Wepa ends rollercoaster year on a high — Q4 earnings review

Arturo Alaimo

26 April 2023•4 min read

Wepa’s management yesterday (26 April) started their Q4 22 presentation by saying we are living in a VOCA world (volatility, uncertainty, complexity and ambiguity), and businesses need to adapt rapidly to this new environment. After riding an earnings rollercoaster in prior quarters, Wepa delivered strong end-of-year results driven by increased demand (back at pre Covid-19 levels) and cost pass throughs to customers.

The company managed to meet the target of triple-digit EBITDA set in Q2 and Q3 22. FY 22 adjusted EBITDA (adjusted for extraordinary expenses) reached €149.4m, up by 56.4% YoY. It’s worth mentioning that Q4 22 adj. EBITDA increased by a mighty 486.4% YoY to €82m.

Headline Results

EBITDA margins significantly improved in Q4 22 (16.7%) but remain weak across FY 22 at 8.8% (vs 7.7% in FY 21), and the company failed to hit a the target guided in Q2 of 11%-13% for 2022. During Q3 22, management also affirmed that they were confident margins will reach 12%-18% in the longer term. During the Q4 call, management reinforced this guidance, confirming a target of 12%-13% for FY 23.

In 2022, Wepa shortened the lengths of its contracts with customers from twelve months to three-four months, allowing the company to respond more quickly to costs fluctuations. The last price increase was at the end of October 2022, reaching an average of +57% on prices compared to 2021. According to management, the price increase in Q4 22 was around +15% compared to Q4 21.

With variable costs accounting for ~60% of all production costs, higher selling prices on finished products was inevitable in 2022. Cost of materials rose by ~52% to €1,090.8m in 2022 (vs €714.1m in 2021), driven by costs increases related to raw materials, energy and packaging. Wages increased by €17.3m to €234.6m in FY 22.

Wepa last August expressed concern about gas shortages and rising prices, as a big energy German energy user. It modelled a number of risk scenarios including gas rationing of around 20-30% in Germany last winter and lobbied the government for special treatment. It also considered switching production runs outside of Germany and using alternative energy sources.

It’s worst fears didn’t come to pass. The gas market in Europe was largely supported by LNG supplies, helping compensate the cuts from Russia. Volatility remained at high levels in the second part of the year, as energy prices sharply declined at the beginning of Q4 and then bounced back at the end of the year, driven by concerns on LNG availability.

The company said it continues to be flexible in its cost hedging strategy, for pulp, FX and energy prices. Pulp prices tend to be hedged by one-third to two-thirds, while FX and energy prices hedges range between 0% and 90%. According to management, hedges on pulp prices are relatively low, considering the decline at year end. The company is, as usual, hedged in a range of 70%-90% against US dollar. Finally, energy prices tend to be hedged on a short term basis at a relatively low level (60% in Q3 22).

Management said that they are in continuous discussions with their client and any significant price drop in their inputs will have to be reflected in decreased prices in the contract agreements they have with them.

Liquidity

The FY 22 cash position decreased to €16.6m from €27.4m a year ago, due to lower cash from operations. As of 31 December 2022, there was no drawings on the €150m RCF. The ABS facility was upsized to €220m during Q4 22 and drawings stood at €216m. Additional funds were required to cover inflationary effects on working capital.

Management said on the call that the RCF has remained undrawn due to strong cash generation. Cash generated will be utilised to reduce ABS drawings and strengthen the balance sheet position, to support any incoming crisis from the volatile environment.

Q4 22 free cash flow (adjusted by ABS) substantially increased YoY to €14m (vs-€5.4m in Q4 21) driven by strong results. Moreover, the Investment projects initiated in 2020 were finalised during the year. The new plants in UK and Poland were up and running since May and June 2022, respectively. As a result, FY 22 cash flow from investing activities reduced by €61.8m to €60.8m.

On the other hand, FY 22 FCF declined, due to the substantial outflow from Working Capital.

Working capital (WC) was high in 2022, the trade WC negatively impacted cash generated from operations at negative -€112.9m. High level of inventories and receivables are the main drivers of the WC ramp up. The post Covid-19 pick-up in demand at the end of 2021 alongside large stocking in preparation of a possible shortage of gas in Europe, drove the company’s inventories up sharply to €333.7m compared to €246.1m in FY 21. Inflationary prices of finished and semi-finished products sitting in inventories, also affected its valuation.

FY 22 Receivables significantly increased by €41.2m to €122.3m from, mainly due to the pricing management.

Net debt leverage declined to 3.9x (vs 6.2x in Q4 21), due to the strong Q4 EBITDA performance. This gives a lot of headroom to WEPA’s covenant of 6.5x on the RCF, with springing covenant at 50% usage of the facility.

Wepa’s €400m 2027 SSNs and the €200m 2026 SS FRNs were little moved by the earnings release , rising slightly to 84.4 and 94.9, respectively, with the SSNs yielding around 6.85%, compared to 7% before the call.