BUA Cement Plc (BUACEMENT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the BUA Cement Audited Full Year 2021 Conference Call to Analysts and Investors. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Yusuf Binji. Please go ahead, sir.

Good day, everyone, and thank you for being part of BUA Cement's Full Year 2021 Conference Call for Investors and Analysts. My name is Yusuf Binji, the Managing Director of BUA Cement Plc. Presenting with me are Jack Piekarski, the Chief Financial Officer; and Finn Arnoldsen, the Group Chief Operating Officer. BUA Cement is the largest cement producer in the Northwest, Southeast and South-South regions of Nigeria and operates from 2 states using 3 modern lines with the fourth line being commissioned in January 2022. This brings the total installed capacity to 11 million metric tons per annum, making us the second largest cement producer in Nigeria. In 2021, BUA Cement reported revenue was NGN 257.3 billion, up 22.9% from NGN 209.4 billion in the prior year. Furthermore, the company was conferred with the largest corporate bond listing and single largest corporate debt issue awards by FMDQ, a recognition of our maiden bond issue of NGN 115 billion in December 2020. We are a sustainably led institution guided by the United Nations Sustainable Development Goals and our credit ratings by Agusto & Co. and DataPro remain at investment grade. I believe you all have copies of the presentation that has been shared earlier on. And if you will turn to Slide 7, here, we showcased our milestone over the years with the most recent win the introduction of LNG to our fuel mix. The installation of the 50-megawatt gas power plant at Sokoto and the cold commissioning of Line-4. As you are aware, the plant is now fully operational, having been commissioned in January 2022. Slide 8 highlights our strategic positioning in Nigeria, together with the existing lines across these locations. And we have 3 lines in Sokoto with a total installed capacity of 8 million tons and 2 lines in Obu with a total instrument capacity of 6 million tons. Kindly turning to Slide 10 is a summary of our performance and activities for the year. Our performance in 2021 was upheld by on season market demand and supported by an excellent business model. EBITDA increased by 24.1% to NGN 120.1 billion from NGN 96.8 billion in 2020, with EBITDA margin at 46.7% from 46.2% in 2020. Profit after tax increased by 24.5% to NGN 90.1 billion from NGN 72.3 billion in the previous year, translating to an earnings per share of 266 kobo from 214 kobo. The expansion drive announced in 2020 is progressing as planned, and we are committed to minimizing the impact of our activities on the environment. Capacity building through employment programs and making societal impacts through the tangible investments made to communities. If you go with me to Slide 11, we provide a bit of context around the numbers. Revenue per ton increased by 15.5% to NGN 47,448 per ton from NGN 41,065 per ton in 2020 due to pricing activities during the year. EBITDA rose by 24.1% to NGN 120.1 billion from NGN 96.8 billion, resulting from higher net revenue, which was up 22.9% to NGN 257.3 billion from NGN 209.4 billion in 2020. The EBITDA margin was slightly up by 0.5% due to the combination of higher revenues and cost containment, which resulted to gross margin expansion. Moving to Slide 12. We show the movement in EBITDA. Revenue increased to NGN 257.3 billion on the bulk of pricing activities and increased volumes dispatched. Cost of sales rose by 19.7% to NGN 136.4 billion from NGN 114 billion, given increased repair and maintenance expenses, energy costs and raw material costs. Selling and distribution and administrative cost increased by 24.1% to NGN 16.7 billion from NGN 13.5 billion due to an increase in staff costs, donations and distribution and [ repair ] expenses. Others increased by NGN 1 billion on the back of impairment gain on financial assets, change in loan terms, which resulted in a gain and share based expense. Slide 13 highlights an assessment per ton. Cost of sales per ton rose by 12.6% to NGN 25,151 from NGN 22,345 in 2020. Led by energy cost, repair, operation and maintenance costs and raw materials. Though current cost trailed inflation, which close [ the year ] at 15.6%. Energy cost per ton rose by 11.9% to NGN 9,448 per ton from NGN 8,442 in 2020, attributed to higher market pricing amid a weakening currency. Selling, distribution and administrative cost per ton up by 16.7% to NGN 3,079 from NGN 2,638, resulting from increase in staff costs, distribution, cost of repair and maintenance and donations. Moving to Slide 15. We cover our strategic pursuits in 2021, and I'm pleased to announce the introduction of LNG to the fuel mix at Sokoto. Our power generation plants are running fully on LNG. This has reduced our dependence on high carbon-intensive fuels. It is also noteworthy to mention that we have signed contracts for additional 70 megawatt gas power generators in each of our 2 plants. Parallel to this is the construction of additional cement production lines of 3 million tons per annum in both locations. All these projects will be delivered before the end of 2023. In 2021, we engaged in impactful activities in the communities where we operate. Some of these activities can be found on Slide 16. Every year, we award scholarships to [ 150 ] new students. And in 2021, we continued with this tradition for both undergraduate and postgraduate students in various disciplines, particularly across the [ sciences ]. We empower the communities with skills acquisition programs. In particular in France, was the graduation of 70 women in diverse fields of specialization for which we also provided [indiscernible]. We carried out renovations of schools, provided solar and electrical water [indiscernible], electrified communities by providing and installing transformers, donated patrol vehicles in support of the security architecture of the community and we are presently involved with some growth projects. Finally, we are all aware of a fire incident one of the fuel tanks in Sokoto during a task carried out by a contractor. We would like to reiterate that the plants were in no way majorly affected and operations [indiscernible] resumed after the fire was extinguished, and the cordoned area assessed as safe. Again, we express our condolences to the families of those affected. In line with IAS 10, this has been disclosed as a post reported event in audited accounts and the impact classified as not expected to be of material significance. On this note, may I kindly ask for the phone lines to be open so that we can provide responses to your questions. Thank you.

[Operator Instructions] The first question comes from Ayodeji Dawodu from Standard Bank.

Congrats for the results. And thanks for the call. I just wanted to find out in terms of competition with, I guess, the new capacity coming on stream from yourself and another competitor. How do you see that shaping out this year compared to last year? And also, how do you see the retail pricing environment given this increase in supply that's coming into the market?

Thank you very much, Mr. Dawodu. You are aware, we have increased our capacity by 3 million metric tons per annum from Sokoto and definitely, this is about 10% of the local demand in Nigerian market. And certainly, it is a big volume. And immediately, we did that, we brought down the price of our spend per bag by NGN 350, both in our Sokoto and Edo. And this has impacted in the market. If you may recall, towards the end of last year, the end user prices were almost in the region of NGN 5,000 per bag, in some places NGN 4,500 what I believe. Now if you go to most places, you will see prices below NGN 4,000 per bag. In fact, in the immediate vicinity of where our plants operated, like, for example, in Sokoto, you can retail prices for above spend NGN 3,400 so I believe the Nigerian Republic has actually benefited by this additional capacity that we have brought on stream. And we hope also the competitors will do likewise so that the cement will be regularly affordable to Nigerians. Maybe Mr. Finn can also chip in some few words on this. Finn?

Yes, Mr. Yusuf. Yes, as you are saying, we have brought another line, another production line into the market here. But that is actually not sufficient because if you have -- if you are looking into the figures into the market development like during 2021, we saw an increase of roughly 8%, 9% and it might -- it could even be higher because of some market limitation during the year. And we also see a tendency of accelerating demand. And at the same time, it's not coming much capacity on we commissioned over line. [indiscernible] is having this ocular line. But still, it will be pretty high pressure in the market here. We can already see it on the prices that the demand is real surplus actually be practical capacity. Nigeria has a lot of capacity theoretically. But when you look into the realistic dispatch figures from the operators then we actually need more capacity. And as also Yusuf also here indicated, it's coming up capacities during 2023 from our own, doing our own activities but we don't realize any other real capacities coming up here. So this will be a pretty tough market situation where we all have to do utmost to produce optimum dispatch from each lines. We are only 3 operators in this country. So all of us have to do or opposed to avoid the prices and that the market can really facilitate the available capacities.

Sorry, just a follow-up question. I guess -- on margins, I mean, where do you see potential for uptick in margins? It seems as though last year, there were significant pressures there. Could we see improvements there may be on the cost side on the revenue per ton side?

I will allow Mr. Jack if he's with us, the Chief Financial Officer, to respond to this.

Good afternoon, ladies and gentlemen. Yes, so obviously, with the volume increase, our margins will de facto increase or at least remain the same depending on the cost side because when you when you increase volume, your revenues increase and all the fixed costs, actually, they remain the same. Therefore, the margin is improving. And on the cost side as well, when you have more lines, you have a lot of synergies in terms of, for example, when you purchase various spare parts or various fuel and other energy-driven components. So with the volume, we'll be able to at least maintain, hopefully, the current prices -- or if not, if it's important to at least to negotiate better prices. So I think the margins will continue to improve and in line with revenues and depending, of course, on the inflation and any devaluation, which directly impact on the imported items, which are very few in general.

Ayodeji, do you have any further questions?

No, that's all please.

The next question comes from a [indiscernible].

Please confirm you can hear me?

Yes, confirmed. We can hear you.

Okay. Thank you for your call and congrats on your results. Two questions really. Well, I think one has been answered in parts, while I would appreciate more clarity on it. So the first one is on capacity expansion. I'm trying to see the rationale behind the expansion that we've been seeing in the industry, given that capacity utilization is just around 50% thereabouts for the industry. And I know you mentioned earlier about practical capacity. So I want to know what goes into that and how we can really estimate practical capacity? The next question would be on pricing of cement. I mean we know that last year, the inflationary environment, we forced a revision in cement prices. So I would like to know what are your expectation for prices going into 2022, given that inflation is still very much around? And I think in EBIT preserve margins which should be -- would you see a situation whereby we'll see another upward review of cement prices. So that's my question.

Okay. Thank you very much, Mr. [indiscernible]. Regarding the practical capacity of our cement plants, these are a function of so many things. Like the age of the plants, the availability of spare parts, the planned maintenances, the unplanned maintenances that inevitably will occur. So you will find out that in most situations, cement plants have a number of issues and they are not able to operate really fully depending on the -- these factors that I've mentioned, this invariably will have an effect on the capacity. And most importantly, also the type of cement that one actually produces. For example, if you decide to go for a very high-quality cement, that limits the amount of additives you can add into the cement like limestone and that will practically lower your capacity. It does not really mean that the companies -- the machines are not doing well. So what all the same also, we believe Nigeria is very dynamic. It's the cement demand is going up year-by-year, we have seen it. So that is the practical justification for us to continue building new plants. And we will do that until the [indiscernible] time that the supply actually catches up with the demand, and that is what a rational investor will do. The prices of cement, like I mentioned earlier, we opened up the 315 [indiscernible] because we do actually believe that some of the benefits of the cost savings were made through various innovations that shall be passed on to the consumer, and that was what we did. Well, unfortunately, it has not fully reflected in the market because of the very, very strong demand. And you know the retail prices are a function of supply and demand. So where the market continues to remain undersupplied. Other retailers down the line will make very high profits, thereby driving off the end-user prices. But like I've said also, we have seen a reduction compared to last year, I think across all market segments and also from all the producers. And this is as a result of increased availability. We believe the current prices will be sustained throughout 2022. Of course, also the cement plants are facing an increasing cost, especially cost of energy where you look at the price of diesel, I don't have to mention how much it's selling now, but I think it has almost gone two to threefold within the past few months and this is what we use to fuel our trucks that do distribute cement products across the country since we don't have a rail network that can convey large consignments of goods. So we also know the naira continues to depreciate against the dollar, and we have to buy a lot of spare parts. So all these are having a very big impact on our costs but we are so far absorbing, and we believe we will maintain these prices, except if the situation actually becomes unaffordable. And uneconomical then we have to see what we can do in terms of price per alignment. So that's all I have to tell you. That's all I have to say on this.

[ Owa ], do you have any further questions? [Operator Instructions] At this time, we do not have any further questions on the phone lines. So I'd like to hand over to you for questions on the webcast.

Thank you. Okay. Thank you, Claudia. We have a couple of questions on the webcast. And I'll just take them one by one. The first question is from [ Olua Milayo ] [indiscernible] from Meristem Securities, which is asking, can the company shed light on its total sales volume in comparison to the previous year? Also, is there any information on alternative for our sources given the increase in gas prices. That's her question.

Okay. Jack, you have the numbers, the sales volume from [ 2021 ].

Yes. So for 2021, we sold 5.4 million tons of cement and the previous year 5.1 million. So there was an increase of about 300,000 tons or roughly 6.3% compared to last year.

Okay. Thank you very much, Jack. Regarding the energy sources, definitely, as a responsible manufacturer, we are looking at various forms of alternative energy on what we can do. As you are aware, we have just recently diversified because our major priority first is the environment. And that was why we reduced the use of high carbon intensive fuels, like LPFO and diesel and switched on to LNG. This year, we'll try to consolidate on the use of LNG even though like you pointed out the gas prices are actually going up. And we are looking into also the use of solar on a limited scale up to about 10 megawatts, probably by next year.

Okay. The next question is from Salam Yomi. He is asking, he says congratulations on the outstanding performance. What was your production volume in full year 2021? I think we've answered that. He was also asking what are you doing in terms of exports? Have there been any improvements in your export?

Thank you, [indiscernible]. Yes, definitely, when it comes to export, this year, we have started is just 3 months into the year, but the volumes are far more than in terms of last year. And certainly, we will export whatever we have of excess capacity, like we have said [ severally ] our priorities to satisfy the Nigerian market first. And whatever we have of export, we are going to send it out to our customers in Niger Republic and Burkina Faso.

The next question is from [indiscernible]. He's asking for the time frame for the construction of the plant. And have we started construction on the 2 plants we've mentioned. He also has a follow-up question, wanting to know the impact of energy cost on the potential for margin expansion?

Okay. Thank you very much [indiscernible]. The construction for the 2 new lines located in Sokoto an Edo started last year. We are still in the civil stages. The time frame for completion is sometimes within Q3 and Q4 of 2023. So far, the 2 projects are on course. We do not foresee that there will be a slippage. So like I mentioned in my earlier speech, we hope to deliver these 2 projects before the end of 2023. They are on course. Jack, can you shed light on his second question?

Yes. The impact of the energy cost and the expansion. So roughly energy costs are about 35%, 37% of our total operational cost. So of course, this is the largest cost item on the -- in our P&L. And so it depends on different factors. If we exclude the devaluation on some items that we import. And if we exclude -- or if the inflation is maintained at current levels, actually, with the synergies that we have and the replacement also of expensive imports of some energy items then we should be able to maintain the energy cost. But roughly, in general, what we consider is something which is in line with the inflation, and we all know the inflation in Nigeria is not going to reduce drastically, probably it may come down a little bit now depending on this current situation in Ukraine that has also an impact on various cost. So it's difficult to predict, but somehow, there will be no large difference compared to what we see today.

So the last question is from [indiscernible]. He says congratulations on your full year '21 performance. Could you provide information on your energy mix and what is your outlook for the year in terms of the demand for cement, given the view that electioneering activities and related uncertainties could negatively influence CapEx decisions of economic agents?

Okay. Thank you very much. On the energy mix, this is something we have discussed extensively, but just to give you an insight, our -- and like Jack mentioned, energy is one of the biggest cost that we have between that 5% to 7%. So when it comes to energy, we are basically using pipeline natural gas in our plant in Edo state. And then we are using a mixture of coal and LNG for our factories in Sokoto, both to power the generators and also the furnace that we call the [indiscernible]. And going on to your second question regarding the cement demand. Going forward, like we have mentioned, we believe that the market is going to remain very strong as it has. We know we are going into an [ election year ]. I do not really think the electioneering will affect the genuine demands by people engaged in building more infrastructure. So on the contrary, we really expect the demand to remain very strong, and we shall be able to sell all that we are producing. We are going to run flat out.

Yusuf, maybe I can just chip in a comment there about the general consumption here because that is all what we talk about. As we say, all the producers are actually on the maximum output in practical terms. And of course, as we have seen last year, almost 10% up, no reason why it should not continue like this. We also know that GDP growth last year was 3.8. Probably, it will even increase during '22 and probably '23. We see in the marketplaces a lot of private consumers entering markets that is new customers, more agricultural activity driving up the consumption in the rural areas. So it's absolutely no reason to see that we have a kind of a reaction negatively in these markets. Yusuf, the [ MD ] mentioned also the export -- what we also know is that in general, Africa, particularly West Africa, the consumption is going up. People are spending more money locally. Complication with the Forex. So that means they are investing and the spending really CapEx within their countries. So for us, as a producer, also the export opportunities which also arise. But as also mentioned earlier, of course, the priority has to be the domestic market and with any surplus going for export. But it looks pretty bright in terms of the, let's say, the production. So the key is to keep the production floating in order to satisfy the market demand.

Please just one more question that just came in from Chiamaka, Greenwich Merchant Bank. She says congratulations on being the single largest corporate debt issuer in 2021. Are we expecting any major issuances via commercial papers or bonds from the company this year?

Yes. Thank you very much. As soon as we have any decision towards that from our shareholders then we'll definitely let the whole market know. You know we have done Series 1 of the NGN 200 billion bond last year. And the Series 1 was NGN 115 billion. So we still have another NGN 85 billion. This share has not yet been taken whether to go for Series 2. It all depends on our needs. But like I said as soon as that decision is taken, definitely, we will have to come out with that information. Thank you.

That will be all, sir.

[Operator Instructions] The next question is a follow-up question from [indiscernible].

Okay. Just a follow-up on the question I asked previously. Okay. So I hear you when you talk about the cost pressures and all of that, and we can only hope that these cost pressures, there's no amounts beyond your comfortable threshold where we will not see an increase in the price of cement, was speaking to capacities to you. First, could you just give us an update on your Adamawa project? And then secondly, could you give us a number that we could work with in terms of practical capacity, given all the factors that you mentioned, the age of the plants, the grade of cement you produce and all of that. Could you just give us a number we could work with as effective capacity or practical capacity we may?

Okay. Thank you very much, Mr. Osadwi. It's good you asked the question regarding Adamawa. I probably have a very good memory on that. In December 2020, we signed contracts for 3 cement plants, 1 in Adamawa, 1 in Sokoto and 1 in Edo. And in my speech, I made reference to the ongoing construction in both Sokoto and Adamawa, which are due for completion in 2023. The -- in -- both in Sokoto and Obu due for completion in 2023. The project in Adamawa is still on. We have signed a contract. We have not started construction activities. We are still trying to do some clarifications on the raw material availability in that particular area. Once we are done with that, that will give us the go ahead, whether to start construction or move to another site elsewhere. Regarding the practical capacities. It's very difficult to tell you this is how it's going to be because cement is not something you produce and keep if the market really goes down. But we are operating at a very high operating coefficient and we do give forecasts for the next quarter. If you notice about 2 or 3 weeks ago, we have actually given a forecast of what we are going to produce and sell during Q2. So I think this is the best we can do for the time being with the quarterly forecast in line with the loop. So you will see our figures in that forecast.

May I just confirm, do you have any further questions?

No, I don't.

[Operator Instructions] Mr. Binji, since we do not have any further questions, can I hand back to you for closing remarks.

Thank you very much. On behalf BUA Cement Plc, I wish to thank all those that have joined us and spent the last 40 minutes on our presentation to investors and analysts on our 2021 annual accounts. Thank you very much, and have a very nice day.

Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you very much for joining us. You may now disconnect your lines.