Highlights of the first nine months and outlook for 2014
High profitability thanks to strengthened market position, profitable acquisition-based and organic growth besides strict cost management
The strategic decisions taken in the past few months and the Group-wide measures relating to the “Top Line Growth” (TLG) programme are already showing initial signs of success. The Group’s operating profitability has continued to improve despite the adverse overall conditions and led to an Operating EBITDA margin of just below 20% in the third quarter of 2014. The growth programme goes along with strict cost management as well as a clear focus on profitability and cash generation. In addition, the Group is in the process of launching a multi-year programme to systematically enhance the Group’s internal processes going forward, including administrative, sales support, in-house logistics and production processes. “It is essential to look forward and systematically exploit Braas Monier’s opportunities in this ever-changing environment,” Pepyn Dinandt, CEO of Braas Monier Building Group, emphasised the Group’s on-going efforts to achieve above-average market growth complemented by strict cost management and profitability improvement.
Braas Monier won additional mid-term revenues and earnings potential at the end of October with the agreed takeover of Spanish and Portuguese market leaders – Tejas Cobert (Spain) and CT Telhas Cobert (Portugal). In a normalised environment and including synergies, particularly related to the components business, the Group expects this acquisitions to generate additional potential of at least some EUR 50 million in revenues and around EUR 10 million in EBITDA. The opening of a second plant in India will also continue to drive organic growth.
The exceptional cash flows generated by the operating business allow the Group to achieve consistent and ambitious growth, both organically and through acquisitions, without losing sight of the Group’s debt reduction targets.
Nine-month revenues slightly higher year on year despite weaker market environment
From January to September, Braas Monier achieved above-market growth in several countries – both in growing and contracting markets – such as Germany, the Netherlands, Poland, Malaysia and China. At EUR 907.7 million, revenues in the first nine months of 2014 increased slightly by 0.3% (adjusted for currency effects: +1.7%) compared to the previous year (EUR 905.1 million). In the third quarter, revenues were 5.1% (adjusted for currency effects: -4.8%) lower compared to the previous year (EUR 360.7 million) at EUR 342.4 million.
Sustainable improvement in profitability
Braas Monier has improved its profitability thanks to strict cost management. The slight improvement in revenues of EUR 2.6 million in the first nine months of 2014 resulted in a EUR 32.0 million, or 27.5%, increase in Operating EBITDA to EUR 148.4 million (9M 2013: EUR 116.4 million). As a result, Braas Monier achieved an Operating EBITDA margin increase of 340 basis points to 16.3% (9M 2013: 12.9%) on the back of efficiency gains and consistent cost management. In the third quarter, when the margin is usually at its highest due to seasonal effects, it also exceeded the level of previous year’s quarter (19.3%) at 19.7%. Braas Monier therefore largely compensated for the revenues decline in the third quarter, with Operating EBITDA at EUR 67.4 million falling only narrowly short of the previous year (EUR 69.5 million) by EUR 2.1 million, or 2.9%. In the first nine months of 2013, substantial restructuring costs of EUR 45.0 million were incurred. No expenses of this nature occurred in 2014.
Positive net profit achieved
Braas Monier reported positive net profit, both in the third quarter and the first nine months of 2014. After a loss of EUR 25.9 million in the previous year, net profit from January to September 2014 increased by EUR 54.1 million to EUR 28.2 million. The contribution of the third quarter of EUR 23.0 million more than doubled compared to the previous year (Q3 2013: EUR 11.3 million).
Equity position strengthened, financial flexibility increased
As a result of the capital increase of approximately EUR 100 million in connection with the IPO in June this year, total equity rose from EUR 16.2 million at 31 December 2013 to EUR 111.0 million at 30 September 2014.
The leverage ratio, defined as net debt to Operating EBITDA, was reduced significantly to 2.0 times at the end of the nine-month period (previous year: 3.2 times). Today, the financial liabilities of the Group mainly consist of a Senior Secured Floating Rate Note of EUR 315 million and the remaining Term Loan B amounting to EUR 200 million. Both instruments mature in 2020. Further financial flexibility is provided by the currently completely undrawn Revolving Credit Facility of EUR 100 million.
Mixed segment development
Due to the weakening of the German market, revenues in the Central, Northern & Eastern Europe segment fell far below from July to September compared to the same period in the previous year. In absolute numbers, the operating result (Operating EBITDA) was only slightly lower thanks to the stable margin. Yet in the first nine months, also this segment recorded a slight increase in revenues and a strong improvement in Operating EBITDA.
On the back of dynamic growth in the UK and positive impetus from the Netherlands, Western Europe achieved the strongest revenues increase, both in the first nine months and in the third quarter, which is reflected in the above-average earnings increase for both periods.
While Southern Europe suffered the sharpest drop in revenues within the Group, it was still in line with expectations for the third quarter given the economic situation in Italy and the impact of the Ukraine crisis on the countries in South-Eastern Europe. The considerable margin and earnings improvement, both in the third quarter and for the first nine months, also demonstrates the efficiency improvements and strict cost control.
Asia & Africa saw a strong increase in revenues and earnings in the first nine months, adjusted for currency effects. The operating result in the third quarter was slightly lower year on year due to positive one-time effects in 2013, at slightly higher revenues.
At Chimneys & Energy Systems, with its geographical focus on Central and Eastern Europe, the negative revenues development from the second quarter continued into the third quarter and subsequently fell short of the previous year’s nine-month figure. Earnings in the third quarter fell below the previous year in absolute terms, but the margin increased. On a nine-month basis, earnings were up, both in absolute terms and in terms of the margin.
Revenues in the components business in the Central Products & Services segment improved in the first nine months, but were clearly lower from July to September compared to previous year. This was attributable to distributors running down their stocks in anticipation of lower sales as well as weaker demand in individual markets. This resulted in a marginal loss for the third quarter and the first nine months.
Dynamic growth continues in the UK; the situation in France and Italy remains difficult; Germany is stagnant; the Ukraine crisis dampens overall sentiment for full-year 2014
In view of the weaker market expectations for Europe, Braas Monier is focusing on implementing additional TLG initiatives in order to outperform the markets. Excluding acquisition-based growth in the fourth quarter, management forecasts for 2014 revenues around the previous year’s level. Like in the first nine months, a positive price effect is expected for the full-year as well. Management also anticipates a considerable EBTIDA improvement of more than 20% for 2014. At year-end 2014, a sharp reduction in the net debt to Operating EBITDA ratio to below 2.0 times compared to 2.9 times at the end of 2013 is expected, including acquisition-based growth in the fourth quarter on a pro-forma basis.
From a cost perspective management expects moderate increases in input costs (raw materials and wage inflation). The fixed cost structure will be positively impacted by the roll-over effects from headcount reductions that took place in 2013 under the framework of the restructuring program (Step 200+). The majority of this effect has already taken place in the first nine months of 2014. Management does not expect operational restructuring costs in 2014, however, some provisions made in 2013 will be paid in cash in 2014. Non-recurring financial expenses in 2014 will consist primarily of refinancing cost and transaction costs for the Initial Public Offering.
Growth stems primarily from the UK. In Germany, the general market development in the third quarter of 2014 did not match previous estimates. The general economic downturn is also impacting private residential construction and particularly the renovation business, where pending projects are more easily postponed compared to new construction. Braas Monier expects to generate slight growth in Germany, thereby further strengthening its market position in a stable market environment. Braas Monier will not be able to escape the continued market downturn in France and Italy in the fourth quarter. Given consumer uncertainty with regard to the Ukraine crisis, it is difficult to give an accurate assessment of the business development in Eastern European countries. However, management anticipates a largely balanced revenue trend in this region at best for the rest of the year. On the other hand, Asia & Africa are expected to show continued growth. Chimneys & Energy Systems as well as the components business are expected to show an improving performance in the fourth quarter again.
Looking beyond 2014, management is positive in regards to the residential market development in Europe, Asia and South Africa in the medium term. Yet the continuation of political crises such as e.g. in the Ukraine or the Middle East could pose a risk to a near-term economic recovery in Europe.
Braas Monier will continue to strive for above-market growth by rolling out existing initiatives under the Top Line Growth programme to further countries as well as introducing new ones. Management sees the Company well positioned for further opportunistic bolt-on M&A. In Asia, the opening of new plants in the next couple of years is expected to support organic growth.
Input costs are expected to increase moderately. An unwaning focus on strict cost control and cost management at all levels as well as the launch of a multi-year programme to improve the internal process efficiency in the organisation should help to increase the Company’s EBITDA margin.
Sustainable Capex is expected to be at a level of around EUR 60 million p.a. for the following years. Braas Monier will concentrate on a further reduction of its financial leverage, measured as a ratio of net debt to EBITDA.
For the full interim financial report and other information on the Group, see the investor relations section on our website.
*) Operating EBITDA of the last twelve months (LTM)