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Edited Transcript of VALN.S earnings conference call or presentation 19-Jul-19 8:00am GMT

Half Year 2019 Valora Holding AG Earnings Call

Bern Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Valora Holding AG earnings conference call or presentation Friday, July 19, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Mueller

Valora Holding AG - CEO

* Tobias Knechtle

Valora Holding AG - CFO

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Conference Call Participants

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* Gian Marco Werro

MainFirst Bank AG, Research Division - Analyst

* Jon Cox

Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities

* Lorena Zini

Bank Vontobel AG, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the half year report 2019 conference call and live webcast. I'm Sandra, the Chorus Call operator. (Operator Instructions) and the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Michael Mueller, CEO; and Tobias Knechtle, CFO of Valora Holding AG. Please go ahead, gentlemen.

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Michael Mueller, Valora Holding AG - CEO [2]

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Good morning, ladies and gentlemen. This is Michael Mueller speaking. With me is Tobias Knechtle, our CFO. It's our pleasure to present our half year results to you.

We posted a significant increase in operating profit, higher earnings per share in the first half of 2019, which in our view confirms the strong operating performance of our business.

We published our half year results presentation online, and I will talk you through the presentation together with Tobias. I'll turn to Page #4, where we published a strong set of figures.

And our EBIT increased in the first half year by almost 9% to CHF 43 million at a margin of 4.3%, which is again an increase of 0.3 percentage points. Also, the increase in GP margin, gross profit margin, is at 44.9% and an increase of 0.7% (sic) [0.7 percentage points], quite remarkable and already above the guidance we have given at our Investment Day.

The ROCE, one of our key financial metrics, improved already this first half year by 0.3 percentage points versus the full year 2018 to 9.2% ROCE on that level, all -- including all the goodwill. And Tobias will talk you through further detail on the specific numbers shortly.

External sales is stable at CHF 1.3 billion, stable, reflecting again a strong performance on a like-for-like basis. We're very pleased on our operating level how same-store sales developed across all the formats and banners. We have in Switzerland strategically a slightly challenging first half year in terms of sales given the rather cold weather in the first half year. And so even more so, we're very pleased and see that as a strong sign for our business and the operating performance overall of our business that overall sales remained stable.

The leverage ratio is stable or roughly stable at 2.3x, supporting again our -- in our view, a very solid balance sheet.

The highlights of the first half year in 2019. Specifically in the Retail business, the completion of the SBB tender offer has been highly successful for us. We won all the 5 slots. We will refurbish now 262 convenience and kiosk locations across the SBB network. This includes also 31 new locations, highly attractive -- at highly attractive places.

We have also opened our first cashier-free convenience store in Switzerland, a new, innovative concept, the avec box, and opened a future store with avec X at the main station in Zürich, where we test currently the cashier-free store concept and additional innovative product offerings.

In Retail Germany, we see a very solid recovering, with a -- we benefited from a positive GP contribution, and the cost measures that we started to implement already in H2 2018 start to pay off.

In food services (sic) [Food Service], specifically the B2B business had a very strong top line growth driven by higher efficiency and again enlarged capacity. We will see further capacity expansion coming online over the next couple of months. We will complete in H2 towards beginning of H1 next year our line expansion, specifically in Oranienbaum, and the investment in our plants in Cincinnati in the U.S.

In the B2C business, we saw a very positive same-store growth with, again, 1.8% across the Food Service network, which again confirms, in our view, the strong operating momentum we have in that business.

On a group level I've mentioned, EBIT at CHF 43 million, an increase of 9%. And also here on a group level, we start benefiting of the new organization that we introduced as of the beginning of this year that will further leverage the know-how across the group. And we'll realize further cost synergies, specifically in the Food Service business in Germany where we integrated the Ditsch and BackWerk Retail operations.

And with that, I hand over to Tobias who will talk you through the financials of the first half year.

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Tobias Knechtle, Valora Holding AG - CFO [3]

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Thank you, Michael. Welcome as well from my side. A pleasure to have you on the call. I'll start on Page 6, as always, with a review of the return on the capital employed.

We managed to increase the capital employed by 0.3 percentage points to above 9%, 9.2%, compared to December 2018. Without goodwill, we even stand at 18.3%, an increase of 0.4 percentage points, and that on a stable capital employed basis.

If we de-average this 9.2%, it stacks out that's Retail stands at 19.1%, whereby Switzerland still stands at attractive 28%, slightly slower than at the end of the year due to the lower EBIT on which I will talk a bit more on the coming pages.

Germany, Luxembourg, Austria managed to increase their ROCE to attractive 9.4% driven by high EBIT and a stable capital employed. Without goodwill, overall, Retail stands at 32% and shows how healthy that business is.

The Food Service side also managed to increase the ROCE by 0.2 percentage points to 5.9%, and that despite the investments we're making right now in the capacity expansion, which increase the capital employed but obviously as it's work in progress, do not contribute yet positively on the EBIT side. We expect that this value, the 5.9%, will increase over time as the new production capacity and as well synergies flow through the P&L.

Now going through the P&L starting on Page 7 with external sales and net revenue. We have on a year-on-year basis this time a stable development of revenues and external sales. If we de-average that again on that page, first of all, by categories, we note that our core categories, the ones we've really been investing and that, as mentioned at the Investor Day, will drive as well us in the future, have been growing by 2.2% in external sales and by over 3% in net revenues. And by core categories, we mainly refer to food but it also includes services and all which is what we call nonfood, which are accessories, et cetera, et cetera.

So all in all, in a stable development with a good advancement on our core categories.

Slicing it this time by region on Page #8, we see at Retail Switzerland a decrease by around 2% driven by same-store going back by 1.7%. Michael already mentioned the main reason for that. It's the historical high weather temperatures last year and the record low temperature in spring of this year, which make a huge effect on our same-store revenue in Retail Switzerland.

Despite similar weather conditions Switzerland -- Germany, Luxembourg, Austria managed to increase the same-store, thanks to our new initiatives and as well a decline in the press, which was less pronounced than in the previous year on a same-store basis.

Switzerland. Switzerland overall revenue was also affected by the phasing effect of opening/closing. If you look at the number of stores we post in the appendix, you see that we managed to increase our network. However, with the phasing in the course of the year, these openings were rather back-end loaded, and therefore, the decline in revenue was accentuated but puts us in a good position going forward.

In Food Service, we managed an increase of 9% year-on-year whereby same-store contributed 2% driven by all Retail categories but especially Switzerland stacking out with a 3.1% same-store growth.

The big figure to highlight here, of course, is Ditsch B2B where we had an increase of 20% to CHF 60 million in H1 driven by the strong market momentum, the higher capacity that we managed to utilize and efficiency gains. We are now very happy that the new production lines will come online in the course of the year in order to satisfy that very dynamic market demand that we're seeing right now.

In the area of others, you see the positive net revenue development that is driven by bob Finance.

So looking at that, overall stable development but very promising trends both on the same-store side and as well on the B2B production side.

A flat development, as guided, should translate nevertheless in positive gross profit development, and you see exactly that result on Page #9. We managed to increase GP by 1.4% to CHF 451 million. And as guided, we have a GP increase of 0.7 percentage points to almost 45%. Hence, we are on that level, more than on track as well with the midterm guidance that we announced a couple of weeks ago.

These improvements, both in absolute terms and in the GP margin, is mostly driven by the favorable product mix changes, as explained. So food is going up, the core category, while the others being stable or, in the case of press, slightly declining.

De-averaging that again by the business units on Page 10, you have a slight decline in the GP in Switzerland driven by the sales of 1.5%. However, an increase of the GP margin, thanks to better purchasing condition and promotional income, which has been a recurring trend.

Germany, a GP increase of almost 1%, which more than offset the slight sales decrease, and a strong GP margin increase to 33.5% driven by the product mix, as explained, on the sales.

Food Service has an increase of 6.4% to CHF 135 million driven by the B2B business but also the Retail formats, especially in Switzerland. A margin decrease of 1.8% (sic) [1.8 percentage points] to 78.3% is mostly driven by the headwinds from raw material prices. Wheat is dramatically higher than last year as we're baking off the crop of last year, which was significantly down due to the dry weather of summer of last year.

Gross profit in other increased by CHF 1 million that is driven by bob Finance.

The operating cost on Page 11 increased underproportionally by 0.7%, CHF 3 million, to 408%. That gives a cost ratio of 40.6%.

Looking in more detail on Page 12, you have a decrease in Switzerland by around CHF 0.5 million. That is higher project expenses that we had, the avec box, the avec X, also SBB tender offer. But we managed to more than offset that through overhead savings as well the restructuring that we made at the beginning of the year.

Retail Germany has a decreased cost base by 1.4 percentage points (sic) [1.4%]. That is driven by the process improvements and the initiated cost measures at the beginning of the year, which already are paying off in the first half.

Food Service has higher cost of 5.7% that is driven by higher sales and the production volume in the B2B. The cost ratio, however, decreased by 1.9 percentage points, thanks to the economies of scale and the efficiency gains. So overall, I would say a solid development and control on the cost side.

Adding and summing it up on Page 13. Coming to EBIT, we have -- on a like-for-like maybe on that page, I should quickly explain that. We show the year-on-year comparison at constant currency and adjusted for IFRS 16 impact. In the appendix, we show very clearly how we move from the reported last year's figures to the IFRS 16 adjustment up to the FX adjustment, up to the here shown CHF 39.4 million for last year.

From this CHF 39.4 million in H1 2018, which corresponded to 3.9% EBIT margin, we post an increase of almost 9% to almost CHF 43 million, which equates to 4.3% EBIT margin. That is driven by the organic development in the Food Service but as well the performance in Retail Germany and bob Finance.

Again de-averaging that on Page 14, Retail Switzerland with a decrease of around CHF 3 million driven by the lower sales, lower GP and the costs related to the said innovations, concept and the SBB tender offer; Germany, an increase of CHF 2 million driven to relatively equal terms by the GP development and by the initiated cost measures; Food Service, an increase of 11% driven by B2B mostly and Food Service Switzerland and the EBIT margin stable or increased to above 10%, a stable increase of 0.2 percentage points to 10.4%, thanks to the efficiency gain, and that despite the said raw material price increases.

In Other, [you saw on bob as well] the decreased expenses at headquarters, also reflecting the cost efforts made on Corporate level. And all -- with all that, you get to that CHF 3 million -- over CHF 3 million increase year-on-year, 9% increase and an EBIT margin of 4.3%.

[There's some music] as well, below EBIT in this first half year, which is shown on Page 15, at real exchange rate in this half year, EBIT increased by 7%. Financing activities decreased by 21%. We spent CHF 9 million, and that despite having replaced the hybrid bond last year, in fall of last year, by a Schuldschein done in the first half of this year, therefore having more net debt on that side. However, thanks to the positive financing conditions, the financing activities net decreased to this minus CHF 9 million, an improvement of 21%.

Income taxes, stable at 19%. As a result, the net profit from continuing operations increased by 21% to CHF 27.4 million.

Last year, we posted an impairment on discontinued operation, which falls away this year. As a result, the group net profit is almost 50% higher, an increase of 45.5% to CHF 27.4 million. Again, and now relevant EPS for the group as the hybrid falls away and, therefore, this is above -- in the full year, above CHF 5 million hybrid coupon not being deducted from the group net profit, the full group net profit is now attributable to shareholders, and, as a consequence, we have an increase of EPS by 2/3 to almost CHF 7 per share in the first half year.

Page 16, the balance sheet. We have a strong equity ratio of 45%. Including the leases, liabilities, it still stands at 31%. Apart from that, if you adjust it for IFRS like it's shown on that page, there's not much movement. As a consequence, we still have a very stable leverage ratio of 2.3x despite the payment of the dividend in the first half year, that shows we are solidly financed. We have a very strong balance sheet, which also extends to the said ROCE figures that we had at the outset of my presentation.

Moving to Page 17 and the free cash flow driven by the positive EBIT development and a lower outflow in net working capital driven by seasonality. We have a strong increase of cash flow from operating activities compared to last year by 2/3. We, however, as expected and announced, managed and spent more on CapEx this year, increasing by CHF 16 million year-on-year. And as a consequence, thanks to the above-mentioned positive development in EBIT and net working capital, free cash flow increased by over 50% to CHF 15.7 million in the first half of this year.

Prior to handing over to Michael, I definitely would like to spend a couple of minutes on the guidance. There's nothing new on these coming 3 pages. These are exactly the guidances we presented a couple of weeks ago on our Capital Markets Day, but we think it's worthwhile reiterating that we're fully on track to achieve our full year guidance.

Page 19 shows the original guidance of CHF 100 million. As already mentioned end of June and more than fully confirmed with the June result, the normal operation are well underway to achieve what we expected from them this year.

The sole reason for the adjustment of the guidance of this year to be around CHF 90 million is driven by SBB. These minus CHF 6 million and minus CHF 6 million, minus CHF 12 million in total, which are, as I'll show in a minute, mostly noncash. This effect is, of course, driven by the success of the SBB tender offer.

The cash flow is unchanged compared to the announcement of what we expected at beginning of the year because as said, these CHF 12 million adjustments are, to a very large extent, noncash, and therefore, cash flow will be expected in the order of the magnitude of the dividend this year, and that's despite the significant extraordinary investment that we're making this year.

We expect at the end of the year a GP margin of around -- above 45% and an EBIT margin on stable level of around 4.3%. Normally, we always have a seasonality of 40% to 45%, so EBIT in the first half year equates to 40%, 45% of the full year EBIT. If you would -- if you scale up the CHF 43 million that we achieved this year with, let's say, 42.5%, standing exactly in the middle of -- for the 40% to 45% seasonality, you get pretty much again to the CHF 100 million normal guidance that we gave, and that shows again that we are well on track to deliver the operational guidance, as said.

The impact of why we come to CHF 90 million is therefore fully attributable to the SBB cost that we'll incur in the second half of the year. And I would like to remind the details of these on Page 20. The CHF 12 million are decomposed by CHF 2 million cash effect coming from refurbishment, therefore closure, deconstruction, et cetera. The remainder, CHF 10 million, are noncash stemming from CHF 4 million accelerated impairment as we refurbish early and, therefore, hope to have the better turnover, the better mix, et cetera, earlier. We impair the assets on that accelerated basis that leads to this CHF 4 million impairment this year.

The remainder, CHF 6 million, is the initial depreciation of the right-of-use assets as these new contracts have been labeled as an adjustment and not new contracts, and, therefore, you start depreciating these at the moment of the signature of the contract. Important here, that is a pure shift in timing. What we're spending more in the P&L this year, we'll gain in the PL over the coming years. And therefore, overall, that is, over the coming years, a 0 effect on profitability.

I'll finalize my presentation with Page 21 on the operational targets. Again, no news compared to 3 weeks ago but worth keeping in mind we are driving for external sales growth of 2% to 3%. We should achieve that by 0.5% around same-store growth, a network expansion of around 50 shops per year and a B2B production increase driven by the capacity expansion.

As already shown in the first half of this year, the GP margin should continue to increase, thanks to the shift in product categories on an average of 0.5 percentage point per year. As a consequence again, EBIT margin increases by 0.2% (sic) [0.2 percentage points] per year, and that, in turn, translates to an EPS of plus 7% per year again on average over the coming years until 2025.

And with that, I'd like to hand over to Michael for the key investment highlights.

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Michael Mueller, Valora Holding AG - CEO [4]

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Thank you, Tobias. So we turn to Page 22, the 3 main drivers to deliver the guidance that Tobias just has presented and that we documented and presented in far more detail at our Investor Day 3 weeks ago.

The 3 pillars are, first of all, the foodvenience focus that we established across the group. We see that as one of the most promising retail clusters. There are positive macro trends supporting our business, be it a general increase of on-the-go snacking or shopping and general increased mobility of our consumers, so more people coming across our stores, increasing footfall at these locations.

Second will be benefit from a very dense network that we have across these highly attractive, high-frequency locations, be it tabloid -- transport locations or selected inner-city locations. And we established very strong partnerships with key landlords, be it an SBB, be it a Deutsche [Bahn], and we're able to serve our customers ultimately through highly recognized, attractive brands. And we brought also quite new innovation into the convenience market, most recently, as mentioned, when we started to test the cashierless, 24/7 convenience store concept here in Switzerland.

Secondly, we're very confident with our planning. We see high reliability in the plant development and, therefore, in our view, a quite predictable development. We're fairly resilient to the economic cycles since in the snacking on-the-go consumption, people are traveling, be it to work and coming across our stores regardless of these cycles. And secondly, the disruption through, for example, the e-commerce is currently far less relevant to our business than what you see in other retail businesses.

And ultimately, development of our business is secured with long-term contracts here in Switzerland in the Retail business, especially through the SBB tender that we won earlier this year and secures these highly attractive locations for another 10 years here in Switzerland.

And ultimately, we see potential for top and bottom line growth. We're very pleased with the development of [RoU]. You saw again first half this year quite strong same-store figures almost across all locations. We see, on top of that, very strong and positive development of our core categories, as Tobias outlined, especially through -- the core categories have been growing 3%. And from this core category, a substantial part of the margin improvement, be it GP margin improvement, EBIT margin improvement, is based on that growth, and we see continuous opportunity to further increase the share of these core categories, especially the food, across our group, which then will ultimately lead to both top and bottom line growth.

With that said, we're very confident that we ensure an attractive dividend and that we can do that based on a resilient, reliable business that shows steady growth and ultimately on the basis of a sound balance sheet.

And with that, we come to the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jon Cox.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [2]

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Congratulations on the -- what looks like a better-than-expected margin there. I'm just wondering how much of the SBB cost, this CHF 12 million you're talking about, actually fell into H1. It's -- it looks like you're now saying that it's all going to be in H2. I'm guessing there must be something in H1. That's the first question.

Just on some of the sort of the basis points improvement. The -- when you're on Slide 13 and 14, the improvement looks a bit different in margin. I guess that's with the FX effect. You're talking about 40 basis points improvement. And then on Page 14, you're talking about 30 basis points overall group improvement.

I'm guessing this is a CHF 1 million sort of which basically makes it look at a little bit better on the CHF 1 million constant currency comparable you have.

And then just in terms of the food margin, I'm just wondering what sort of margin should we expect for the Food Service business for the year as a whole. The margin there was up 20 basis points, maybe a little bit lower than maybe some of us were expecting. What we should be thinking about that for the year as a whole.

And then my last question, just on the Other segment. Obviously, clearly better than expected. I wonder, do you have any best guess for the others contribution for the year?

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Michael Mueller, Valora Holding AG - CEO [3]

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Thank you, Jon, for your questions. Maybe I start with the first question on SBB extraordinary cost. As you can imagine, I mean, there have been obviously costs, extraordinary cost already in the first half. I mean part of the reason why we have not been more specific to break that down into the first and second half is also because, I mean, you can debate endlessly what kind of costs are actually related to SBB and what are rather costs or investments we would have made regardless whether we're in a tender or not. Take the avec X and the avec box example, we're strongly committed to develop these kind of formats going forward. We will definitely continue to use these formats.

Also, at SBB locations, we already have launched the concept at the very prominent SBB location at the main station here in Zürich. But we have -- would have done that -- or we have done that not only related to the tender offer.

So now then, it's a little bit difficult to come to a clear guidance on what the extraordinary costs related to SBB have been. Definitely fair to say there have been costs already in the first half. There have been definitely other extraordinary costs in the first half related to the new innovations we brought to the market. And just to remind yourselves, we already started to roll out this new avec concept already last year, and we have accelerated that this year, so you can assume, also related to that, these activities we had some extraordinary costs.

But in general, we try to avoid to guide or to be too specific on extraordinary or one-off costs. We do that internally and externally because otherwise you end up in endless debates what's one-off and what's recurring. We don't want to have that. Ultimately, management is responsible to deliver their numbers regardless of these activities.

But maybe just to roughly outline, I mean, the majority of the impact you see, this CHF 12 million, as you pointed out correctly, is in the second half, definitely the noncash elements, as you can imagine, so the depreciation elements, because we have not started to roll out the new concept. So the investments are coming online in the second half.

And with that also, the impact from IFRS 16 falls into H2. And then what's remaining in terms of cash, what we guided in our presentation or documented in our presentation, this CHF 2 million, let's assume as -- for the sake of making an assumption, it's roughly 50-50. So it's CHF 1 million roughly that we could allocate to the first half year. But having said that, bear in mind there have been other activities in the Swiss business that also -- I mean you could debate whether that's extraordinary or one-off type of cost. But as I said, that's not the style we want to use to guide you and also not how we guide and manage internally our numbers.

And with that, maybe Tobias can answer the [food margin first].

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Tobias Knechtle, Valora Holding AG - CFO [4]

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On the margin, where you said the difference between Page 13 and 14, that's merely rounding. The current figure. It is 0.3, as stated on both pages. If you simply take that rounded figure, 3.9% to 4.3%, that leads to 0.4, but the -- that's because both, of course, are rounded.

The food margin, indeed overall we're happy with the development of Food Service also in the first half year, as you can expect, with the strong development we have both on same-store and on the production side. But indeed, the margin should expect to be -- you should expect to be higher in the second half. Most clear reason for that is the wheat prices, as mentioned here, which in the first half year fully affected us; should be lower than, hopefully, with the new crop coming on board.

And then as well, we had -- we've been talking about the network optimization. There are some costs related to that as well as to realization of the synergies. But all in all, sound basis on the Food Service side, again increasing margin expected on full year basis.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [5]

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Okay. And then just last on the Other segment.

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Tobias Knechtle, Valora Holding AG - CFO [6]

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Remind me of the question there.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [7]

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Yes. Sorry, yes. On the Corp or Other line, you were minus CHF 3 million versus minus CHF 6 million a year ago. What's your best guess for that line for the year as a whole? I'm guessing it's going to be like minus CHF 6 million or something like that.

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Tobias Knechtle, Valora Holding AG - CFO [8]

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Well, we're not giving guidance on the individual lines. But clearly, you've got all the Corporate costs reflected there. You have bob contributing, I would say, as well on a stable basis. So indeed, making an extrapolation in that order of magnitude won't be totally wrong.

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Operator [9]

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Your next question comes from Gian Marco Werro, MainFirst.

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Gian Marco Werro, MainFirst Bank AG, Research Division - Analyst [10]

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Thank you also for the presentation, especially also for the very detailed appendix in relation to the IFRS changes. I have 2 questions. The first one is in relation to the CapEx increase and the related depreciation and amortization, and the other one is in relation to your tax rate.

So the first question is in 2018 I can see that you expanded your B2B production already, and your CapEx increased in this last year by around 30%. So why now are your depreciation, amortization, excluding the all IFRS impact, very, very similar to last year? So I have really some issues understanding that.

And then on the tax rate's development for the overall long-term outlook, probably you can help us there. How do you expect the tax rate to develop, especially by expanding now in Germany and The Netherlands?

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Tobias Knechtle, Valora Holding AG - CFO [11]

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Yes. On the tax side, I'll talk with that one, we expect -- we're now at 19%. We don't expect significant increments. So between 19% to max 21% depending on the mix is what you can expect. On the -- if you disaggregate that a bit more, as we show on the finance report, we see a shift from deferred taxes to current income taxes. As explained already in the past, you will continue to see that shift as the deferred assets that we had to activate in the past start to be depreciated, and, therefore, you see that shift occur in income tax. In the -- but in the tax ratio overall, that should be roughly stable at 19 to 20, around that order of magnitude, percent.

On the D&A side, there's no smoke and mirrors here. You really need to disaggregate deeper. We haven't changed anything on the accounting policy or the like. So that is still the same. However, the one line that we invested, which you know is the production capacity expansion we've been talking about that we now are utilizing, that is not that relevant and, as you correctly state, is compensated -- overcompensated by the movements we have on the costs on the POS network.

You -- we are not yet depreciating, of course, the investment that we're making right now. This is work in progress. We'll start depreciating these new capacities at the moment where they go into use, so towards the end of the year, and for one line at the end of -- or in the course of Q1 2020.

So you should see an increase in D&A over the coming years in Food Service through the investment, you're absolutely right. But the one line that was invested, compared to the overall investment, that doesn't materially move the needles compared to the other effects we have in depreciation.

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Gian Marco Werro, MainFirst Bank AG, Research Division - Analyst [12]

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Okay. And maybe just as a quick follow-up. Can you just remind us a little bit about the split of the investments in 2018 then? I mean you invested in this capacity expansion definitely but then probably also in some Retail expansion. How does it then appear that the depreciation and amortization do not really move from 2018 to now H1 2019?

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Tobias Knechtle, Valora Holding AG - CFO [13]

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Well, again, the main reason overall, if you look at the network excluding the CapEx for the production, is roughly in the order of magnitude, so they were relatively stable. And therefore, D&A hasn't really moved. The CapEx -- the big increase in CapEx that you have now is really in the work in progress of the capacity expansion. I'm not sure it's giving the same answer. I'm not sure if I got your question right.

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Gian Marco Werro, MainFirst Bank AG, Research Division - Analyst [14]

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That's -- it's okay. But I'm more talking about the investment that you already did in 2018. There, the investments increased by -- or your CapEx increased by 30% versus '17. So, I mean, there was a -- I can expect there was a huge increase in your capital employed also.

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Tobias Knechtle, Valora Holding AG - CFO [15]

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Well, no. If you look at the capital employed, that one stays stable. Gian Marco, then -- you really go then in the different lines, how quickly do you depreciate parts versus software versus building, et cetera. So no change in policy on our side, stable development. And again, a big chunk of the increase also is this work in progress. You will see an increase in the D&A, of course, once we now have the production capacity coming online and as well then, of course, with the SBB investments once the stores are refurbished.

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Operator [16]

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The next question comes from Lorena Zini, Vontobel.

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Lorena Zini, Bank Vontobel AG, Research Division - Analyst [17]

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I will have a question on the B2B business. So you had a very strong growth here in the first half. You mentioned higher capacity as a reason. Could you just maybe be a bit more precise here? Are we talking about the Ditsch USA and the higher capacity there? Or where -- what kind of capacity are we talking about?

And then how should we think about this business going forward in terms of growth? And with the new capacity coming online, how confident are you that you're going to fill it up? Like at what pace can we expect like full capacity utilization or close to like high capacity utilization? That would be useful for us.

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Michael Mueller, Valora Holding AG - CEO [18]

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Thank you, Lorena, for your question. I mean in general, I think we're fairly consistent of the last years, and that's also what we presented and discussed at the Capital Markets Day. I mean we are very pleased with the development of the B2B business across all the markets we're active. I mean we have seen here in the market and specifically with our operations quite strong growth. And we guided that we see that this will continue going forward, and we're committed to invest in that business.

We have completed quite substantial investments already in the first years after the acquisition of Ditsch. We announced 18 months ago now a substantial investment in Oranienbaum, in our factory in Germany, and in the U.S.

Now back then, we explained that there are 2 drivers for this investment. First of all, we see a growing market. We have niche operator in the lye-bread market. We see this niche growing. And overall, especially in the U.S., artisan breads as a category overall enjoyed quite substantial growth. We want to benefit from that growth. And at the same time, we clearly said we come towards capacity -- full capacity, and that's exactly what we experienced now over the last couple of months. We operate at full capacity with also some of the restrictions that brings to us. Going forward now with incremental capacity both in Germany and the U.S., we actually see quite some opportunities to grow the business in those markets.

Now coming back to your specific question was which market was driving growth in the H1, I mean, all the markets have been contributing. We definitely benefited from the line extension in the U.S. So there we filled that line up in kind of record level. And going forward for the investments, we anticipate that we see that the capacity that we'll add is typically -- and I think we've added that 18 months ago -- will be filled up over a course of 2 to 3 years.

So you see now with this investment that we create flexibility to third market and top line growth for the next 2 to 3 years.

But maybe, Tobias, if you want to add to that.

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Tobias Knechtle, Valora Holding AG - CFO [19]

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Well, I think the only point to add is that indeed, we filled -- and that was line 2, that we -- that was implemented, I think, in 2017, early 2018, the doubling of the capacity in the U.S., as Michael correctly said. And going forward, I'm sincerely only slightly exaggerating when I say that we don't need to sell one additional pretzel in order to utilize the new lines that will come online profitably because we are really close to maxed out now, which leads to not optimized lot sizes, which leads to night shifts, et cetera. And therefore, we -- we're really longing to get these new capacity expansions.

However, if we look at the sales pipeline we have, we're very confident that we will sell more pretzels than today with this new capacity coming online hopefully as soon as possible.

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Michael Mueller, Valora Holding AG - CEO [20]

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Okay, thank you. So we have an additional question from the webcast from Benjamin (inaudible). There are actually 2 questions. First question is what are the first results of our tests of the avec box and our future store, avec X, at the main station in Zürich. What was the footfall? How many customers did you have at this POS? And what's -- I mean what type of conclusions do you draw from the tests? That's question number one. Maybe I can answer that directly.

I mean first of all, we see the test as very positive and successful specifically because the main goal of that test was to see how customers respond to such a new offering. And the vast majority of customer feedback was very positive. We saw also across different customer groups high acceptance rates for the new concept, meaning that there were a lot of customers regardless of demographics, age willing to download our app to get access to that store.

And secondly, from an operational point of view, we were very pleased that even though it was a kind of a test or a beta test of a new concept, actually the operations ran quite smoothly and we did not have substantial flaws or outages in the systems experienced.

More specific numbers in terms of customers and sales we do not publish. I mean as you can imagine, this is -- as we will guess, will become probably more so in the future quite a competitive field, so we do not want to share more detail. But all in all, I can confirm that we are very pleased with the results and very confident now to move to the next level. As I mentioned earlier in the presentation, we are planning already further tests also with improved systems at new locations here in Switzerland, but we also considered to start testing in other markets.

The second question is about Brezelkönig. So whether we see opportunities to open the Brezelkönig or king of pretzel, as you call it, format in the U.S., the short or midterm. This is not part of the plan we presented. The pretzel market in the U.S. is quite strong. We see very strong demand, especially also from the convenience channel that we serve with our product in the U.S., but it's not part of our plan currently to open these kind of formats in the U.S.

So do we have further questions from the participants on the call? I don't see further questions, and I think those are the questions in the webcast.

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Operator [21]

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(Operator Instructions) We have a follow-up question from Jon Cox, Kepler Cheuvreux.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [22]

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I'm just wondering about the competitive intensity in the B2B bakery business. Have you seen any noticeable uptick at all? As you know, there's a big competitor there in some difficulty. Just wondering if that's having any impact on your business, particularly in Germany and Switzerland.

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Michael Mueller, Valora Holding AG - CEO [23]

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Thank you, Jon, for that question. I mean first of all, we compete in a niche market. Even though it's quite a sizable niche, it is a niche within the bakery market. I mean lye-bread enjoys quite substantial growth. Specifically, if the lye-bread comes in the form of a pretzel, it's a very popular product, especially in Germany. But it's still a niche offering, and that niche we serve with very specific and, in many cases, products that are tailor-made to the needs of our customers, a lot of them in the convenience channel, which has very different requirements to other, let's call it, mass market products.

So with that, you have also -- by designing or by tailor-making the products to these customers, you have also more opportunities to -- ultimately to defend the margin there. So it's a quite different market to the mass market. You probably see with the -- that it's served by other manufacturers.

Especially your -- the question regarding Germany and Switzerland, so, I mean, first of all, the Swiss market is fairly small for us. I mean we serve, to a certain degree, the Swiss market. But in relative terms, it's fairly small. So it's mostly the German market. And in Germany, Ditsch enjoys in the relevant market a very solid market share. And you have rather seen competitors -- small competitors -- not only the large competitors but small competitors in the niche market struggling and competitors that remind themselves to focus on their core competencies, which ultimately need -- leads to -- or leads them to leave certain niche markets and lye-breads being one of them.

So if you're a large baker and you serve mass market or if -- even if you're a smaller baker with a broad product range, since the lye-bread market is so specific, that's probably one of the markets you start to reconsider whether you want to serve that market. And if you focus your strengths on your core competencies, I mean, ultimately could lead that some of them reduce capacity or completely stop producing these products, and that was also an element we benefited off. So we have, as a specialty manufacturer, benefited from the focus and the know-how we have in that specific market and took rather share also from other manufacturers. I hope this answers your question

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Operator [24]

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We have a follow-up question from Gian Marco Werro, MainFirst.

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Gian Marco Werro, MainFirst Bank AG, Research Division - Analyst [25]

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I have a question also in relation to the expansion of your Retail segment also in Germany and The Netherlands, especially for BackWerk and the franchise setup. How do you evaluate the competition there with your franchise concept compared to other competitors? And how do you convince a potential franchise taker from agreeing on a partnership with Valora?

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Michael Mueller, Valora Holding AG - CEO [26]

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Yes. I mean this answer applies to all the markets. This is not specific to The Netherlands or any other market. Ultimately, you convince franchisees that they can make a decent amount of money relative to the work they put in and relative to the capital they've put in.

Now with BackWerk, I mean, we have a concept that is very unique. Especially in The Netherlands, it benefits from the fact that you see quite strong growth in the -- out of own consumption. In the Netherlands, the market was, the way we see it, a little bit behind, especially Germany, if it comes specifically to the breakfast segment. So Dutch people are still more used to have their breakfast at home and then go to work rather than hopping on their bike or getting on their car, going to work -- or train and then going to work and ultimately eat their breakfast on the go. So especially the breakfast segment is an area we see quite some good growth. And with that, we offer opportunity to our franchise partners.

And then ultimately, I mean, you have to be a strong partner, a fair partner, to these franchisees. And since we, I mean, perform very well and our concept is very well received, specifically also in The Netherlands, we have actually quite some interests from partners to get involved with us in the business and run BackWerk stores in The Netherlands.

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Gian Marco Werro, MainFirst Bank AG, Research Division - Analyst [27]

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And maybe just compared to that also, how do you experience the feedback from your avec franchise takers in Switzerland now with the decision to switching the business model now to agency setups?

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Michael Mueller, Valora Holding AG - CEO [28]

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Yes. Thank you for the question. I mean this is a completely different setup to the BackWerk setup. I mean we call it franchise as well in Switzerland, the avec franchise part that is affected by that decision. Ultimately, it is very different from an avec -- from a BackWerk franchise concept in regards of the investment. So if you're a franchise partner within avec, I mean, we invest in your store. So it's -- we build the store for you, while at BackWerk you do this investment yourself.

The only difference to all the other store, and that's why we call it the franchise and not the agency model that we use in the other stores, is actually that you have to invest in your own inventory. So it is a franchise concept, but it is what we call rather a soft franchise concept in regard that we hold lease agreement and we invest in the stores.

And so with that said, the change is actually not that significant, and it affects only a very small number of stores also compared to the overall network and number of business partners or agency and franchise partners we have across the business.

Having said that, I mean, I understand this triggers a question in terms of how the economics change for us and how the economics change for our partners. I mean on our side, definitely we have not done this to change the POS economics but rather to simplify our side of the back office, reduce complexity and, with that, also strengthen the service we can provide to our business partners ultimately even if they're the partner to all of them. And this is far easier to do if you have a lot -- a smaller set of different partner agreements.

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Operator [29]

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There are no more questions at this time.

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Michael Mueller, Valora Holding AG - CEO [30]

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Good. So if there are no further questions, and I don't see further questions on the line and also on the webcast, so I thank you very much for attending this half year results call.

As we opened the call, we are very pleased with the operational performance, and we think these numbers illustrate very well the strong operating momentum we have across all the businesses.

Thank you very much for your questions and your attendance and looking forward to talk to you soon. Thank you. Have a good day.

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Operator [31]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.