Waberer International : Analyst conference call transcript

2018 SECOND QUARTER RESULTS ANALYST CONFERENCE CALL TRANSCRIPT

AUGUST 8, 2018, 12:00 CET (11:00 BST)

[Presentation slides availablehere]

Operator: Good afternoon Ladies and Gentlemen, and welcome to the second quarter 2018 results conference call of Waberer's International. My name is Emilia and I will be your operator for today's conference. I will now hand you over to Ferenc Lajkó, CEO to begin today's conference. Thank you.

Ferenc Lajkó (CEO)

Good afternoon everyone. Thank you very much for joining today and let me welcome you to our second quarter results conference call. I am joined here by Barna Erdélyi, our Chief Financial Officer and Márton

Teremi, IR Manager of the company.

As you are probably all aware, we had released a communication on our full year result expectations less than four weeks before we disclosed the actual results for the second quarter yesterday afternoon. As this is the first conference call since our modified expectations were announced, let me first elaborate on the first half Group results and the headwinds we are facing and why we think the current margin decline in the international operations is temporary. Afterwards, I'll give the floor to Barna, who will interpret our performance by business segments and our second quarter financials in more detail.

Let's start on slide 4. You can see that the first half of 2018 showed strong 17% revenue performance. While the regional segment continued to show healthy organic revenue growth of 8%, the increase in the revenue of the International Transportation Segment was entirely due to acquisition effects while there was no organic growth.

Comparing that increase in revenue to the decrease in Group EBITDA, it is apparent that we have been facing margin pressures in both our international and regional segments. I will walk through the drivers of this margin squeeze with you on the next slide for the international segment. Regarding the regional segment, as we communicated earlier, the first half year of 2017 was an outstanding good period in terms of profitability and we are generally satisfied with the current trends in the business and results have been broadly been going on as expected. So this is the base effect we have there.

The lower EBITDA margin had an unfavourable impact on our bottom-line as well, meaning that the Group net result decreased by 5 million euros. Apart from the effect of lower EBITDA, the decrease is also attributable to a higher asset cost due to a larger fleet and a one-off revaluation effect due mainly to a stronger euro.

Let's now turn to slide 5, where we included a bridge analysis to visualise the headwinds that we have been facing in the first half of 2018. The chart shows the main components contributing to the 2.7 percentage point EBITDA margin decrease between the first half of 2017 and the first half of 2018.

Let me start with the dark blue part on the left hand side. We have long been discussing with you that the general wage pressure in the CEE region and rise in the fuel price have weighed on our margins. Let me add three comments on that.

• - First, we have so far been able to manage the driver shortage situation which most of our competitors are struggling with and we have been able to do so without a significant increase in the average driver wages. The rise in non-driver wages, on the other hand, were higher and cost a similar amount to the Group margin than the change in driver wages. So this is a bit new effect.

• - Second, the rise in fuel prices is passed on with a lag of a few months but we faced unfortunately a continuously increasing fuel price trend this year so far, meaning that there is a lag in how quick we can build in those changes into the transportation fees.

• - Third, utilisation should revert to earlier levels. The change in the order portfolio is partly a result of the market developments and its effects will be mitigated when capacities become scarce in the autumn season. But we have also have taken important measures to improve the efficiency.

Now, these cost pressures have impacted the whole transportation market and players have reacted differently. Our strategy has been to raise prices in order to lock in higher fees with our key partners before the high season arrives in the autumn. Some smaller competitors couldn't handle the situation and went out of business. Other players wanted to keep their fleet running as much as possible even if their activities are much lower in profitability or even loss-making. All in all, our order portfolio changed and not to our benefit. Loaded ratio, our key efficiency metrics, remained high, but trucks had to wait more for an appropriate order, meaning that they took less distance. We estimate that this decrease in the capacity utilisation of our trucks contributed the most to our margin decline.

Now, I believe this is a temporary situation for several reasons.

• - First, the wage situation is affecting everyone and is hard to see an end to in in the short run but we believe that we have a unique and direct coverage of the main sources for drivers.

• - Second, fuel prices should stop rising sooner or later so we can pass on the total effect to clients - we have already seen good signs of that happening in the third quarter.

• - Third, utilisation should strengthen as the volumes come in the autumn. Nonetheless, we are fine-tuning our systems and procedures in order to enhance our adaptivity to market changes like we experienced in the first half of the year.

To sum up our expectations, we think that price increases should cover at least for cost pressure without any sacrifice in utilisation and efficiency. With that in mind, the management expectation - as we announced a couple of weeks ago - a double gigit growth and slightly decreasing EBITDA performance in 2018 versus 2017.

Let me now hand over to Barna to talk about the segments.

Barna Erdélyi (CFO):

Thank you Ferenc and welcome everyone. Let's turn to page 7. The second quarter performance of our international segment generally reinforce Ferenc's chart and messages.

Revenue increased by 19 percent year-on-year due entirely to the effect of the consolidation of Link. Recurring EBITDA, on the other hand showed a 14% decrease year-on-year, meaning a 3.6% decrease in margins. Apart from the general trends discussed in Ferenc's comments that are also applicable in a

Q2-over-Q2 relation, let me highlight two small details here that influence our statements.

First, insurance costs have shown a peculiar year-on-year trend, affecting other cost and other operating expenditures what you can check in our Q2 report. In our captive insurance model, damage costs, as processed by the insurance company, are accounted as direct costs under "other cost". However, the change in damage reserves is accounted among other operating expenses, based on IFRS. These work inversely in the short run so that higher damage cost usually results in a reduction in reserves to keep long-term damage ratio and other assumptions unchanged. This results in distorted gross profit figures for the international segment, albeit it has no EBITDA effect. Total insurance costs of the fleet that includes the financial effects of settled damage claims as well as reserve provisioning have decreased significantly year-on-year on a per unit basis.

The other issue is the size of our fleet, which has increased by 20 percent year-on-year, or more than 600 trucks. The original Link acquisition accounted for ca. 400-450 of these, meaning that there has been a 150-200 truck organic increase in the number of trucks we own. This rise is distorted upwards seasonally as there are some trucks that we have not yet returned to the lessor even though replacements already arrived. This dynamics, although normal in the industry, causes fluctuations in our debt, depreciation, and cash flow figures that I'll discuss later in the presentation.

Moving on to slide 8, let's have a look at the most important financial and operating indicators of the

Regional Contract Logistics segment.

Revenue in the RCL segment increased by 9% to EUR 34 million as a result of further expansion in warehousing activities as well as higher demand for value-added services coupled with higher prices in the segment. Due to the higher demand for warehousing activities, capacity in the RCL warehousing grew by 3% in the second quarter.

EBITDA decreased by 18% in the second quarter of the year. Let me note that this is mostly due to a strong second quarter in 2017 mainly because the uneven intra-year distribution of warehouse rental arrangements last year. This distorted last year's second quarter margin upwards and as communicated earlier, we still think EBITDA margin levels of 12-13% is more realistic for the regional segment going forward. So the performance of this division is in line with our formal expectations.

On slide 9, turning to the Other segment, we registered a 13% revenue growth in the second quarter of the year. As it was mentioned previously, this segment mainly includes the Group's insurance activities with respect to services provided to third party customers. In the second quarter of the year, revenue growth was mainly attributable to client acquisition.

EBITDA decreased by 10% year-on-year in the second quarter to EUR 1.7 million, mainly due to higher competition in the market that put pressure on margins coupled with higher reinsurance costs in our third party customer base.

Let me note that, insurance is not our core activity and in terms of nominal value, the contribution of the Other segment is moderate to Group results.

Finally, let me highlight a few changes about our financials.

On slide 11, let me share some details regarding the financial result and taxes. Regarding financial results, we faced significantly higher financial expenses amounting to 3.4 million euros. Let me note that this increase is attributable to the foreign exchange depreciation of the Hungarian forint and the Polish zloty in the second quarter, resulting in the revaluation loss. The fleet refinancing costs have notchanged substantially and the implied interest rate on our debt was under 1.7% as you probably know from our report.

Regarding tax expense, we booked a net gain of EUR 0.2 million in the second quarter. This was mainly due to a EUR 1.2 million deferred tax gain as a result of slightly quicker than anticipated vehicle replacements, lowering future expected tax base. Excluding this impact, tax expense was EUR 1 million, significantly less than last year as a result of a lower pre-tax profits while local tax expense remained roughly in line with previous years' average amounts.

On slide 12, there are yet again two things I'd like to draw you attention to.

For one, and this is important for us - we closed the deals in the second quarter via which we bought the minority stakes in almost all companies we had a minority in, the most important being the 40% minority share of our regional transportation segment.

The other is the debt situation which rose to 3.4 times EBITDA. As mentioned, the main factor behind this increase is the dynamics of the fleet replacement cycle during the year. There are a number of vehicles that we have not submitted for replacement while some new ones arrived ahead of schedule, meaning that the current number of trucks that we are operating is temporarily high. I expect the leverage ratio to return to around 3.2 times EBITDA by the end of the year.

Finally, let's look at the cash flow on slide 13. Our cash flow from operations was smaller than last year mainly as a result of lower profit and higher working capital demand. At the same time, our CAPEX rose because we spent more on IT, mainly because of an ongoing change in our underlying transportation management system, and our financial cash flow was impacted by the one-off acquisition of the minority interest.

Ferenc Lajkó (CEO)

That concludes the formal part of Waberer's conference call. Now, operator, when you are ready, we will take the first question.

< Q&A >

If you have any follow-up questions, please do contact our Investor Relations Department. Please also note that the transcript of our conference call will shortly be available on our website. Thank you again for joining us today and your continued interest in Waberer's.