one of the things that the team in Germany or in the U.K. are now preparing for is the brand relaunch, which we’ll see in the back end of this year and also with potentially some additional new innovation.
And then the last acquisition we did in 2016 in Spain. What we’re seeing is that both in HFS and also in grocery, there’s a positive market development. We’re benefiting from that with double-digit growth across the business. And again, the integration is proceeding as planned. So overall, I think for all of those 4 acquisitions, they are progressing well and we’re pleased with the results that we’re seeing.
What does that mean for 2017? I think we are not — or we’re confirming basically the outlook for 2017 as given at the Q4 results. Continued strong growth over all brands. We’ve seen 9.2% in the first quarter. We guided for 8% to 9% for the full year, basically more or less in line with the growth that we’ve seen in 2016 and that we confirm. The effect of the 2016 acquisition, of course, was 13% in the first quarter. And of course, it tails off as the effect of that gets smaller during the year. And then partially offset by the lower private label and distribution sales. And again, I think the effect that we’ve seen in Q1 is the effect that we will see for the remainder of the year and is also in line with our guidance and our expectations.
The EBITE percentage, above 8% for the year, of course. Q1 has been well ahead of that. I think when we look at the phasing, in particular, of A&P, that seems to be panning out a little bit differently from what we had initially expected. But if we look at the full year and that’s really what I would like to reiterate again, for the full year, we’re seeing at the growth as guided and also the profitability above 8% as guided.
Financing costs, no change. Tax rate, no change. Capital expenditure, no change. Depreciation and amortization has gone up a little bit compared to earlier guidance. The main reason for that is that we are now including, as a result of the acquisitions, we finalize the purchased price allocations, particularly of Biogran. And we will see some depreciation on intangible assets, in particular, the customer lists that we have sort of put on the balance sheet as part of the purchase price allocation. So there’s a bit of an uptick as a result of that.
That basically concludes my very brief sort of additional color on Q1, and I’d like to open up for questions now.
[Operator Instructions]. The first question is from Mr. Alan Vandenberghe, KBC Securities.
I have 3. The first one is on the margin. Ronald, you already indicated or provided at least an idea of the main drivers of the EBIT margin improvement. I was wondering if you could provide more details about how important the A&P phasing was in that margin improvement. That’s the first question. Then on the A&P spent in general for the full year, about the phasing, so you spent a bit less than expected and less than last year in the first quarter. How do you expect that to evolve throughout the year? And in absolute and relative terms, how do you expect A&P spending to be versus last year? And then maybe on the private label and distribution contracts, according to my calculations, you are down somewhere around between 15% to 20% in the first quarter. Is that a number that we can extrapolate throughout the remainder of the year? Yes, that’s it.
Okay. Alan, that’s fine. Thank you. Yes, so in terms of the EBITE margin, so there is, as we already said at the presentation of Q4, so we’ve seen in Q1 a 50 to 60 basis points contribution from the M&A. And then a significant part of the remainder is actually the A&P phasing in terms of percentage points. A little bit of gross margin improvement and the rest of it is basically the A&P phasing. So in terms of the actual phasing, we — I’m expecting to spend more in Q2 and Q3 than we did in the prior year and for the full year. In terms of absolutes, I’m expecting to spend a little bit more as well. In terms of percentages, it’s more or less in line, I think, with 2016, I think, as we see continued good growth.
We are investing in the different markets where we see opportunities, of course, to invest behind the brands, but we also don’t need to overinvest, I think, in a number of discussions that we’ve had with people as well. We’re reaching sort of critical mass. We then don’t necessarily need to increase the percentage as we continue to grow at these levels. And in terms of private label and this whole entity of distribution brands, I think the range, 15% to 20%, you can extrapolate that for the remainder of the year, particularly because one big driver is the loss of the Dr. Schär contract in France and that won’t come back. And the other part, the private label element is predominantly linked to the restructuring in Germany. And again, that’s on its way and those contracts will not come back.
The next question is from Mr. Karel Zoete, Kepler Cheuvreux.
I have 3 questions. The first one is with regard to categories. Can you call out which categories did particularly well and why you see more difficulties? The second one is on Spain. The acquired business had a significant part of third-party brands. Have you already done the review which you will keep and which might be replaced by own brands or — yes, how does that look like? And the third one is with regard to the new capacity and the expansion. When do you expect that to come onstream and allow for more volumes?
Yes, okay. Karel, I think — so in terms of categories, I think Dairy Alternatives, whole drinks, particularly tea, did well, breakfast, cereals with some of the launches on the Zonnatura and also Tartex has done well and sweets in between, so the biscuits, are called out in France, for instance. And also, they’ve been doing well for us also with launches, sweet in between and snacks in Zonnatura in the Netherlands. With regards to Spain, that whole review is underway, of course. What we do see is that they are sort of significant contributors to growth as well, as the Spanish market is developing very well.
The other bit that we’re looking at is, of course, how can we use it as a springboard and a platform to drive growth of our own brands in Spain a lot more and that’s exactly where we’re focusing more of our attention, I think. And in terms of new capacity, tea will basically come onstream at the back end of this year as and when these machines get installed and we’re sort of doing the expansion of the factory. Some of that volume basically will then be brought from external parties in-house. So it won’t necessarily increase the volume per se, but what it will do is, of course, it will change the mix of what we produce in-house versus what is outsourced.
The next question is from Ms. Anna Patrice, Berenberg.
Few questions from my side, first of all, the acceleration in own brands organic growth, it was roughly 6%, 7% in the Q3, Q4 last year and now you’re back to 9%. So maybe if you can comment to what has driven this acceleration. Secondly, on the sales, please. Could you remind us, please, what is the current sales fleet own brands versus how much is from third party and how much is from private labels, given the decline in third-party private labels? And also if you could give indications where you would expect the private labels end up or third party end up as a percentage of sales in the midterm? The third question is on the regional development. If you can comment a little bit more what was the growth like in the U.K. and in Germany.
You said that in France, Bjorg has increased sales by double digits, so what was the growth in those countries? And also on the U.K., how the current situation looks like and have you been able to increase the prices to offset the foreign exchange over the pound weakness? And then maybe the last question is on the gluten-free launch in France, maintain your leverage in Mrs Crimbles. It was absolutely separately developed and separately sourced. And what is the plan going forward on the gluten-free to expand further in France to bring in other countries, et cetera?
In terms of the growth in Q1 versus Q4, I think I continue to try and focus all of you on sort of looking at the full year numbers because I think the guidance for this year, 8% to 9% in own brands, basically more or less in line with what we did last year. I do realize, of course, that and I read that in some of your notes this morning, Q3, Q4 were a little bit softer. But I think as activities differ from quarter-to-quarter with promotions, with A&P phasing, sometimes with listing in distributions, in particular customers, it’s really tough, I think, to draw too many conclusions from just 1 quarter. So I would say the quarter is in line with our full year expectations, and 2016 was also in line with our full year expectations.
So with things like the launch of gluten-free, with some of the chilled products under Bjorg that are coming upstream, we’re seeing, as I talked about, Tartex returning to growth, good additional listing of Clipper in a number of countries, and that’s helping to drive growth. But we try to really focus on the year-on-year growth and focus on full year number. In terms of the split between own brands and sort of private label, sole agency, I think we always had 80-20, that now starts to drift more towards 83%, 84%, 16%, 17% by the end of this year, I think. In terms of U.K., Germany, in Germany, in total, in our own brands, we saw close to double-digit growth again, driven in particular by the good performances of Clipper and Tartex, as mentioned before, with some of the innovation behind that brand. Allos remains something that actually declined in the quarter.
And I think as we talked about at the time of the Q4 results, that’s still something where we need to do a little bit of repair work. And in terms of profitability, of course, the overall growth helps and we will start to see the results of the restructuring that we put in place. U.K. was a tougher quarter in Q1. As you can imagine, we are having lots of discussions with all the retailers to put the prices up and the price increases through. That’s going well. But whilst we’re in that process, of course, the retailers are less willing to sort of support promotions and activities like that. So that basically was a tough environment. If we look at the full year outlook also for the U.K., we’re confident that we’ll get those through and that we’ll maintain the profit of that country through these price increases.
And I think within the U.K., we’re seeing good pockets of growth despite that [indiscernible]. It was another strong quarter. In terms of gluten-free, now the French gluten-free range, which is also organic, was developed separately and also sort of touches a number of different product categories and Mrs Crimbles. As I said, the initial results are encouraging, I think, and as and when established and successful like with a lot of other innovations that we increasingly will roll out across the rest of Europe.
And then on the sales, please, you said that the third party in private label is probably around 15%, 17%. Where do you see it in, let’s say, 5-year time, 3-year time? Do you think that you will still have the third-party brands or the private labels? Or that will be reduced to 5%, 10% of sales or even less?
No, I find it difficult to say at the moment. I think strategically we focus, of course, on developing our own brands. And as those continue to grow at — in line with the long-term growth, which you already said was 5% to 7%, but I’ll give you that we’ve been growing ahead of that more recently. So mathematically, it will become less and less of a small part of the business, private label and sole agency. But strategically, where — it differs by category and by country for some of these brands. There is a longer-term roll for a number of other contracts, particularly private label. We may decide to free up capacity to support our own brands. And in a number of categories, we will maintain though. So would I see that going down to 0 in the next 5 years? I think that’s very unlikely.
The next question is from Mr. Alan Vandenberghe, KBC Securities.
I have a follow-up question on the margin evolution. Yes, you always had the impression that you indicated that the private label and third-party contracts had lower-margins than your own brands. But if you look at the first quarter performance and the information that you gave about the A&P spending and the impact of M&A, it seems like there was no beneficial impact of reducing the third party and private label contracts in the first quarter. Can you maybe elaborate a bit on that, Ronald?
Yes, I think — Alan, thanks for the question. I think there’s, of course, a lot of things that are sort of at play in terms of looking at the gross margin. And one of the things that is partially offsetting some of those benefits in particular in Q1, of course, is the fact that the margins, the gross margin in the U.K. are under pressure because of the higher input cost as a result of the weakening of the pound whilst we’re still repairing those margins through the price increases that we are discussing with the retailers and that will be implemented during the year. So we do see that benefit coming through, but particularly the U.K. margin, the forex effect, there has an impact.
The next question is from Mr. Robert Jan Vos, ABN AMRO.
Robert Jan Vos
I have one question, actually, on A&P. What exactly was the specific reason why you materially lowered A&P spend in the first quarter? And also related to this, I think phasing of A&P is a recurring theme in your quarterly updates, also increasing the volatility in your EBIT margin. When do you expect this pattern to become a bit more stable?
Robert Jan, thanks for your question. Yes, I think we did see lower spend than we had originally anticipated. Actually, if you look at where that occurred, it was in a number of countries, but predominantly, I think, France and the Netherlands. The reason for that and the volatility that we see, I think, unfortunately, in the business like ours and the size that we are shifts off EUR 1 million or EUR 2 million of A&P between quarters can have a material impact on the profitability as reported. I think going forward, I don’t see that changing too much. I think that’s why I would really like — and that’s what we do internally, focus on the full year.
And within the that, there will always be some of volatility and shifts between quarter as the business sees that necessity because we may plan to spend behind the campaign that is planned. But then if the actual execution of such a campaign is maybe not up to scratch, then we decide maybe not to spend the money behind that and we’ll do the work again and then postpone it. Or sometimes, there might be a promotional activity, might be a better way to sort of achieve the goals that we — the targets that we want to achieve than spending it on A&P. So given the size of the business, I think, obviously, there will always be that volatility.
Robert Jan Vos
All right, that’s very helpful. And just as a confirmation, did you say that for the full year, you do not expect it to change as a percentage of sales? Was that your statements on A&P?
No, I don’t think it would — I don’t think it will materially change. But again there as well, if we do see opportunities to accelerate the business further, then we may decide to fund specific brands a little bit more and drive up the growth of where we are today. And in absolute terms, as I said, it will go up a little bit. And in percentage terms, it will probably be broadly in line with 2016.
The next question is from Mr. Reg Watson, ING.
Just a question on the top line, you’ve maintained your guidance for low double-digits growth for the full year, but obviously, Q1 was much stronger than that. What makes you so cautious about the rest of the year?
Yes, low double digit, so 15% is a little bit above low double digit, yes? But I think as I said in the reiteration of our guidance, I think if you look at the constituent parts, so 8%, 9% on our own brands, which is the guidance in Q4 and reached [indiscernible] in the first quarter, have actually achieved the acquisition effect, which of course in the quarter 1 is still higher than that. That will tail off throughout the rest of the year as the anniversary of some of these acquisitions starts to happen. And then, the 15% to 20% range for private label and sole agencies will be there. So that 15% will start to come down predominantly as a result of the acquisition effect tailing off throughout the rest of the year.
And you’ll lose the effect of GBP in the second half the year as well so that will help. You had acquisition effect in the first half offset by GBP weakness still in the first half anniversary-ing. That would then at all kind of drops out in the second half?
Yes. But again, on the forex, yes, I don’t know what’s going to happen there.
The next question is from Ms. Anna Patrice, Berenberg.
And if I can also ask a question on the M&A pipeline and if it there is anything that you’re looking into. Is there any particular that you will be interested or any particular country where you would need to expand? That’s the first question. And the second question on Biogran acquisition. Because the company also has private labels or third-party labels, so how do you see the development there? Do you think that you will trim the portfolio of Biogran or you’ll just grow as it is now and then focus on it later on? So just your thinking here.
Okay. Thank you for the question. Yes, so in terms of M&A, the pipeline, we can’t really comment on that. But we are, of course, as we did in 2016, looking at all kinds of various opportunities. And I think as we’ve always said, we try and do that along a number of lines either focused on existing categories where we can build further strength in terms of regions, areas like, for instance, Austria, Switzerland, the Nordic region, which is still white spaces. In terms of our footprint, those areas that we would — we’d look at. And with regards to Spain, I think in that business, the third-party brands still play an important and strategic role. Over time, of course, as I said early, we will bring in more of our own brands into that business. And therefore, as that continues to grow, I would expect that the third-party brands there as a percentage of the total business to become less of a relevant item.
Okay. Just a follow-up question on EBIT margin A&P. You gave guidance of roughly above 8% EBIT margin in the beginning of the year. You said that A&P increased [indiscernible] of sales as you want to invest with more. Now you said that A&P will most probably will stay in line. You didn’t increase of the EBIT guidance, the EBIT margin guidance. So is it just together kind of rounding up things or–
Yes, that’s just rounding up. I don’t think we — at Q4, we said we would — as I said, in terms of absolute spend, we will spend a little bit more as a percentage. From what we’re seeing now, it’s broadly in line and that’s why the guidance of still above 8% for the full year is what we’re seeing.
[Operator Instructions]. There are no further questions at the moment.
Okay. If there are no further questions, then thank you very much, everybody, for listening into the call and asking questions. And thank you very much, and have a good weekend. Thank you.
Ladies and gentlemen, this concludes the webcast and event call of Wessanen. You may now disconnect your line. Have a nice day.
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