Wendel (MF) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Wendel's 9 Months 2024 Trading Update Conference Call and Webcast. [Operator Instructions] You can also ask your questions on the webcast. Olivier Allot, the Director of Financial Communications and Data Intelligence, will read them. I must advise you that this conference is being recorded today. I would now like to turn the conference over to your speaker, Mr. Jérôme Michiels, Wendel Executive Vice President and Director of Wendel Growth. Please go ahead, sir.

Thank you, and good afternoon or good morning, everyone. Thank you for joining for this 9 months update. I am here in the room with Olivier Allot and Lucy Ho from our IR team; and Benoit Drillaud, our CFO, is also with us. So let's start directly with the key highlights on Slide 2 of the first 9 months, where we've had, as you know, a lot of things going on. And I will start with the principal investments that is the portfolio of companies that we have on our balance sheet, where we posted consolidated net sales growth of 8.9% organically. So as you can see, quite a strong performance on the principal investment companies, whilst we have also registered a strong performance on the asset management which is, at the moment, only IK Partners that grew their fee-paying assets under management by 19% year-to-date and raised EUR 1.8 billion. That's quite an amount for just the first 9 months of 2024. Following the announcement of the acquisition of Monroe Capital, Wendel represents now EUR 40 billion of assets managed when we include this transaction that we expect to complete during the first half of 2025. In terms of net asset value, the fully diluted net asset value at the end of September stands at EUR 184.5 per share, which is 13.7% more than at the end of December 2023. Our loan-to-value that we present here pro forma, which means that we have adjusted our loan-to-value to take into account the acquisition of Globeducate that closed after September 30, as well as the various commitments that we will take with Monroe and the ones that we already have at least part of it with IK Partners and taking into account the acquisition of Monroe, the loan-to-value ratio is at 18.9%. As we announced on October 22, the acquisition of Monroe, which is really the big event of this quarter, will dramatically expand our asset management platform and will further rebalance our business model towards more recurring cash flows and growth. So this is a very positive and transformational development for Wendel. Moving on to a little bit of detail on our net asset value. As I said, EUR 184.5 per share as of September 2024. When you divide it, you can see the first bucket of listed assets at EUR 3.8 billion, within which Bureau Veritas represents EUR 3.6 billion with a share price shy of EUR 30 at the end of September, very good performance. I will come back to that. Then in terms of unlisted assets, EUR 3.15 billion. And on the asset management, EUR 450 million. This is an important point I want to make. This EUR 450 million is only the -- our shareholding in IK Partners. It does not include any sponsor money at the moment. As you know, we will commit sponsor money to IK Partners. But at this point in time, we haven't been called on this sponsor money. So the value that you can see here is solely our 51% shareholding in IK. We have a very large pile of cash available on the balance sheet of around EUR 3 billion at the end of September. But bear in mind that this was before the acquisition of Globeducate that closed since then. And this is before the acquisition of Monroe that will take place, as I said, during the first half of 2025. So in terms of net asset value, when you adjust for the bonds outstanding of EUR 2.4 billion and various smaller items, the total net asset value is at EUR 8 billion or EUR 180.3 of net asset value. And again, when you adjust for the full dilution, you're looking at a net NAV of EUR 184.5 per share, which is up 13.7% versus the end of last year. But let's break down this growth over the period on Page 5 of EUR 26.2 per share in terms of fully diluted net asset value. This is actually largely the result of the principal investment with roughly EUR 25 within the total. This is driven by the performance of Bureau Veritas share price, plus 34.3% over the period with only a slight decrease for non-listed assets at EUR 1.2 per share. The asset management, which is, again, only IK Partners over the first 9 months has been increasing in terms of value, and this has been driven by the positive evolution of the market multiples that we use to value our shareholding in IK. And this is only over a quarter since the first inclusion of IK Partners in our net asset value dates back to the end of June. So plus EUR 1.5 on this line. We've had the cash operating cost and net financing results representing a minus EUR 1.2 per share. Bear in mind that we have positive carry in there, given the balance of cash of EUR 3 billion that we currently carry and where we get some very decent yield higher than the average cost of our debt. This has enabled us to take down our own costs that are limited to EUR 1.2 per share over the first 9 months. We've had some positive impact from the share buybacks over the period at plus 1.4%. This is the accretion related to the cash that we invested to buy back Wendel shares over the first 9 months. So in total, EUR 26.2 million. When you adjust for the dividend that we paid in May this year, you're looking at a 16.1% increase of net asset value. So 13.7% unadjusted for dividend. When you reintegrate the dividend, it's EUR 16.1 million to EUR 184.5 million. What has happened in terms of performance at our portfolio companies on Page 6, it has been quite a strong 9 months actually, with consolidated sales up roughly 15%. But more interestingly, when you look at the organic growth for the period where we exclude any effect related to foreign exchange or scope, the total is at 8.9%. This is largely driven by the very positive performance of Bureau Veritas over the first 9 months. I'm sure that you have seen the results that Bureau Veritas announced this week. They have even upgraded their guidance for the second time for 2024. The first 9 months have been very positive with 10.5% organic growth across the board. I mean, when you look at each operating group of Bureau Veritas, there is a strong performance in most of them with double-digit performance and sometimes well above the 10% this first 9 months. Stahl has been -- has had a more muted performance with minus 0.4%. So I would say, stable performance over the first 9 months. They've had a good first half. Fair to say that Q3 has been softer and more quiet than previous years, but they are still holding up in terms of organic growth with a slightly negative amount. Scalian, which is consolidated within our sales, but with 1 quarter of lag given the different closing period has registered a minus 2.5% organic growth over the first 9 months. I'm sure you have seen that the market for engineering services and digital services is difficult given the slowdown in terms of large projects and the more difficult conditions that customers are facing. So we are seeing that as well at Scalian, but we have had some very positive contribution in terms of external growth at plus 2.3% with the acquisition of Mannarino that we -- that Scalian completed just before summer as well as smaller acquisitions that were completed over the 9 months. And this is really in line with our investment thesis of buying and building up Scalian on a larger scale. CPI, very good momentum there, 8.1% organic growth. Same at ACAMS, 8.6%. But bear in mind that there has been a shift in terms of timing at ACAMS with a conference that took place in 2024 earlier than in 2023. And as you know, ACAMS revenues are pretty sensitive to that because these are big events, and this can move the needle from one quarter to another. But despite this calendar effect, which is positive, there is good performance at ACAMS for the first 9 months. IK is not consolidated over the full period, as I said, as we only started the consolidation at the end of June. So there is just 1 quarter of revenues in there, and we are not in a position to comment on the organic growth as it is not to be included in the 8.9% consolidated that you see there. But I told you the headline on the first slide, the fee-paying AUMs are up 19%. Fundraising is at EUR 1.8 billion. So very, very positive performance, which translates as well in terms of revenues. Now moving on to the financing and our liquidity on Slide 7. At the moment, as I said, we have a very high level of liquidity, EUR 3 billion in cash, supplemented by our committed credit facility, which is fully undrawn at this stage of EUR 875 million. This is, again, before the acquisition of Monroe and Globeducate. Monroe is a EUR 1.13 billion transaction for the 75%. So this is yet to come. Globeducate has been closed post-September 30. So this has been a cash outlay of EUR 625 million that you need to take out from this EUR 3 billion. In terms of gross debt, you have the maturity profile on the right-hand side of the slide, EUR 2.4 billion in total with the exchangeable bond of Bureau Veritas being the earlier for EUR 750 million, then EUR 210 million in 2026 and the rest pretty well spread across the line in the next few years. Our cost is pretty low actually at 2.4% in terms of average coupon. And you can see in there that we have pretty cheap financing and a very high level of liquidity over the long term with 3.9 years in total. And as I said, our cost of debt compares very favorably to the return that we've been able to make on our cash since the beginning of the year, which stands at 4%. The loan-to-value ratio, again, we presented for information purposes adjusted for the upcoming acquisitions that Monroe and for the acquisition that completed, which is Globeducate, it's at 18.9%. If we strip out those 2 big events, obviously, we are in a net cash position at minus 6.8%, but we felt it was more relevant for you to get the info on the pro forma LTV ratio at 18.9%. Quick reminder on the acquisition of Monroe, which is really transformational. For those of you who might have not had the time to follow our announcement earlier this week, we announced the acquisition of Monroe Capital, which is a leader in the fast-growing U.S. private mid-market credit category. It's a company based in Chicago with about $20 billion in AUM, one of the leaders in private credit. They have a nationwide coverage plus 2 offices overseas. This is really a very high-performing GP and a transformational milestone for us as it actually unlock the benefits of our platform that it will include cross-selling synergies and operational efficiencies, which brings the total of assets under management within this asset management platform at EUR 31 billion and the fee-related earnings at EUR 160 million expected for 2025. This is for 100%. As you know, we have currently a shareholding of 51% in IK Partners. And we will acquire 75% of Monroe for a consideration of EUR 1.13 billion. This will immediately give us rights to 20% of existing and future carried interest as part of this initial consideration, which is, by the way, subject to an earn-out payment. And assuming this earnout is paid, which we very much hope because it will mean that the performance is good, the -- our entry multiple would be between 14.7x and 18.5x in terms of 2025 pretax FRE and 4.2x on pretax PRE, that is carried interest revenue. So a very interesting transaction, whereby Wendel will invest sponsor money as well to accelerate the growth of Monroe and to support new product launches and in the end, accelerate the generation of fee-related earnings and ultimately, obviously, cash flow streams to Wendel. This is really a transformational step for us with a strong potential in terms of value creation, as well as diversification as we are expanding our operations in asset management in a new vertical in terms of asset class and which is a very interesting market, fast growing in the U.S. for mid-market credit. And this enables us to enhance the profile of Wendel through the sponsor money and the return that we will make and the acceleration of Monroe growth to higher and recurring cash flows that will be distributed to us as well as an increase of performance-related earnings over time. And based on the above, we are strongly confident in actually exceeding our 2027 FRE target in terms of Wendel share that we had set at EUR 150 million based on Monroe and IK Partners' internal growth potential, we believe, and we have a high confidence that we should be above this level in 2027. So let me now maybe conclude and comment on the key takeaways for the first 9 months. I think what is really important is that transformation is underway and Wendel's asset management business is now a significant performance driver, thanks to the upcoming acquisition of Monroe. The performance of the portfolio has been quite strong with net asset value up 13.7% year-to-date plus dividend of EUR 4. It's even higher, as I said. We've had some portfolio rotation, very much in line with our strategy with the disposal of Constantia earlier this year, the partial sale of BV for EUR 1 billion -- EUR 1.1 billion of proceeds, the acquisition of Globeducate for EUR 625 million. And obviously, the acquisition of Monroe -- the upcoming acquisition of Monroe that we expect to complete in the first half of 2025. Now following this, our priorities for the next few months are really to create value on our assets to successfully build the private asset management platform with the acquisition of Monroe and IK Partners that is not a very, very good start. And obviously, to maintain a solid financial structure. You know, this is very important to us. So we are really focusing on that. And based on this, there will be opportunities to create more value for our shareholders and ultimately sustain our double-digit TSR, which is the objective that we are pursuing. Thank you very much, and I would now open the room to questions.

[Operator Instructions] And the questions come from the line of Alexandre Gerard from CIC Market Solutions.

Just one question on my side to start maybe with Scalian. I'd love to have an update on the levers of value creation at Scalian. So I see that you have reinvested EUR 44 million for the financing of the acquisition of Mannarino. Do we have to understand that Scalian is not in a state at the moment to be able to self-finance its development? So just a very general question regarding the way you see the development of that company going forward? And maybe also an update on its balance sheet. Do you feel that the company which is rather leveraged at the moment might reach its covenants or not?

So on your first question about the levers of value creation, there are many. Some are, I would say, internal in terms of what we call the value creation plan. We have this playbook for every company that we acquire, where we deploy our operating partners and try and identify with the management some levers for value creation. We have that at Scalian. So there is a series of initiatives going on from sales force to staffing, to utilization rate, to performance in terms of cash generation, et cetera. So we have those levers that management is working currently on. M&A is a key driver for value creation. The acquisition of Mannarino is very attractive in terms of valuation, in terms of growth profile and in terms of profitability. Mannarino is a company that is active in engineering in North America for air transport, and they are really one of the leaders in their field. It's a company that is growing by 30% and with 30% plus EBITDA margin. So this is enhancing the growth profile of Scalian, and this is to generate synergies as we will try to deploy the expertise and offering of Mannarino throughout the group. And this is very much the type of acquisition that we are looking for at Scalian because it makes a lot of sense from an operational and strategic perspective, first; and second, from a financial point of view. In terms of why did we invest? We started off, as you know, when we closed the acquisition in July 2023 with a leverage of 5.5x or something like that or slightly above, I think, at closing. And the investment thesis is very much to use financing both from existing lenders and equity when required, when the size of the transaction requires equity to commit equity from our side as well. Mannarino is a fairly large transaction. I mean, if you look at what Scalian has done historically, this is quite a large transaction actually in terms of total consideration and EBITDA, et cetera. So this one required some equity. This is the first one that required equity since we invested in Scalian. There has been a few others that took place that did not require equity, but this one was funded through a combination of new debt from existing lenders and new equity from shareholders, including Wendel, obviously, and management. You asked about an update on the balance sheet. We reported on June 30 on the net debt of Scalian, which included the new drawing for the acquisition of Mannarino. So it was slightly up versus the entry when we invested in July 2023. As you might have seen for the first 9 months, we are looking at a slightly negative performance. So there is some headwind in markets that Scalian is active on. You've seen the peers, I'm sure, reporting on that, the guidance and the messages that come from the other players in the industry are not different than the one I've just given. So this puts some pressure, I would say, on the revenue growth. And we are obviously very focused. The management team of Scalian is very focused on preserving their financial flexibility and preserving the balance sheet, but no issue there, as you have asked, nothing in particular to be mentioned.

And the questions come from the line of Grégoire Hermann from Berenberg.

Maybe just a few questions on Stahl, please. I think Q3 was slightly disappointing, and you mentioned tensions on the auto segment and the luxury exposure as well. Can you give us a bit of insights for the rest of the year, if you're seeing a continued similar performance? And maybe just on the acquisition that has been announced during the quarter, Weildburger. Is there anything you can say about the valuation of the acquisition? And if we should expect more to come by the end of 2024 and 2025?

Yes, the performance has been slightly negative in Q3. You have that at the back of the press release. The organic growth is minus 3.1% for Stahl just for the third quarter. And it's -- the reason for that is as you rightly pointed out, the softening of the auto market as well as luxury and we have all seen the disappointing earnings for Q3 of the large luxury companies. So Stahl is obviously exposed to those sectors but not with the same magnitude, minus 3.1% is slightly negative compared to very negative figures from auto and luxury. The outlook is, we don't give any guidance, as you know, for our companies. But I think at this point in time, management think it has been a softer August compared to previous year. They are obviously very focused and attentive because in this market environment, volatility is higher and the messages that come from auto and luxury are not reassuring. So they will have to live in this environment. But as you know, Stahl is very good at defending margins and managing prices and both on the purchasing side and on the sell side. So they will continue to do so in the next quarter. Regarding the acquisition of Weildburger, we are not disclosing. We have -- I can't disclose the valuation. But what I can say is that obviously, it's very positive from a strategic point of view. It makes sense from a financial point of view as well. Will we continue to do acquisitions? Yes, possibly, given the very healthy capital structure at Stahl, we are at a low level in terms of leverage. So there is room actually to make more M&A. And as you know, M&A has been a big part of the success story of Stahl over the years with ISP and before that, Clariant and BASF. So yes, I think we'll be open to that certainly if opportunities come.

We have no further questions on the phone line. I hand back to you for the webcast questions.

So we have a question from [indiscernible]. Are you considering further portfolio rotation and decrease your listed investment part?

Portfolio rotation is part of our strategy. We have done a lot, I think, recently with -- I mean, just this year and last year, acquisition of Scalian, sale of Constantia, EUR 1.1 billion realized proceeds on Bureau Veritas, acquisition of Globeducate for EUR 625 million. That's just on the principal investment side, on the asset management side, acquisition of IK Partners, acquisition of Monroe. People have been busy, are very busy at Wendel. We just closed Globeducate. Monroe is not closed. This has been a lot of -- this has required a lot of efforts from the team. And we don't want to rush things. So as I said, we need the focus of the team now, the teams is to create value on these assets to successfully build the asset management platform. Before the acquisition of Monroe, this was just IK Partners. Now it's IK and Monroe. We are looking at about EUR 30 billion in assets, which is quite sizable. So a lot to do. And as I said, we also want to maintain a solid financial structure, and we are really focused on that at the moment. There will be portfolio rotation certainly at some point. This is again -- this is part of our strategy. But in terms of which assets and when, honestly, don't know.

Question from [indiscernible]. Will Monroe have the ability to participate in lending on IK deals on an arm's length basis?

Well, there is -- if the answer is yes, and I think it should be yes, but there is little chance actually because Monroe is active in the U.S., IK Partners is only active in Europe. So there is really no chance that this happens. So IK is working with all debt providers in Europe, be it funds or private lenders as well. So they are working with people like Monroe, but this is not going to happen anytime soon in my opinion.

Another question from [ Kent ]. Are you -- what are you or are you thinking about the current discount to NAV given that execution of NAV growth and portfolio rotation does not seem to be compressing the discount?

Well, execution, I think we are in this journey of pivoting Wendel from a pure balance sheet investor towards a balanced balance sheet and asset manager. I think we've made 2 very important steps with the acquisition of IK first that we included in the net asset value for the first time just 3 months ago. And now the acquisition of Monroe that we announced but have not yet closed. So, I think it will -- it takes time before it shows in the numbers. It takes time even in the current net asset value, as I said, there is no sponsor money that has been called on IK. We are just accounting for our shareholding in IK at the end of September. We haven't yet closed Monroe. So there is more to come. It will show in the numbers, and I think it will certainly take time for investors to realize that a 50% or 40% discount is not warranted for such an attractive model in terms of growth, in terms of recurring cash flows and in terms of performance. We are doing our work, and we are looking to achieve double-digit total shareholder return. We have done so in the first 9 months, 13.7% not adjusting for dividends, but if you include the dividend, we are up 16.1%. So we are doing our work. We are carrying on with the road map and the execution and hope that the market would realize that this level of discount should not be applied. But we, at the moment, are aware that -- or recognize that it takes time before it shows really in the numbers.

A question from Mourad Lahmidi from Exane. In your future NAV, are you going to split Wendel's stake in the GP and the sponsor money? Or are you going to consolidate the two?

Yes. The sponsor money will be disclosed in our financial statements and the consolidated financial statements that will be considered as financial assets at fair value. So yes, you'll have the detail of what is -- what relates to the GP and what relates to the sponsor money.

Question from Mourad again. On Scalian, how much of the EUR 740 million goodwill on their balance sheet comes from past acquisition and how much comes from past LBO accounting?

Scalian, the goodwill on the balance sheet of Scalian comes from -- mostly from our -- always because when we consolidate a company for the first time, we just cancel what was booked before the acquisition. And so, we consider a new goodwill. Of course, a part of the goodwill now include Mannarino and for the future of the next acquisitions.