BUA Cement Plc (BUACEMENT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the BUA Cement Plc conference call for analysts and investors for the first quarter ended March 2023. [Operator Instructions] Please note that this conference is being recorded. I'd now like to turn the conference over to Managing Director and CEO, Mr. Yusuf Binji. Please go ahead, sir.

Good day, everyone. Thank you for joining us on this conference call. My name is Yusuf Binji. I'm the Managing Director and CEO of BUA Cement Plc. Presenting with me is Jacques Piekarski, our Chief Financial Officer. The business environment during the first quarter was challenging, having met with shocks from the government's currency redesign policy and its impact on our sales and distribution activities, the elections, which halted some of our activities and price changes in some input materials, including energy costs. Nevertheless, we were able to record another significantly positive performance in top line growth, while maintaining our investment credit rating following the review by DataPro. I'm sure all of you have got copies of the presentation we are going to go through today. So if you will kindly turn with me to Slide 10, so that we go directly into the main business of the day. You will see that our net revenue increased by 9.7% to NGN 106.4 billion from NGN 97 billion in Q1 2022. EBITDA declined by 2.8% to NGN 45 billion from NGN 46 billion, and EBITDA margin contracted by 5.4 percentage points to 42.3%, from 47.7% as at Q1 2022. Similarly, profit after tax and earnings per share declined by 19.1% and 19.4% to NGN 26.8 billion and 79 kobo per share, respectively. The expansion activities we announced in 2021 continue to progress as planned, and commissioning remains on course for next year. On sustainability, we are committed to minimizing the impact of activities from people and the environment, while positively influencing the communities through this tangible investments made. Turning to Slide 11. You will see that our revenue per ton was up by 18.5% to NGN 66,250 per ton, from NGN 55,904 per ton in Q1 2022, given the price adjustments affected last year. As earlier stated, EBITDA declined by 2.8% to NGN 45 billion, resulting from an increase in raw materials and energy costs, depreciation charges, distribution costs, given the increase in fleet size, fueling costs and debt issue expenses. The combined effect of these cost lines led to a contraction in EBITDA margin to 42.3%. Yet we remain upbeat about the times, the business model and our ability to sustain profitability and margins at acceptable levels. If you'll kindly turn to Slide 12. We showcase EBITDA drivers and the constraints met with. Net revenue increased by 9.7% or NGN 9.4 billion to NGN 106.4 billion from NGN 97 billion in the prior quarter, and that was due to the price increase that took effect last year. Cost of sales increased by 14.7% or NGN 7.2 billion, to NGN 56 billion from NGN 48.8 billion, resulting largely from raw material cost depreciation charges, energy cost, and repair and maintenance cost. The net selling, distribution and administrative costs increased by NGN 3.5 billion to NGN 5.4 billion from NGN 1.9 billion in Q1 2022, and attributed to increases in distribution costs, given higher volume prices, the acquisition of additional trucks, depreciation charges and the debt issue expenses. If we turn to Slide 13, we show the effect of the cost pressures encountered during the quarter. Cost of sales per ton rose by 24% to NGN 34,817 per ton, from NGN 28,124 per ton in Q1 2022. Energy cost per ton increased by 13.3% to NGN 14,261 per ton, from NGN 12,593 per ton as at Q1 2022, due to price increase and the fuel mix adoptions. Selling, distribution and administrative cost was up 2.2% -- was up 2.2x to NGN 7,467 per ton from NGN 3,352 per ton, due to the acquisition of additional trucks last year and also higher fueling cost, which doubled from an average of NGN 325 per liter to NGN 761 per liter, and also the depreciation and debt issue costs. Finally, if you'll turn to Slide 15, we present our [ priorities ] for the year, and you will see that, definitely, we have strong targets in terms of synergy and the new market penetration, our expansion activities. We also continue to sustain innovation, and we pay a very serious attention to sustainability issues with the transitions we are doing from heavy fuel oil in Sokoto to commencement of what our plan in Sokoto and Obu to install additionally 70 megawatts each of LNG or natural gas-powered power plants. Thank you very much. On this note, I will kindly ask that the phone lines be opened, so we may address the questions you may have during this call. Thank you.

[Operator Instructions] The first question comes from [ Funmi Dada ] from [ Standard Bank ].

My first question is, what percentage of your volume is self-collect? And what percentage is delivered volume in terms of the volume for Q1? The second question is, what is the breakdown of your energy mix across your plants?

Okay. Thank you very much, [ Funmi ]. The ratio of self-collection to deliver, I do not have the exact figures. So what I will give you is strongly approximate, and it varies from plant to plant. For example, in our factory in Edo state, we have 70% self-collection, and delivered is about 30%. While in Sokoto, the delivered is about 80%, and self-collection 20%. These are rough figures, not really precise, but that is the trend generally. The energy mix, we have mentioned this severally. In Edo, we are basically using natural gas to power both our kiln and turbine. And that is mostly available except for some periods where we had shortage of gas supply from the grid and we have had to supplement fire in the kiln with heavy fuel oil that is sourced from an independent refinery. Our fuel in Sokoto is a mixture of coal, which is a solid fuel for firing the kiln, and LNG, which is a gaseous fuel, and this is transported in tankers from Port Harcourt to Sokoto. The -- we have made a full transition from liquid fuel to gaseous fuel for our generators. As you are aware, we generate 100% of our power, electrical power, using generators in Sokoto, and these are run 100% on LNG. So that is it regarding the fuel mix.

The next question comes from Kayode Eseyin from CardinalStone Partners.

I would like to say congrats on the Q1 results. At least, we were able to grow strongly on the revenue link. So my question is mostly for this one. First one is around your volume. What were the volumes in Q1 2023 and volumes in Q1 2022, just for comparison? And then for outlook for volumes, what's your -- do you have any updates on the Adamawa plants, particularly as regards when we're expecting those plants to come online? The other two plants were expected in 2024, the Sokoto line and the other one, [indiscernible] PT. When exactly in 2024 are those likely to come on stream? Then also what's the update on financing from IFC? And then I also understand that borrowing costs have sequentially been capitalized. But now that we are in place of unwinding that some plants have recently been commissioned. How are you planning to unwind these borrowing costs? And are you going to change the way you capitalize this interest expense on your income statement? And then another question is on the tax rates, particularly with the Minister of Financing that they are working on phasing out the pioneer tax incentive. What are your expectations in line with this new policy trust by [indiscernible]? And then are you also expressing to see the low effective tax rates given that we are expecting some new plants coming on stream?

Okay. Thank you, Kayode. Very heavily loaded. I will attempt to answer the first three or four. And then our CFO, Mr. Jacques, if he's around, he will talk on the borrowing cost capitalization and the tax rate with respect to the pioneer status and the [indiscernible] update. Regarding the volumes for 2023, during the first quarter, we sold roughly 1.6 million tons, and this is 1,605,316 tons compared to 1,734,901 tons sold. It's just a slight dip of like 130,000 tons. And given the reasons why this has been affected -- why we encountered most of these negative trends during the first quarter of 2023, you are all aware of the cash crunch, which affected deliveries and the consumption pattern, also the tensions and uncertainties and concerns leading up to the elections in February and March, and we believe this have significantly affected consumer demand. Regarding Adamawa, we have mentioned during previous phone calls, that we have not yet started construction activities because we are not yet -- we have not yet concluded the raw material investigation that is really needed for us to secure the proven results needed to set up a plant that is going to last for decades in that area. So this project is still on hold, pending when the investigations will be brought to a final conclusion. We have done some core drilling that we have mentioned before, and we are not so much satisfied with the volumes of limestone discovered there, but it is an ongoing thing. We will look at other areas within Adamawa. Regarding Line 5 in Sokoto and the Line 3 in Edo, we are very opportunistic that commissioning activities will start within the next few months. And we may well see the intermediate product from these two plants being produced by -- before the end of the year. By intermediate product, I mean you will see some klinker production. It will take like about a month before we have cement available into the market. So that will bring us somewhere within the first month of Q1 2024. Regarding the IFC financing, I am happy to announce that some progress has been made. Agreements have been signed with IFC itself. There are other lenders as part of this syndicated package, and we hope to conclude the signing before the end of the first half of this year. But we are going to make a disclosure as soon as everything has been fully signed. So not all the transaction amounts have been concluded up to now. And we have not done any formal signing ceremony, what agreements have reached an advanced stage. So we'll give an update to the stock exchange at the appropriate time. Jacques, if you are around, can you shed some light on capitalization of the borrowing cost and also the pioneer status?

Yes, indeed. On the borrowing costs, so we are following the IFRS standards. So as long as a plant is under construction, the related loans interest, they are being capitalized with the line. At the day the line is commissioned, this interest, they become -- they are expensed. So actually, that's one of the reasons you may have seen in the -- an increase in the net financing costs between both quarters with a 1-year gap. We have -- in 2023, we have the expense of the bond interest. Remember, some time ago, we got a bond for NGN 115 billion. So this interest now, about NGN 2.2 billion, have been expensed. In Q1 2022, they were still being capitalized because the related line, Line #3, was commissioned as of April 1, 2022. So that's on the borrowing cost. Now on the tax rate, I did not hear about this new policy, but on the pioneer status, as you know, the government has approved some years ago an extension of the granting of pioneer status to cement manufacturers, so -- to all of them. So we have applied and we have obtained pioneer status for the new lines that we commissioned and also for future lines. And this is the same for all cement manufacturers. So it is a 3 years' time frame from the date of commissioning, and it will not be granted anymore in the future, as it was confirmed by the government in its announcement. So I don't know, you mentioned the new policy, the line was not very good. Can you repeat what that was, please? On pioneer status?

There were some recent updates with -- from the Ministry of Finance, mentioning that they are working on phasing out pioneer status incentive for mature industries. I mean, if you ask me, cement industry sound like a mature industry.

So no, I just answered that. So for us, it was -- that was already announced. Actually, it was 2 years ago. Those who have applied for pioneer status, in our case, we have been granted a pioneer status for the lines that have -- that were pending pioneer status. And for the forthcoming 2 new lines, we will also get pioneer status. So there is no change on this.

Yes. All right. So I just have 1 or 2 last questions. I mean you mentioned cash crunch and political instability have been the reasons for the slowdown in Q1 volumes. So my question is, what's your outlook for Q2 and beyond? Are you optimistic on volumes going forward, especially considering the fact that consumer will still remain very different? How are you thinking about volumes? And then also in light of declining diesel prices, what do you think the outlook for the impact on energy cost is on your bottom line going forward? What's your -- do you have exposure to diesel prices? Or have you rightly immunized yourself of the volatility we have seen in that space?

Thank you very much, Kayode. Let me just clarify what I said. I never mentioned political instability. I said concerns around the election we are in. So we mentioned the cash crunch on the concerns, people who jittery around that time. There was no instability as far as I'm concerned. Well, that basically, we believe, affected the consumption. And you can see not only us, probably on consumer goods also and all manufacturing companies had a dip, and this could be attributed to majorly these two factors. Regarding the volumes going forward, we are optimistic that with all these things behind us now, the cash crunch is over. And the election, there is much certainty now, and it's why we believe things are getting back to normal. And we have already started seeing an increase in the demand and consumption of cement. So we are very optimistic that the second quarter and the third and fourth quarters will be much better than the first quarter. We have also seen the ratio on AGO price is easing up. Last year, we were getting AGO sometimes above NGN 800 a liter being delivered to our plant. This has come down by probably about 20% now. And we believe it will continue to come down, and the availability has improved also. So definitely, this is going to have a positive effect on our bottom line. If you may recall, we mentioned also last year that we have tried to cushion most of the effect of these energy prices. We have not passed all this cost to the consumer. So with the gradual easing up of these prices, that definitely will favor our bottom line.

[Operator Instructions] I'd like to hand over for questions on the webcast.

Thank you, Claudia. Yes, we do have some questions on the webcast. The first question is from [ Gilbert Ayola ], [ Badozun Shareholders' Association ]. His question reads, I want to thank you for the opportunity given. So my question is as follows: what is your company doing to address future challenges in energy management to reduce increase in finance -- to reduce energy movement, to reduce increasing finance cost? That sounds -- let me just move on to the next question. The next question is from James Ola-Adisa, Chapel Hill Denham. How do you see prices growing in 2023?

Well, okay, to answer the first question from James, definitely, we cannot really say much about where the prices are heading going forward. We have already had a price increase at the beginning of the year. And certainly, we will wait to see the response of the market also. Our main goal is to make cement affordable to all Nigerians and, at the same time, guaranteeing decent returns to our shareholders. So that will guide our future pricing calculations.

Thank you, sir. The next question is from [ Mohamed Hanafi ] from Afreximbank. Can you please indicate what percentage of exports of total revenues and value of exports in absolute terms in the first quarter?

I'm not sure whether we have those specific figures, but it's something we can check later and get back to [ Mr. Hanafi ] from Afrexim. Thank you.

Thank you, sir. The next question is from Moses Njuguna, EFG Hermes. His question reads, what is the relative cost of HFO compared to other fuel sources like LNG? Thank you.

Well, it all depends on buying HFO from. For us, we are buying from Nigerian crude, some are importing. So definitely, these prices are going to vary. Also, it depends on the quality of the hedge for [indiscernible] and also a lot of parameters. But definitely, all energy sources are very expensive at the moment. And it's not so easy to compare because they are not apple-to-apple. In the cement industry, we talk of the energy content. So what you will -- from 1 liter of HFO, you will not get it from 1 liter of diesel. The diesel will give you more energy content because of the higher calorific value. The same thing with gas. So it's not easy to compare apple-to-apple. We can give you specific cost per liter, but that will not help much until you compare them on the carolific value basis. Thank you.

Thank you, sir. The next question is from David [indiscernible], Meristem Securities. He wants to know -- he's asking about the capacity of Sokoto line 5 and line 3 after completion?

What the two new lines under construction in the two respective states have a ton capacity of 3 million metric tons per annum.

Thank you, sir. The next question is from Gilbarco, [indiscernible] Association. His question reads, what's the company also doing to address the large figures on received cash of funds from trade receivables to ensure they have more funds to boost its operations? Thank you.

Jack, I think this is for you. Thank you.

Yes. The trade receivables that -- in the unaudited financial statements, they total -- only NGN 86 million. Actually, the trade receivables are very low. As you know, we are selling against cash. So I'm not sure exactly what the gentleman means by -- to decrease these receivables because they're already almost nil compared to the revenues.

Thank you, sir. I have no more questions on the webcast.

We will now return to questions on the phone lines. The next question comes from Samson [ Afolabi ] from ARM Securities.

So my questions are -- I would ask them in [indiscernible] so the first one, also understand what the company is on signing less price increase? Are we going to be expecting any price increase in the next quarter or during the year? And also I want to [indiscernible] changeable, maybe increase in price relative to other players in the industry? Is it that we also targeted on monitoring other price increases in the industry before they make down strategic price increase? Does the first question concerning pricing? I also want to ask about the company's plan concerning fuel subsidy and an event or let's say in a situation where we see that there's a remover of subsidy on the petrol? you know there is petrol minority affect like much more. I also know like what impact do you foresee in a situation where subsidy is removed? And what are the countermeasures that I'm pleased to like limit the effects and the impacts of this particular activity? And also there's another question, so I want...

Hello, Samson, are you still on the line? Hello, Samson.

Can you hear me?

I can hear you now. Sorry, you can proceed.

Okay. So where did you lose me -- where did I answer?

On the fuel subsidy, we had that one. So you...

Okay. So is [indiscernible] first, I just want to know the company's plan on the fuel subsidy on the impact? Our duty is going to impact? What are your plans to mitigate these impacts? And number three, I want to add, concerning the recent sale of [indiscernible] what's [indiscernible] near term [indiscernible]? What's like an update on which was a significant sell off recently? Is this a normal market magnesium that is in play or there are [indiscernible] moves concerning the management and some large shareholders that are making that particular call? And finally, I also ask that on is -- for future purposes like this webcast, is it like we call the issuing that we can't get the recording of this webcast just for the sake of like I just go back to like pick some details there because there are some details that have been mentioned in this webcast? And we would like to go like go back it and then pick one or two things from there. So those are my major questions for now.

Okay. Thank you very much, Mr. Samson [ Afolabi ]. I've already addressed the question on price increase going forward. I'm not in a position to speak about the prices relative to other players. I think that question is best directed to our players. But what basically [indiscernible] is our production cost, our margins and also how we'll be able to sell into the market because it doesn't make sense. You have prices that Nigerians cannot be able to afford. So definitely, these are the guiding principles when we are fixing our prices. We do not fix them relative to the prices of other players. Neither are we in discussions with them in fixing prices. Regarding the issue of the fuel subsidy, I believe from what I've read in the papers, this is limited only to petrol. I don't really know. We are using diesel in our vehicles and for the transport of cement, but that is already a deregulated product. So definitely, if the subsidiary removal is limited only to petrol, it will have almost no effect on our operations. So definitely, that is not an issue, of course, that we need to have contingency plans to mitigate. Regarding the sale of shares, I'm not really aware of that. But one thing you have to know is that we have a total of about 33 billion shares, probably one of the highest in Nigeria. So even if you see a sale of a few millions, it is less than 1%. Definitely shares have to be traded upon. And when you compare the volumes of trade in our shares with respect to other companies, like I said, we have a bit of share capital of more than 33 billion shares. So it is definitely very, very insignificant, less than 1%, so no cause for concern at all. Regarding the recording of this conference call, I'm afraid maybe Claudia will have to answer that. He is back to the service providers. Ladipo, is this available in any form that it will come...

Yes, sir. All the recordings and the transcripts are always on the website immediately after the call.

Okay. Thank you. Next question, please.

Samson, I just like to confirm if you have any further questions?

No, I don't have any other questions.

The next question comes from George from BusinessDay Media.

Can you hear me? Please confirm if you can hear me.

Yes, we can hear you, but with a lot of background noise.

Okay. Apologies. So my question -- congratulations on your results. So my question is regarding your volume. I didn't get what you said at first. Probably, can you just help me recap on that? And what proportion of your volume was exporting in the period? That's one. Then my second question, are you considering going into an alternative [indiscernible], given the high energy costs? Or are you already doing that? If you are, if you can just provide clarity on that. Then the third question is regarding your trade receivables. If you look at your trade receivables, it went more than threefold. And here, you specified, you had only three corporate customers, given that you do only cash and carry basis. I'm just wondering, given the election uncertainties and the currency crunch, what kind of activities or project did your 3 corporate clients and given that -- and saw your trade receivables increased by over 391% in the period?

Okay. Thank you very much. George, regarding the volumes, I mentioned the volumes for Q1 to be NGN 1.6 million compared to NGN 1.73 million for Q1 2022. I've addressed the question of export, I don't have the exact figures yet, but we can provide that later. On your second question regarding alternative fuel, certainly, a very interesting topic in this main industry. Investment plant aspires to have a substantial portion of its energy source replaced by alternative fuel, it makes would say it close of the environment and reduces some of the emissions. For us, we are focusing strongly and more on reducing our carbon footprint, and that is best provided by making a drastic transition from high energy, high carbon-intensive fuels, like LPFO fuels, like LNG and gas, and that we have succeeded in doing 100% for our generators in Sokoto. The consumption of liquid fuel, this high carbon-intensive fuel was massive, and this has been replaced substantially. And I believe that has reduced our carbon footprint and making the environment cleaner and our world safer. Definitely issues of other alternative fuels, like agricultural products, have been looked into. You know we have had that in the past in the [indiscernible] company of Northern Nigeria, where up to 20% of the energy use in the kiln was replaced by rice husks and peanut shells and wood shavings. And that is a project that we are also thinking of reviving because of the preponderance of agri products in the northern part of the country. I would like more clarity on your third question on trade receivables. I would like to know what you mean by three corporate customers? As I'm aware, we are up to more than five to -- more than 500 customers, 500 to 600, with probably more than 90% of them being active. So I'm not sure where you got these three corporate customers. Can you shed more light on that, George?

Okay. Okay. So you do what is called a cash and carry basis, except for three corporate customers. That was highlighted in your books on notes [indiscernible]. So I'm just wondering...

Let me clarify. Corporate customers within construction companies. So these are people we sell to on credit, if I'm correct. But the majority of our sales is on cash and carry and is more than 99%. And definitely, the corporate customers do not have a big chunk of our business. Certainly, it's less than 1%, that I can assure you. So it's just a classification. Like was explained by our CFO, we receive cash upfront, and then deliver, and we hardly do credit sales, probably for just about maybe three of these customers. And like I said, it's less than 1% of our turnover. I hope that clarifies you -- the question.

Yes, it does. Just that I was just shocked that the less than 1% drove the over 391% in your trade receivables.

No, that cannot be correct. So maybe there's a miscommunication somewhere, or probably, I don't know. Jack, do you know the particular item he is referring to in the report?

By a multiple, which is value very little. As we mentioned before, nothing has changed compared to the past. We still have a few of these construction companies. It's a timing issue. The receivable was 80 million last year. And due to timing issue, they placed higher orders in Q1 this year than last year. Suddenly, it went to 86 million. But look, if you take this -- it's really not material and nothing to be worried about or no change in strategy. This is just 0.01% of total assets. So it's really -- is completely insignificant. So no change from the past. No different strategy, and just a timing issue in the orders that were placed at that time.

George, does that address your questions?

Yes. Yes. I'm fine.

At this time, we do not have any further questions on the phone lines. Ladipo, I'd just like to check if we have any webcast questions?

Yes, I do have some questions on the webcast. Thank you. The first question is from -- the next question is from [ Adibayo ] [indiscernible]. His question reads, are there any chance -- is there any chance for an improved free float currently at 2.08? Thank you.

Thank you very much, [ Adibayo ]. I think the major requirement is for the company to be able to meet up with the free float requirements of the NGX, and that we have done. Regarding further free flows I think that is mostly led -- is a decision of the shareholders. And I cannot speak on their behalf.

Thank you, sir. The next question is from Olayinka Adesanya, SBG Securities. The question reads, I would like to confirm if you took price increases in Q1 2023? Also, please can you provide your ex-factory price per bag?

Yes, we did. We increased prices by some amount, I think 1st of January 2023. Since then, the prices have remained stable. Our ex-factory price from all our plants is NGN 3,700 per bag. And delivered in some places, I think, NGN 4,300 to most part of Nigeria. Thank you.

Thank you, sir. The next question is from James [indiscernible]. His question reads, on the net finance cost, how were the net gains on FX exchange realized?

Yes, Mr. Jack, are you still with us?

Yes. Again, we are following the IFRS standards. So the net gains is when you have foreign currencies in your books that are accounted for at the official CBN exchange rate, and then when you convert them or you realize them, the rate is higher. So the difference results into an exchange gain. So very straight forward. There's a difference between the different rates or the rate movement between the accounting date and the realization date. Thank you.

Thank you. The next question is from Moses Njuguna, EFG Hermes. His question reads, could you please provide carbon emission, dust emission, water usage and other environmental statistics for Q1 2023 and compare them to Q1 2022? Thank you.

Thank you very much, Moses. These figures will be provided in our annual report. We do such -- provide such figures on an annual basis, and they are always included in our annual report. Thank you.

I have no more questions on the webcast. Claudia, do you have any questions?

There are no further questions on the phone lines, and that does, in turn, conclude our question-and-answer session. Mr. Binji, at this time, I would like to hand over to you for closing remarks. Thank you very much, sir.

I would like to thank all the investors and analysts. Indeed, everybody that has been a part of this conference call was spending a greater part of [indiscernible]. So we look forward to seeing you when we present the half year results sometime in July or early August. Thank you.

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