BUA Cement Plc (BUACEMENT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the BUA Cement Plc presentation to investors and analysts for the 9 months ended September 2023. [Operator Instructions] Also note that this event is being recorded. I will now hand the conference over to the Managing Director and CEO, Mr. Yusuf Binji. Please go ahead, sir.

Good day, everyone. And once again, welcome to BUA Cement's 9 Months 2023 Conference Call for Investors and Analysts. My name is Yusuf Binji, Managing Director and CEO. And joining me are Jacques Piekarski, the CFO; and Mr. Finn Arnoldsen, the GCOO. From our last discussions in August, the challenges in the economic environment remain unabated, especially with the depreciation of the naira. In view of this, our operations, like many others within the manufacturing sector, have not been totally immune from the fall out. Nevertheless, the 9 months results marks a turnaround instrument sales as we recovered from the decline experienced during the first quarter and in comparison with the corresponding period in 2022 due to the fall off from monetary policy changes at the time, together with the election preparations. Furthermore, we launched the maiden edition of the BUA Cement scratch and win promo in August and which closed a week ago. For us, this was our own way of appreciating customers. And on Slide 17 of the presentation, which you have, are the faces of some of the winners. Now I will ask you to kindly turn with me to Slide 10. Here, we are presenting our performance. On Slide 10, you will see that the net revenue increased by 27.9% to NGN 335.9 billion from NGN 262.6 billion as at the 9 month 2022, while EBITDA increased by 20.8% to NGN 138.9 billion from NGN 115 billion during the first 9 months in 2022. Conversely, EBITDA margin contracted by 2.4% to 41.3%, owing to a rise in cost lines. However, profit before tax stood at NGN 76.1 billion, up from NGN 74 billion in the corresponding period. By extension, earnings per share increased to 225 Kobo from 219 Kobo, an increase of about 2.8%. With regards to the plant expansions at Obu and Sokoto, we continue to make satisfactory progress, and we look to commissioning at both locations during the first quarter of 2024. From a sustainability standpoint, our resolve is to continuously seek out measures at minimizing our impact on the environment, prioritize the safety of our staff and the communities around us and improve lives through the investments continually made into these communities. A scorecard of our activities on the environment can be found on Slide 16. Now turning to Slide 11. You can see that revenue per tonne increased by 21.4% to NGN 68,540 from NGN 56,468 as of September 2022. And this is attributed to price adjustments made through the course of the reporting period. EBITDA increased by 20.8% to NGN 138.9 billion year-on-year from NGN 115 billion during the prior period due to a 27.9% rise in net revenues, and this was partly offset by rising raw material and energy costs, alongside operations and maintenance fees and distribution costs. As a result, EBITDA margin contracted to 41.3%. In spite of this, we are positive about our ability to keep margins at sustainable levels, especially with the commissioning of the 2 new lines very soon. On Slide 12 is the evolution of EBITDA, which was driven by growth in cement volume sales and price adjustments. Cost of sales increased by 30.5% or NGN 43.6 billion to NGN 186.4 billion from NGN 142.8 billion on the back of increases in raw materials and energy costs, our operations and maintenance fees. The net selling, distribution and administrative cost was up 2.2x or NGN 5.8 billion to NGN 10.6 billion from the NGN 4.8 billion during the 9 months of 2022. Accounting for the increase were distribution costs from higher fueling costs and increased fleet size, that is the size of our trucks, including repairs and maintenance, depreciation charges, staff costs and advertisement and promotional expenses. Turning to Slide 13. We show our cost profiles amid the high inflationary environment. Cost of sales per tonne rose by 23.9% to NGN 38,047 from NGN 30,713 as at the end of September 2022. Energy cost per tonne increased by 20.2% to NGN 16,803 from NGN 13,978 fueled by price increases and the further depreciation of the naira. The net selling, distribution and administrative costs increased by 37.5% to NGN 6,069 per tonne from NGN 4,413 per tonne due to the factors already mentioned. On Slide 14 is a highlight of our strategic pursuits with the focus of creating added value for shareholders. As an update, I already discussed the ongoing construction of Obu -- the ongoing construction at Obu and Sokoto. In terms of capturing new markets and market share, we are increasing our market presence, growing the market share and have been unaffected by the border closure. Finally, on the innovation front, the payment integration project with the banks is complete, which has improved further processing and the accuracy of payment confirmation among others. So if you will turn to Slide 16, you see our EHS score card. And on Slide 17, some of the faces of some of the winners during the scratch-and-win promotion that just concluded a week ago. This brings me to the end of this session. And I will now kindly ask for the phone lines to be open so we can take your questions. Thank you.

[Operator Instructions] Ladipo, we have no questions at the moment. Would you like to manage the questions from the webcast?

Okay. Thank you, Chris. Good afternoon, everyone. My first question is from Helen Brume, Afreximbank. Her question reads, was 9 months performance fall significantly short of forecast? Kindly provide some explanation for the performance.

Okay. Thank you very much. Mr. Jacques, can you go through the numbers in respond to this?

Yes. If we look at the income statement, our down to operating profit, actually, the performance is very positive and much compared to last year. So what has driven the decrease in the expected bottom line was these exchange losses that everybody incurred. So the -- in terms of operations, if looking at our various revenues and cost lines, actually, we're doing very well and much better than last year, particularly given the increase in cost and energy costs, which are not directly under our control. So it is a positive sign. The exchange losses, which everyone incurred in this country, are hopefully over, at least, to this magnitude that everybody experienced, to a lesser degree for us because we we're managing our FX exposure. And so we are optimistic about the future, unless there is again -- but we don't think so a further depreciation of the naira. Thank you.

Thank you, sir. The next question is from [indiscernible] FBN Bank U.K. Her first question reads, how has the recent price decrease by BUA Cement affected revenue? And the next question reads, how is BUA Cement managing FX exposure? Any impact on FX -- any impact of FX devaluation on its performance? Thank you.

Okay. Thank you very much. I will talk on the first one, and then Mr. Jacques will talk about the effects of the ForEx exposure. Now the revenues have not been impacted by the price reduction that we did. First of all, let me try to put that in context so that you understand the background. The price reduction was as a result of our commitment to make cement more affordable to Nigerians and also in view of the expected capacity that we are going to put into the market as from January 2024. So the strategy was to strategically position us so that we'll be able to deliver the additional volume expected to come from these 2 new lines directly into the market. We carried out a reduction on our ex-factory price to NGN 3,500 per bag. And this has been received positively by the market, and we have observed immediately. We did that announcement from the 1 October 2023, which was a low [ season enforcement ] sales. We immediately witnessed a spike in patronage and demand for our product. So in fact, it has had a positive effect. We were able to come down with a lot of this inventory that we accumulated. As you know, the cement plants operate on a continuous basis. You don't shut them down because the demand is low. You continue producing with the hope that when the market picks up, we will be able to sell out of the inventory that you have accumulated. So that afforded us the opportunity to sell more volumes. So it hasn't really had any negative effect on our revenue. In fact, it has been very positive. We are almost selling full blast [indiscernible] at full capacity, even though it is still part of the low season. The high season for cement starts around December, January, Feb, and during the peak of the dry season. So it has been very positive for us actually, and that is very interesting. Jacques, would you like to respond to the effects of the ForEx exposure?

Sure. The -- managing FX exposure in Nigeria is a very challenging task. And we've done very well given this -- the environment. For example, if you look at the financial instruments here in Nigeria, there is no hedging possible. With this naira depreciation, no one will give you a -- will give you a price. And the -- in addition, there were no FX available through the normal FX markets through banks. So everybody ended up purchasing dollars from the [ parallel ] market, which was at a very high rate. So what we do in general is, number one, we've done as much as possible, we try to find local supplier for our raw materials. So we have done that, and we have very good results, which has reduced the FX-exposure. Then sometimes, we manage as well to convert with some suppliers. We have the possibility on a small portion to pay in naira, which is also helping us. The rest is just proceeding LCs as fast as possible, then watching the FX market and purchasing at the right time as much as possible. And now we see a -- we saw recently a small appreciation of the naira. Also it went up again the last days, but we are confident that this will not deteriorate further. And actually, there are some positive remarks from banks and CBN that the naira will stabilize even at a lower rate. So that's how we are managing the FX exposure. It's a daily work for us because, yes, we do have some imports of equipment and spare parts. So this is where we have the exposure. And then the impact on the FX, I just explained before what happened. So with the depreciation, certain devaluation of over 60% that happened with the floating of the naira last quarter, which affected everyone. And hopefully, this is over for the future. Thank you.

Thank you, Jacques. I have 2 follow-up questions from [indiscernible]. The next question is, how will BUA Cement manage energy cost going forward? And there's also another question from [ Hau ]. What is the group's export [ earnings ] for the 9-month period? Thank you.

Thank you very much. As we have explained so many times, we manage our energy costs very well, in the sense that our systems are designed to be multi-fuel. That means they have the ability to use solid, liquid or gaseous fuels. In Sokoto and in Edo, we have the possibility to use liquid or gaseous fuels. We have plans on ground to install coal mills. So that will allow us to use solid fuel in Edo also. So we are very flexible, and we look at all the costs [indiscernible] times and then we try to optimize and choose what is best for us. So we are not relying on a single fuel for our production. So we are not really at mercy of increasing prices, yes. And Jacques, do you have the figure for the group's ForEx earnings for the year for the 9 months?

Yes. So we exported year-to-date, approximately 74,000 tonnes of cement to [ Niger ]. As you know, this has stopped now after this coup that happened last July. And so the borders are still closed. So there is no export for the time being. And the price is -- the total revenues for that were above EUR 7 million. And as soon as the situation will get -- will improve, then we'll resume exports. Thank you.

Thank you, sir. Our next question comes from [indiscernible] FBNQuest. His question goes, I have a few questions. Was there a material impact on volumes following the lowering of factory gate prices? How much of the year-on-year unit volume growth seen in Q3 was solely from sales within Nigeria? The second question reads, our estimated energy costs were up 55% year-on-year in Q3. Also noticed this tracked top line growth. I assume this is coincidental. At the rate -- at any rate, should we expect pricing to track costs, especially energy and distribution and cost inflation over the next 12 months? His final question reads, finally, when is BUA going to do an IPO? Thank you.

Thank you very much. I think the first question regarding the material impact on the volumes, I've addressed that in my reply to the question from FBN U.K. Like I said, this is supposed to have a very positive impact, and we have seen it during the month of October. And this will be evident by the time we release our Q4 for year 2023 results sometimes in February next year. So the -- of course, with increasing production and also increasing energy prices, you are bound to see an increase in the energy cost. And that is why you noticed that it went up, and the costs are not steady. If you look at it, we produced approximately 4.9 million tonnes of cement during [indiscernible] this period. And when you compare that to the 4.6 million tonnes we did during the corresponding period last year, you will see there's an increase. So definitely, you'll see a proportionate increase in the energy cost. But when you take the cost per tonne, then that we'll be able to give you a better idea of the impact of the increasing energy cost per unit of production. Regarding the IPO, there will be an IPO in the next 1 year, and that is for sure. Thank you.

Thank you, sir. Our next question is from Melissa Cook, African Sunrise Partners. She says, please give us -- her question reads, please give us more details on the bank payment system you mentioned. Thank you.

Okay. Let me just introduce the top on and Jacques will [indiscernible]. The bank integration system was something kind of an integration that we did with all the Nigerian banks to be the receiving platform for payments for our product. And the system was linked directly into our sales automation process. So that means we are able to get an instant value and an updated ledger. Immediately, the payment is made into the banks without the need for having to do a manual reconciliation or a manual adjustment of the ledgers. So that is the bank integration system that we put in place and is working very well. And we did not go to any [ switching ] agency. This is directly between the banks and the company itself. And the software that we are using fully integrates and accommodates all the inputs that come directly from the bank. Jacques, do you want to add more on this because you spearheaded this bank integration.

Yes. The additional benefits of this implementation is, of course, one is the reduction in administrative task. You imagine having a fully integrated system, you save a lot of manual input. Then as well in terms of controls, this has significantly helped to ensure that within a reasonable time, that we properly have 100% control on what is being sold has been paid and that [indiscernible] because there are sometimes also some partial payments that are being made and then sales are allocated based on this. So it was very manual in the past. And I think this is a major achievement in ensuring efficiency, also for the -- for our customers because we are able to validate their...

Ladies and gentlemen, our apologies, Mr. Piekarski's line is disconnected. Please hold on a moment while we reconnect his line.

So just to recap on what Mr. Piekarski was saying, it has introduced a lot of efficiency. The internal control service strengthened [indiscernible] reduced a lot of the administrative routines and tasks that normally accompany the manual augment of [ ledgers ]. It has also reduced a lot of the errors that will be encountered when you are lodging with a very huge number of customers making payments on a continuous basis into your various accounts. So it's a process that has actually [indiscernible] a lot of benefits and also streamlined how we -- the customer experience that our distributors do get, it makes it very easy and is user-friendly. And we are continuously developing that system. An app will soon be introduced and that each of our distributors will have. And then also, they will be able to place orders directly, monitor their ledger and also put up [ request ] directly into a central system at our head office, where people will be able to receive such requests and attend to them. So that is -- these are some of the benefits of that system that we introduced. Thank you.

Thank you, sir. Also just note, Mr. Piekarski's line is reconnected.

The next question is from [indiscernible] from German Investment and Development Corporation. His question goes, does it concern BUA that cost of sales is rising faster than revenue growth and impacting EBITDA margin? And is this expected to continue in future? Thank you.

Yes. Thank you very much. Jacques, can you answer that or Mr. Finn?

Yes, actually, as we have noted in our financials, yes, it's true, the costs are rising. And this is normal in these emergency markets. Actually, the cost increase, surprisingly, was not that high at the end because -- for example, when you look at our cost of sales, they have increased only by about 30%, and you compare that to inflation which stood at approximately 27%. So you can see that cost of sales are almost in line with inflation. And as you know, some of them are in FX. And when you -- in addition, you account for a 60% devaluation. So you can see that actually, we have managed our sales very well. And yes, we know the elements they are world market driven, like the price of oil. The price of other commodities are affecting some materials. And then we have -- what we have done to offset these cost increases in order to further increase our margins in value and percentage terms is, we've done some pricing with -- throughout the year. And also, we have a volume increase. And I think this will be, next year, a major element of managing our margins will be the volume with the 2 new lines that are coming up each of 2 million tonnes approximately. So we do manage our profitability well. Then the question of exchange losses, that's something that, yes, we try to reduce as much as possible. But when it comes like the 60% devaluation, there is not much you can do. You can just do your best to always have lowest possible FX exposure. So we are confident that we are going to maintain these margins in the future. If not, even to increase them, hopefully. So with the additional revenues of these 2 new lines, if there is no other big surprise coming from the market for -- in terms of cost or other surprises, then we should be very fine for next year. Thank you.

This is Finn, just to add comment to what Jacques was mentioning here. I mean, as we all know, cement is a very volume-driven business because you have generally high fixed cost in [ SM1 ] plant. So if you have low production, of course, your margin will deteriorate considerably. So the key for us, as of any other cement producer, is volumes. So that means for the future, when we are starting up, you know the 2 new lines, January, February next year, that means we will have -- we will increase order volumes, and we also will further dilute our fixed costs, so that will really help us. And of course, as we always have to do is to look into efficiency. It's always a few gains here and there. And of course, this is part of the day-to-day business to have a dynamic organization is to try to optimize, in particular, across the energy cost, but as well also other costs. So this is a continuous thing we are really deep into. I think Mr. Jacques has answered all the other things. Thank you.

Thank you, sir. Our next question is from [indiscernible]. His question goes, can you please speak about price costs attributed to your company and how this evolves, especially in view of rising production costs?

Okay, Mr. [indiscernible], we have explained that in detail. The price cost -- our commitment to make cement more affordable to Nigerians and to also stimulate demand. And reduced price cost is in anticipation of the additional volumes that we are going to be bringing into the market in January 2024. Like it was mentioned by Mr. Finn, cement is a volume-driven business. And what all producers try to do is to ensure that they're trying to sell as much as they can. And by this, you are diluting your fixed cost. So in so doing, we'll also be able to absorb some of the effects of the price reduction. So it's not always that when you see price of your inputs going up, like most people do to go out rush and start increasing the price of your product. There is a little bit also to what the market can really absorb. And like I said, we have made a commitment to Nigerians that we are going to bring down the price of cement in Nigeria...

Ladies and gentlemen, our apologies, Mr. Binji's line has disconnected. Will you please hold one moment until his line reconnects. He will be joining us shortly. Ladies and gentlemen, please just wait one moment for us, please.

Okay. Thank you very much. Sorry, there was a glitch and I was temporarily off, but I'm now back. So what I was saying is that the price reduction was a commitment we made to Nigerians to make the cement more affordable and also in anticipation of the additional volumes we are going to bring into the market. And we are using this medium also to ask all the other cement manufacturers to also do similarly, so that we can make cement more affordable. It can be used as a tool for infrastructural development in Nigeria. And we did this, and we hope that with the additional volumes we are going to bring into the market, this are going to dilute some of our fixed costs. So it's necessarily not eroding margins, but also we are trying to preserve the space, in which we operate. Thank you.

Thank you, sir. Our next question is from Olayinka Adesanya, SBG Securities. Her question goes, thank you for the presentation and congratulations on your performance. I would like to ask the following questions. One, what regions are you seeing volume growth for your cement? Two, what is the plan -- what's the plan on logistics and distribution in line with capacity expansion? Three, why do you think the price cost has not reflected in the local market, Lagos, mainly? And four, what would you say is an acceptable tax rate we can expect for your business going forward? Thank you.

Thank you very much. Let me just answer some of this, and I'm sure also Mr. Finn will be able to add more, especially on the marketing side. The -- all the regions have witnessed steady growth. If you noticed, the last couple of years, there has been an increase in cement consumption in Nigeria year-on-year, even during the COVID period. When the whole world economy was at a standstill, Nigeria managed to witness something like 15%, 17% increase in demand. This trend has continued. It is still continuing, not at the level it was like 3, 4 years back, but it is growing, and it is across all the regions of Nigeria. In terms of our logistical preparations, we have increased the size of our fleet, and this is something we continue doing all the time to be able to deliver door-to-door service to our customers, who so wish that's been delivered to them. This is in addition to the possibility of making the cement at our factories directly by those distributors who have their own transport fleet. But we are doing quite a lot in terms of building of our logistic base, our logistic capacity and our depots so that the cement gets to all the nooks and corners of Nigeria. It is not true that the local market has not experienced a drop in the price of cement. Probably the local market you are referring to is the place where you are from or where you price that cement. So to say, you mentioned Lagos in particular. That is one thing you have to know about cement. Cement is much cheaper closer to areas of operation. We do not have any factory in Lagos or in the Southwest. So obviously, these areas will be the last to fill the impact of the price decrease. But when we have more volumes coming from our plant in Edo and definitely, some of these additional volumes going to impact on the prices in the Southwest when they eventually get there. So -- but if you actually do a survey today and compare it to the price that were available about a month ago, you will see a substantial reduction in the retail prices and also the end-user prices. So there has been a significant effect. Also when we announced the increase, there was a lot of old stock in the market, been sold at higher prices and people were not so ready absorb those losses. But definitely with the cheaper cement getting into these market areas, we will see a gradual downward reduction in the price of cement in all these segments. But of course, like I said, it will vary from one market center to the other, depending on your proximity to the manufacturing plant. Mr. Finn, do you have any contribution to this? Thank you.

Thank you, Mr. Yusuf. Just a kind of a general one. You have mentioned most of the items concerning this. But when you look into Nigeria, generally on the market side here, you can see that still the consumption per capita is relatively low compared with other of the markets in Western Africa. And you know that the cement market also shows to be very robust [indiscernible] how much influenced as we should believe toward external things like we have seen lately towards the ForEx [ situation ], price increases coming up. Yes, you will see it has some impact, but the cement is a little bit is kind of a more long-term thing. We also see that a lot of customers, which has available funds, they are investing actually in buildings and blocks rather than putting the money into the financial institutions because they are -- they feel more secure and that have been seen in all kind of prices here through the financial crisis earlier, the same thing happened. So the cement market is relatively stable despite all these things. And another factor, which we also see in particular in the north, is that we have a much more penetration in areas than before. And then [indiscernible], we also see that the agriculture activity are increasing in the quality. And that means, we also are able to penetrate areas where we have not really been before because the infrastructure is improving. So it's -- somehow, it's a positive things happening despite we also have kind of a general, let's say, official challenges as we all are facing day-to-day. But other activities are located in the north and also in the, let's call it, south central in Edo and in Sokoto. And in Sokoto, we are relatively alone up there. And the markets surrounding Sokoto is also developing pretty fast here. And so as it looks for us now with the new lines coming up, we feel comfortable that we should be able to penetrate also new areas and to be able to sell off other volumes. That is the key for the future business.

Thank you, sir. We still have 2 more questions. We still have a follow-up question [indiscernible]. What would you say is the acceptable tax rate we can expect for your business going forward?

The acceptable tax rate for our business. Today -- I think you are speaking about -- the question is about income taxes. So today, we are about 32%, which, if you compare to, let's say, to the Western countries, let's say, it's quite high. So it's manageable. 30% is not the highest, but it's on the high side. And of course, for us, we would appreciate that this tax rate is decreased in the future. And I think this will be also a good incentive for investors to see that the tax rates are being reduced. And I would say, of course, as a CFO, you may want the lowest, lowest possible tax rate. But let's say, to be realistic and to be, let's say, close to an average, I would say, an income tax rate of maximum 20%, that will be something that will be, let's say, reasonable and if this is possible because, as you know, the country now is looking for additional revenues and these additional revenues, they will mostly come from income taxes. There are also some incentives. From the government, you have [ pioneer ] status. So various companies are -- which have invested in this country into different fields have obtained pioneer status. So this is also helping to reduce the income tax cash, let's say. But in terms of profit and loss, this is compensated by deferred taxes in general. So in total, it's about the same. But 20% will be a good acceptable rate to -- in my opinion. Thank you.

Thank you, sir. Our final question comes from Julie Zhang, Washington University Investment Management Company.

Ladies and gentlemen, apologies for that. Sir, I'm just going to repeat that question. How do you view your market share and competitive positioning against competitors after the strategy to reduce prices and drive volumes? Do you expect incremental changes in your market share this year?

Yes. Thank you very much. Like I mentioned, the price reduction was as a result of our commitment to Nigerians and to make the cement more affordable. This is the major priority. But definitely, our market share will surely increase because we are going to increase our volumes, and we're going to bring these volumes into the market at a time when no any other cement -- local cement manufacturer is adding capacity at the same time as we are going to put these products to the market. So definitely, we expect to see a shift in our market share. And if you go by the informal figures for the 9 months period, you will have seen that there is like a 3% to 4% increase in our market share from about 19% to 23% for the 9 months period, going by the unaudited results released by all the companies. So the market share is going to expand. And by the time, we have new volumes, it's even going to be greater. So by next year, you will see the quantum leap in our market share. Thank you.

Thank you, sir. I have no more questions. Chris, I'll hand over to you.

Thank you very much. We do have a question on the conference call from [indiscernible] of Bloomberg.

I want to find out, you said the ex-factory price was reduced to NGN 3,500. What was it before that reduction? That's my first question. Then secondly, could you give more color on the planned IPO? Why do you want to do it? And like how much do you intend to raise?

Thank you very much. The ex-factory price was, I think, a little over NGN 4,000 before the reduction. But now from both our 2 plants, it is NGN 3,500, and that is even inclusive of VAT. So that is it. On the IPO, I did not say we are going to do an IPO. I categorically said we are not going to do an IPO. Thank you.

Thank you very much. Sir, we have no further questions on the conference call. And I would like to hand the call back to Mr. Binji for some closing remarks.

Thank you very much, ladies and gentlemen, who were spending a greater part of your day listening to our investors and analyst call for our 9 months 2023 results. We look to you joining our next call sometime next year when we present the full audited accounts for 2023. Thank you, and have a very nice evening.

Thank you very much. Ladies and gentlemen, that concludes today's event. You may now disconnect your lines.