Cementir Holding N.V. (CEM) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Cementir Holding 9 Months 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Marco Maria Bianconi, Head of M&A and Investor Relations of Cementir Holding. Please go ahead, sir.

Thank you. Good evening, and good morning, everybody. Welcome to Cementir Holding 2020 9 months results. I'm here with our Chairman and Chief Executive, Francesco Caltagirone, who is happy to answer your questions at the end of this short presentation. You should have received a presentation deck, which I'll go through quickly. If you take Page #2, just a few highlights about 9 months results. Consolidated group revenues declined by 1% to EUR 896 million, mainly due to Q2 COVID-19 impact. Cementir cement volumes sold were up 11.3%, thanks to a 44% increase in our Turkish subsidiary. EBITDA -- headline EBITDA declined by 2.1% to EUR 178 million. This number includes a EUR 5.6 million one-off impact from settlements of previous transactions and some equipment disposal, so recurring EBITDA would have been up by 1%. Higher EBITDA in the Nordic & Baltic, Turkey, China and Egypt and a lower EBITDA in Belgium, U.S.A. and Malaysia. Net financial position reached EUR 218.5 million. It's important to highlight that in the last 12 months, the group generated EUR 127.8 million of free cash flow, so net financial position declined by the same amount. Moving to Page 3, just a few words regarding how we're dealing with COVID-19 pandemic. There's no change with the previous communication. We gave priority to health and safety of our employees, and we focused mostly on cash preservation measures. We took some cost containment and CapEx deferral initiatives. We also utilized some local social contribution and tax deferral schemes. Also, in order to prevent liquidity shortage, we drew some available existing facilities, but this cash was not utilized, so we reversed them in July. Moving to Page 4, we go through each single geography, moving with the -- starting with Nordic & Baltic, that's the biggest contributor to group EBITDA, around 62% of group EBITDA in the 9 months. Here, the important points are that domestic volumes in Denmark were up by 6%, mainly due to increased market activity and favorable weather. White cement export was slightly down due mainly to timing difference of U.S. shipments that were partially offset by higher deliveries in some countries. There were also lower and -- lower export of grey cement by around 8%, mainly due to lower sales in Norway and Iceland. RMC volumes and prices were up. And EBITDA in Denmark was up by 21%, driven mainly by the cement business. The weakest country was Norway, where our RMC volumes were down by 15% in the period, mainly due to lower construction activity because the domestic economy was impacted by oil price volatility and also COVID-19. There was also a temporary closure of some plants, on average higher sale prices and the Norwegian kroner also lost some 10% versus the euro in the period. Sweden, as opposed to Norway, had favorable weather and robust construction market. RMC and aggregate sales were up by around 5%, and EBITDA was modestly up. Moving on to the next division, Belgium and France on Page 5. You can see that grey cement and clinker volumes were down by 5%, a modest decrease in Belgium, more pronounced in the Netherlands with a 15% decline and in France with a minus 4%. There was a sharp decline in March and April due to lockdown, around 30%, but was also a strong rebound in May and June and also August and September with an increase between 7% and 10% in volumes. RMC volumes were down around 13% and a rebound here as well from September onwards. Aggregates volumes were down 10% for the period, with June and September up by 6% and 3%, respectively. Overall, for this region, EBITDA declined by around 14.9%. Moving to Page #6, North America, which accounts for around 9% of our EBITDA. Here, white cement sales volumes were slightly down from last year, around minus 1%, with most of the contraction falling between April and May, again, due to COVID-19. There were lower sales, mainly in the state of Texas, Pennsylvania and Florida, but higher sales in California. Overall, EBITDA declined by around 9.4%, also due to declining average pricing and higher distribution cost. Moving to Page 7, Asia Pacific, which accounts for as well another 9% of our consolidated EBITDA. China was quite interesting because the white cement, clinker sales volumes declined in the period by 5.5%. This was due to the plant shutdown between January and February of this year, but EBITDA was actually up double-digit by 16%, thanks to higher sales prices and benefit from lower fuel and electricity costs. In Malaysia, on the contrary, white cement declined more sharply by 31%, mainly due to activity restrictions from March to April of this year. The local market is somewhat struggling to recover, and some large customers are facing some problems related to health and safety measures. Export volumes as well were kind of weak, 15% down, due to delayed clinker shipments to Australia. They were only partially offset by higher shipment to other countries in Southeast Asia. Overall, EBITDA in Malaysia declined by 22% for this reason. Moving on to Page 8, Turkey. Here, we can see that grey cement volumes increased by 44%, in the domestic market by 27%, mainly driven by infrastructural projects near Elazig and new project in Trakya and Kars. Export nearly doubled thanks to new market opportunities. Also, RMC volumes were up sharply by 34% with higher prices. There was a devaluation of around 20% of the Turkish lira versus the euro. Despite that, we posted a strong EBITDA improvement from minus 8% to minus 5.4%, including a EUR 3.1 million one-off cost from some waste equipment disposal. Moving to Page 9, Egypt, accounting for 4% of group EBITDA. White cement domestic volumes were down 2.5%, again, due to lockdown measures and logistics limitations. There was a significant recovery from June to August. Also, export volumes were up 11%, and EBITDA was up sharply by 40.3% due to higher overall volumes and lower fuel purchasing cost. There was also an improvement on the EGP-euro exchange rate by 7.5% in the period. Moving then to the last slides. I jump directly to Page 11, where you have the full year guidance. As you can see, the group is reaffirming its guidance in terms of revenue and EBITDA with EUR 1.2 billion and a range of EUR 230 million to EUR 240 million, respectively. And we are improving the guidance on the net financial position to EUR 160 million at year-end from previous guidance of EUR 180 million. And this remains with a CapEx of around EUR 60 million as before. So this ends my short presentation, and I will then leave the floor to any questions you may have for our Chairman and Chief Executive.

[Operator Instructions] The first question is from Mr. Matteo Bonizzoni of Kepler.

I have 2 questions. The first one is related to the EBITDA guidance, which you have reiterated. EUR 230 million, EUR 240 million would mean a decline of 7% to 11% year-on-year, when in the 9 months, you have posted a decline of just 2% year-on-year or plus 1% excluding extraordinary charges. And in particular, we have seen a strong improvement in the third quarter, which I would like to know if it's sustainable. I mean if I look at your guidance, maybe not, but if I do look at other indicators, maybe yes, because in Q3, we have seen an EBITDA growth of around what was 12% after an 11% decline in the first half. So I mean the question is why you are reiterating this EBITDA guidance, which would imply a sharp decline in Q4 despite the signs of improvement, which we are seeing in the third quarter? And the second question is related to this improvement, which we have seen in the third quarter. Looking at EBITDA by country, not so much Scandinavia, which was overall in line with the good trend already posted in the first half. But for example, I see here Malaysia rather than smaller countries like Egypt or Turkey, which posted a plus EUR 3.5 million EBITDA in Q3, so totally different from the first half. If you can elaborate a little bit on the sustainability of this sharp positive inflection, which we have seen in some of these countries.

So about the guidance of -- on the EBITDA, for sure, we maintain a cautious approach because the outbreak of COVID second wave is quite, let me say, big and mounting some -- in some of the countries in Europe. The data so far and even October showed that, let's say, in terms of recurring EBITDA, without any exceptional plus or minus, we are more or less on track with last year. So from the moment that we are a few weeks away from the end of the year, and we really don't know what will happen. And if we will have, let me say, further lockdown in some countries, we want just to be cautious. The numbers [ says ], what you have just underlined that we are more or less in line with last year. And so this is our -- let me say, our expectation if nothing changed in terms of macros and the COVID impact. Net financial position, we are, let me say, updated the number because we see that we might even increase a little bit, let me say, or decrease the net financial position by the end of the year. About the performance of some countries, especially Turkey or Malaysia or Egypt, we think that the rebound that we are seeing, except for Turkey, that just yesterday or 2 days ago fired the Financial Minister, and we saw the step-down of the Central Bank Governor, we don't know what will happen in the short term. But for sure, a country that today has 12%, probably higher inflation, real estate is a defensive investment. So the rebound that we are seeing is some -- partly due to the sharp decline of last year, but also partly because the domestic player, investors are just putting their money in real estate to protect probably from I think a quite big wave of inflation that will arrive shortly. And also important, inflation is quite high because the devaluation against the euro and dollar, I mean 1 year is nearly 50% from 6.5% to close to 10% against the euro just from January 9 months. Today, I can say that besides France and Belgium, where we see a slightly slowdown due to the COVID impact of the last weeks, the broad perimeter seems, let me say, to [indiscernible] in -- as we did in the last 9 months. I want also to what I already said last time that the impact that we estimate so far in terms of revenues and EBITDA was about EUR 50 million of revenues and EUR 25 million of EBITDA. This means that if this should have been a normal year, probably, at this time, we would have been at EUR 25 million more in EBITDA and EUR 50 million more in revenues. This also what we expect that might happen if next year will be a normal year. I don't know. I don't forecast. I don't really know also about the news that -- the news flow today about the COVID vaccine. But the potential of this company, especially about the investment that we made for seventh year [ 4-0 ], the digitalization and also the impact of the environmental investment that will arrive in the next, let me say, a couple of years, let me say, should sustain the result of this company, I mean, in the medium term.

The next question is from Mr. Bruno Permutti of Banca IMI.

I have a few questions, if I may. The first one relates to Turkey. I would like to have your view on -- in general view on the country, where you expect the Turkish lira could arrive. And you said that there were some new opportunities for export. So if you can give us some details on the growth of the volumes, how much was related to export? And what do you expect for the Turkish market in the next few months? The second one relates to energy and fuel costs. I would like to know if you had some benefit in the last few months from this point of view. And now probably some energy costs started to rebound, and I'd like to know what you expect to have next year as an impact or in the last quarter of the year or in beginning 2021, if you expect to have an increase in energy and fuel costs. And the last one concerns your net debt position. It's quite low and the guidance you gave for year-end has been improved. So do you think that there is -- there could be some room for M&A? And if yes, which are your country of interest and eventual area of interest?

Okay. So about Turkey consumption, for sure, I mean, we increased the export from 400,000 to -- I mean, yearly figures I am giving you, to probably 750,000, 800,000 tonnes. On the other side, we have to say that Turkey, this year due to the very sharp decline in the currency, increased the export as a country in year -- on a yearly base from 10 million to 30 million. So 3x the cement that usually, let me say, is exported from Turkey. And this also because the internal price is lower than the export price. So what we are expecting is that probably by the end of this year, without, I mean, recurring EBITDA, without exceptional items, we should, let me say, end up close to breakeven EBITDA level. That means nearly EUR 8 million better than last year on recurring EBITDA. And I don't know what will happen, let me say, to the Turkish lira, just because when we have this, let me say, reshuffle in the government and in the Central Bank level, I don't know that what will be the policy adopted. I think that, let me say, a fair rate for Turkish lira against euro, considering the real inflation, should be between 8.5%, 9% and not a 10%. So probably, we have some room of recovery against the euro and dollar, probably another 5% to 6%, 7%. But this is just my feeling. I'm not a macro forecaster. In terms of energy price, let's say, this year, we benefit like all the sector of lower energy price, both from, let me say, in terms of real price and in terms also of a weaker dollar against euro. Next year, we expect to have on the electrical energy, electricity flat towards more smooth decline in price. On the coal, on the pet coke, depends on the exchange rate of dollar-euro because, let's say, we consolidate in euro. And so, so far, we might see an increase compared to this year of nearly EUR 10 million. But this might be, let me say, balanced by a weaker dollar that we expect for next year. I don't remember...

Net financial position.

The net financial position, I'd say, is solid. It's even better than what we forecasted, and I hope also that will be even a little bit better by the end of the year. And we already stated today, it's difficult to plan an agenda of M&A because, as you can see, the economy is captured, let me say, in terms of rebound from place to place. For sure, as already stated, what we are looking for is to have a greenfield in Southern Asia -- Southeast Asia for a white new plant. And just for doing M&A, but not now, and I don't think and not even in the next year, we will look at Central Northern Europe and U.S.A. and Canada. Even if in U.S.A., especially the multiple are very high, and we are not into, let me say, invest at that -- this multiple. So let's say, we are, let me say, increasing our capability to invest, lowering our net financial position. But as you know, as also we did in the last 20 years, we just invest when we find the right opportunities.

[Operator Instructions] The next question comes from Michele Baldelli of Exane BNP Paribas.

I have a couple of questions that relate to the sustainability of margins in Egypt. And then also in the Turkish market, if you can give us a little bit of flavor on what you think where the margins should ponder in the next few quarters. And another question on the reverse, U.S. margins were pretty weak. So I was wondering if you can give us some color on the driver and how to bring back profitability to what it was last year.

So about Egypt and Turkey, I think that, let's say, starting from Turkey, 90% of the player are domestic player in Turkey, so they produce revenues in Turkish lira. And you know that since probably 1, 1.5 years, every player also in the steel sector are forced to pay energy in dollars. So this sharp increase in exports from Turkey is due because otherwise, especially the domestic player, don't have the currency to pay electricity and also [indiscernible], so -- and also for this reason, the price, and this is also one of the reasons we also started to go towards a positive EBITDA is because due to the inflation or the declining value of the Turkish lira, the important inflation of the energy, the price, let me say, increase nearly every month, let's say, in Turkish lira. In Europe, quite a little, but, let me say, it's enough to bring back, let me say, to 0 EBITDA level. I think that this movement should continue next year, because most of the domestic player have debt in strong currency, dollar and euro. And so we've evaluated Turkish lira, they need more Turkish lira to pay back to that debt. In Egypt, let me say, we think that also here, I hope that we should continue on this path of recovery. The security issue, it seems, I mean, this year, we didn't have any major issue. The situation is normalizing. Also a few weeks ago, the flow of gases from Egypt to Israel restarted. And we think from the moment that we export from Egypt nearly 60% that the market should -- we export only white cement. And in the domestic market, we just -- we have the 50% market share, together with the other unique -- the only player in the white cement. So we think the position is start to stable and improving for the export. For U.S.A., [ despite ] the COVID, the election, I mean, the market was also weaker, frankly speaking, and looking at the numbers just from a euro point of view because we saw nearly 8%, 9% of devaluation from dollar to euro. So I don't think that I don't see that the demand -- the result in the U.S.A. is weak. It depends, I mean, the future of the COVID that now we have to, let me say, it seems that more or less this elections is, let me say, finished. And I am, let me say, besides the COVID, let me say, moderately optimistic for the U.S.A. market for white cement for next year.