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 First Half 2021 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. Please go ahead, sir.

Thank you, and welcome, everybody, to Cementir Holding half year results conference call. Good afternoon and good morning to everybody. You have received the presentation deck. So I will make a short presentation, go through the deck and then leave the questions to Mr. Caltagirone, who is here with us today for any questions you may have. So starting with the highlights on Page 2, the results were positive. Revenues reached EUR 664.5 million, up 16.5% from last year, thanks to good performance in all geographies. Cement volumes were up 18.7%, driven by Turkey, Belgium and Denmark. EBITDA was up 36.6% to EUR 133.5 million. And there was a higher contribution from main geographies like Turkey, Belgium, and to a lesser extent, Asia Pacific and Egypt. EBITDA margin was up to 20.1% compared to the 17.1% of the first half of last year. 2020 figures were impacted by COVID-19, and there were also EUR 5.6 million one-off on last year's figures. EBIT was up 83% to EUR 79.0 million, and net profits reached EUR 47.9 million from EUR 20.0 million of last year. This is after EUR 9.7 million of financial charges and EUR 6.9 million (sic) [EUR 16.9 million] of taxes. Net financial debt reached EUR 137.6 million, down over 51% over the 12 months from EUR 142.9 million of last year. This includes EUR 23.0 million of share buyback and the dividends. Moving on to the different geographies. So starting with the most important, Page 3, Nordic and Baltic accounting for over 52% of our results. And in Denmark, both gray and white cement volumes were up due to increased general market activity. White cement exports in particular were up over 22%, thanks to higher deliveries across the board in Europe, but also in the U.S. Gray cement exports were down 11%, mainly due to lower sales into Norway. RMC and aggregates were also up by 11% and 30%, respectively, from last year. EBITDA was slightly down by 2.5% in Denmark due to cost inflation on raw materials, electricity and other operating costs. Norway RMC business was up 3%, and there was a significant recovery from March onwards with the kickoff of some important projects. It's important to notice that the Norwegian krone appreciated around 5.5% versus the euro in the period. Sweden, the market was robust with favorable weather and a strong construction market where RMC and aggregates volumes were up 19% and 9%, respectively, from last year. Also in Sweden, the Swedish krone appreciated 3.5% versus the euro. Moving on to the second largest division, Belgium and France, on Page 4. As you can see here, again, cement volumes were up around 10%. The positive trend was in Belgium and France, whereas the Netherlands and Germany were relatively weak, although much less important in terms of size. Ready-mix volumes were up 30%, thanks to some important projects kick-off. And also aggregates were up 10%, thanks to strong domestic demand and exports to France. Operating leverage and some maintenance costs being postponed during the quarter allowed the EBITDA to increase by 25.2% in the period to EUR 29.1 million. There was a slight negative impact from higher raw material costs. Moving to Page 5 to North America. As you can see here, sustained volume growth also in the U.S., up 13%, especially in the areas in the state of Florida and the York region, but also thanks to attributable base effect. There was also a 1.2% increase in revenue despite a currency translation impact, which was down on average in terms of FX by 10% versus the euro. EBITDA was, however, up 8% thanks to good cost control. Moving on to Asia Pacific on Page 6. As you can see here, China reported strong demand with white cement and clinker sales volumes up 16% in the period. EBITDA was up 22.6%. Malaysia, here white cement sales were up almost 48%, whereas the domestic market was up 25%. In June, there was also a new lockdown in Malaysia, which negatively affected the activity both in the domestic and the export markets. Export volumes were up 50%, and there were increased exports of cement and clinker to Australia, the Philippines and Bangladesh. EBITDA overall was up 79%, despite the negative impact of increasing fuel and other fixed costs. Moving to Turkey on Page 7. As you can see here, gray volumes increased by around 29%, with domestic sales actually up 40% with strong demand in the Marmara and Anatolian and Aegean regions. Exports were down by 8%, and average cement prices were up because of currency according to different local trends. RMC volumes were up strongly by 80%, thanks to the start of new infrastructure projects and the opening of some new plants. In the period, we have to record 33% to Turkish lira devaluation versus the euro. Overall, there was a strong turnaround in EBITDA and across the board, including RMC and the waste business. We have to remind that 2020 figures included EUR 3.1 million of one-offs. The last area is Egypt on Page 8. So you can see that here, again, white cement domestic volumes increased significantly by 30%. White exports were up by 20%, and overall EBITDA was up by 41.7%, thanks to operational leverage and good cost control. In the period, the Egyptian pound devalued by around 8.5% versus the euro. The last slide is about the revised 2021 full year guidance. So we are upgrading our guidance for the year. We expect now revenues of EUR 1.35 billion from previous EUR 1.3 billion, and EBITDA range from EUR 295 million to EUR 305 million, from EUR 285 million to EUR 295 million of the previous guidance. And net debt unchanged to EUR 30 million due to mainly a higher cash outlay than estimated due to the buyback. And then the CapEx is unchanged at EUR 95 million. Obviously, these forward-looking indication does not include any new outbreaks on the COVID-19 pandemic. This ends my very short presentation. And I will now leave the floor to our Chairman and Chief Executive, Francesco Caltagirone, who's happy to answer any question you may have.

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

Yes. I have 2 questions. The first one is related on the -- on your view on the balance between pricing and cost inflation for the year and in general going forward. So clearly, cost inflation will remain an issue. What's your view on your ability to offset that in different countries for the second half of this year? For example, we have seen in Denmark, a little bit of erosion on that slide on the margin. Can you elaborate a little bit on your key geographies? And the second and last question is as regards to your thoughts on this Fit for 55 draft, which will basically significantly increased the decrease of the free allocation for the CO2 from now to 2035. Basically we are going, if this draft is going to be approved, that is to be seen as towards basically a cancellation of the free allocation in 2035. So there is a lot of time to act, but it's a significant change from the current legislation. What are your thoughts about this draft?

About the cost inflation, I can say that compared to last year, we expect go for solid fuels and electricity, an increase across the -- over the 12 months of about 22 million of euro compared from last year. And EUR 7 million on solid fuels and EUR 15 million on electricity. In terms of the increase in dispatching cost and sea freight, we are talking about a minor increase of around 2%, 3%. So this is our estimate, and we don't think that we might face significant headwinds in the second half, more than what we have already estimated for the full year. In terms of pricing, for sure in the first half, even because last year was less affected by the COVID, the Scandinavian region, we have started, let me say, to consider a price increase in the second half of this year for some products. The market in Scandinavia is a bit different compared to, say, the other geographies. Usually, we set the price for the full year during October, November. And for this reason, in the first half of this year, we didn't consider this sharp increase in this, especially in energy. And so for this reason, we suffered a bit. But we think that for the second half, the price increases should outweigh the increase in energy. So we should go back to let me say a normal profitability. Even because the demand is quite strong for every product, so starting from white cement to gray and also ready-mix and aggregates. And in raw materials, we see a scarcity of supply even from the competitors. So there is, let me say, it's more easy to pass the price increase because there is no availability of cement and ready-mix in most of the European market and not just in Scandinavia. For my thought, my thinks about Fit for 55, about the free allocation and what will happen to this sector, I can say that, as you know, we, in our long-term plan, considered a decrease of 30% by 2030 by a linear decrease of 3% each year for the next 10 years. Now what it seems that we will have this amount of free allocation that will be kept for the next 5 years until the end of 2025 as they are today, and then will decrease the 10% from 2026. So considering our linear model, we think that until 2027, so by the reduction of nearly 70% of this amount, we are still in our, let me say, plan and trajectory. The other thing, as you know, today, I think that this document is mainly a technical, let me say, proposal that should be backed by the 27 countries in the next, I believe, couple of years. I don't frankly believe that we should keep this kind of cap, especially in the -- after 2030, because as you know, today, there are not technical, let me say, solution in carbon capture. There are sequestration, users of the CO2. So as we already seen even from the automakers, also the steel production, it's not easy just to implement a timeline scale of this investment because there is no technology. So what I can say is that until 2027, for us, it is more or less as it is today. Then we will have to see. But I think it's difficult to forecast now from 6 years ahead what will happen and what will be the technology, but also what will be the final product of this here, too, because it's almost -- it's all even quite clear that part of the price inflation that we are seeing in most of the raw material is produced especially in Europe by the increase of the CO2 price. So then at the end, I have already stated in one, let me say, in the previous meeting that we had that I don't see that the European community can allow the price of the raw material, starting from electricity that is already double or even more than the price of last year, that can keep continue increasing with this pace. And just because we have to finance something that is unknown so far. And so from the moment that electricity especially will hit all the people living in Europe and affect their balance sheet, I don't see that this, let me say, part will be straightforward. I think that there will be a lot of challenge in the next 2 years from many countries. Because I think it is good and we have to do our best to capture the emission, but then also we have to consider that it's not only an issue of the industry, widely speaking, from steel come to cement, but it's also about every people that have to change its own behavior. And probably to change the balance sheet because also plastic is affecting our everyday life, and probably plastic will be affected in terms of price from 100% to 300% if the CO2 price will go towards EUR 100. So this is my, let me say, early thought about this, but for sure, we have to build in the next few quarters. And I think it won't be a straightforward path. For sure, as I already said, cement is something, together with steel, that we need to change our economy and the way we [ exhaust ], for sure. I expect that every price increase, even because we will have these broader adjustments that will be in place from 2026, as I already said, that we limit the lending of the various products from outside the European market. So this will affect the price, for sure.

The next question is from Tobias Woerner of Stifel.

And also thank you for specifying the cost of the increased fuels and electricity costs. With regard to that cost, can you give us an indication of the EUR 22 million, how much you've incurred in the first half and how much in the second half, or maybe just a weighting of that increase? That would be my first question. The second question relates to Turkish cement prices. Maybe you can give us an idea what the average price was for the first half, maybe in euros or in Turkish lira, whatever you prefer. And what rate it has exited June and where we are at now? And then just thirdly, in Egypt, there was just an agreement struck for the gray cement industry around capacity utilizations and optimizing pricing for the gray cement industry. Will that have an impact at all for you as the white cement industry, or is it something we can ignore?

Starting from the last question on the gray cement. Egypt will not affect whether white cement. Mainly the white cement is exported and the gray segment is mainly domestic. For the cost inflation on energy more or less is 50% and 50%, because especially we have a very low inventories in coal last year due to the sharp increase of -- the sharp rebound of every market in the last quarter of last year. And mainly in electricity we have, let say, a contract in place that, let me say, lets us to spread all the increases. So this affected our balance sheet in the first half of around EUR 10.5 million and will be EUR 11.5 million in the second half. Regarding Turkey, the price scenario is quite positive for the region. When you have inflation up to 16%, 18%, you have to increase the price nearly every month. And then also the demand for real investment are still good. And also, the export from Turkey is very healthy for 2 reason. One, because with the CO2 at EUR 50, cement exported from Europe especially to Africa is, let me say, come to zero because there is not any more convenience. And so they replaced part of, let me say, these exporters from Europe, and also because the African market, especially the West Coast is experiencing disruption for COVID, especially in the harbor. And so it's also, let me say, I think that even this year and next year, the extra capacity of the Turkish market that will be mostly sold for export. That this year, as last year peaked around 30 million tonnes from an average over the last 10 years of around 10 million tonnes.

[Operator Instructions] The next question is from Bruno Permutti of Intesa.

A few questions. The first one relates to the utilization rate of your capacity in Turkey. I would like to have an idea of where you are now. And related to this, what is the outlook you imagine for the operating profitability in the country? So if you -- what could be a normalized operating profitability when you have recovered the utilization of your capacity And a second point was more a strategic -- a medium-term strategic outlook. So you are recovering the situation of Turkey that was probably an issue in the last few years. Probably also Egypt has returned to normality. So you have a very, very low net debt, or you plan to have a very low net debt by year-end. So from the point of view, in the midterm, what is the growth strategy? What could be the growth strategy for the group? So can we imagine that -- how you imagine the group in the next 2, 3 years in terms of possible expansion, possible growth drivers?

Okay. Starting from your first question, today, in Turkey, we have, let me say, for the whole year sales about EUR 4.2 million, EUR 4.3 million, both of cement and clinker on a capacity that is roughly EUR 5 million. Of this, EUR 4.3 million, EUR 800,000 are exported. So this is the situation. The price environment, as I say, is quite healthy. And the average profitability in Europe because then there is also the headwind of the devaluation of the Turkish lira, we think that is, as I already said, that can go back between EUR 30 million, EUR 40 million of EBITDA. So this is the average where we expect that we can land in 2 or 3 years. About our strategy, as I said, we are, let's say, near zero net debt by the end of the year. Or the debt that we will have at the end of the year is the debt that you produce for the buyback. So from the industrial point of view would have been zero because we are, let me say, more or less going to spend nearly EUR 30 million for the buyback that will end early in October. Today, it's difficult, as I say, to value an asset for this Fit for 55 project, because still we don't have the final, let me say, approval and which will be the final allocation, the cost of CO2 or if we did all the technology that we might develop as a sector for carbon capture and sequestration. It is just betting at the casino that where you can earn a lot of money and waste a lot of money. So as I said, I don't believe that for this next year we are going to make a major, let me say, yield everywhere. Because with both tax adjustment was the desire to protecting, let me say, the domestic industries. Europe wants the other countries to converge to its own, let me say, system. So even investing in, let me say, emerging market or even China, today, it's difficult to evaluate because if they start to converge in the next 2 or 3 years, then we have to understand at which level which will be the possible, let me say, cap of the allowance. As you know, China pledged to reach the year, the neutrality by 2060. That is [indiscernible], but we don't know what will happen from now to 2060. And this is a long-term, let me say, sector, and we cannot invest in the sector just having, let me say, the next 5 or 7 years clear. So I think that the M&A activity in the sector, it will be quite low. This is my --. The strategy is to continue then to develop the low CO2 intensive that we are mainly aggregates and partly ready-mix. And also on the size product that you can, let me say, produce with the white cement. They are routinely driving small cars that we are already producing, for example, in Malaysia or we ship for the Australian market. But frankly speaking, I think that these are minor deal. I think that what, let me say, can support, and we believe that we are also quite ahead in our 3-year plan because the results are supporting us, that there will be a scarcity of cement in the next 5 to 7 years, even because what we have seen so far is just the demand from the household for restoration and the main flow of European funds, for the recovery funds will arrive starting from next year. So this will be an extra demand that will add on this, let me say, situation. So we expect in terms of growth, and even the year compared to last year that was anyway, currently on revenue, we expect that we increase our revenues 10%. But keeping the same perimeter is not so easy. But anyway, this means that quantity and price are, let me say, addressed in the right direction. And I see, as I already explained last time, that we are going to experience a market that for the next 5 to 7 years that probably is completely different than the market that we have seen for the last 13 years after [indiscernible]. So with the market that is capped in terms of capacity because of the CO2 allowance, nobody is, let me say, supporting to increase or revamp the plan to Europe. And then with the total tax adjustment to the flow of cement will be all limited, or will arrive with the next cycles of [indiscernible] that this will support an increase of the price of white. So this is a modern theme. So today, for M&A, frankly speaking, I don't see, let me say, reason to invest or to rush to invest because we don't know what will be the cash flow for the medium and long term.

Next question is from Michele Baldelli of Exane BNP Paribas.

I have 2 questions. The first one relates to the export from Cherokee. Because from the slides that you presented, there is written that exports are down. I imagine not through Africa, but probably more through Europe. So I was wondering why, and if the cost of transports and the, let's say, shipping of goods by ships has been one of the reason. The second question relates to the increase of the guidance. If you can just elaborate the 2 or 3 regions that you see performing better than the previous expectations. And the other questions relate to the Turkish margins, because my idea, but maybe I'd be wrong, that probably already this year, EBITDA margin can be on the double-digit figure. So I was wondering if you share this thought or you want to be more cautious.

The export from Turkey decreased mainly because the internal market is healthier than the export market. Then we have to consider one thing that today, for example, with the actual trade, we closed nearly from EUR 15 to EUR 25 to ship cement, large vessel to Europe, but you avoid EUR 50 of CO2. So this is the game and because why Turkish market, the export from Turkish market is so healthy. The guidance, we have increased the guidance, first of all, let's say, because if you have the, let me say, what we have done in the first half, and then if we add the second half of last year, you land around EUR 300 million of EBITDA. So from the moment that we expect that probably we should even be a little bit better in all the region. There is not a specific region because, as I said, today, Turkey, Norway, Belgium are performing better than expected. But let's say in Turkey, we might expect a headwind from exchange rates like what we experienced in the first half from the USA. But also understanding our market, I think it's, let me say, well positioned, especially the Sweden market and the Danish market. So the guidance, let me say, as what we have seen in the first half is better for every market, let's say. More or less, they will contribute. But for sure, I expect that in the second half probably, we might see a better performance from, let me say, Denmark than what we have seen in the first half. Market in Turkey, yes, we are, let me say, close to double digit in terms of profitability.

The next question is from Alessandro Tortora of Mediobanca.

I have 3 question, if I may. The first one is on the U.S. market, if you can elaborate a bit more the scenario because we observed an improvement in the second quarter. So I would like to understand if any price pressure on you, you mentioned the past are now basically indefinitely over in this market. The second question is on the level of allowances and the potential, let's say, deficit that you may have next year. If I remember well, you mentioned something between 600 tonnes, okay, something like that, or 700. It depends on that. So just to understand how you're going to deal with that, if you're going to purchase on the market this deficit of allowances, and if you're fully confident then to pass through this cost through price increases. And yes, these are the 2 questions.

The U.S. market -- no, the U.S. market is performing better. Besides the issue of the currency rate, the price pressure is not anymore, especially because the trade rates are so high that especially the other small players are, let me say, arriving with more difficulties in the United States. And for this reason, I'd certainly say it's easier, and we have done a price, let me say, increase during the last months. The second question was about the allowance. When we say we are working hardly to decrease our need, especially because, let me say, as I say, we think that early next year we will have the natural gas in [ Ogburg ], and it seems that also we will have in the second half of 2023 in Belgium. As you know, switching from coal to natural gas, we cut the 30% of CO2 emission much faster. And then also working on the mix and the rollout of the future stem is going better. So I hope that probably in the update of the investor, the rolling updates that we will do at the end of this year, because we will release early next year, probably we can cut during especially the 2021, 2023 or the 2022 2024. That will be the next, let me say, industrial plan; cut significantly the need of the CO2 that we have probably. I hope that, let's say, will be around the 50%. And this is my feelings that we can cut this for the next 3 years, few years. In terms of how we can finance, let me say, because we already put in every contract everywhere, and the supply of heavy cement players, this is the cost. The cost of CO2 is a line of cost. So if the cost is higher, then probably the reason that we are already sharing is that there is a lack of material in some markets already right in the U.K. But I expect that in most of European country, that the cement production and most of the markets are short in new cement, especially for these infrastructure, the amount of cement that will arrive in the next of years. So I don't think -- and this is, let me say, our view in our industrial plan that the price of the CO2, even if it will be around EUR 50 or EUR 70 will be a major, let me say, issue to fulfill our industrial plan.

Okay. Okay. And then sorry, I recall the third question was on Denmark. Are there any specific reason why you were not able to, let's say, pass through the cost inflation through price increases, also in light of the good, the strong, let's say, volume trend you mentioned in the country?

No. I explained before that in the Danish market, usually, you signed the 90, nearly 90% of your supply in October, November. And we didn't have last October, November a view of this price increase. So for sure, for the contracts that we already start to book and we will finalize in October, November this year, they will include all the price and cost increase inflation that we had during this year. So for this reason I expect, especially in the last quarter of this year, a recovery of profitability just because there is a mismatch, because in most of the other markets, you sell just 1 or 2 months ahead. In the Danish market, even because we are the only player, we set the price for the full year. So this is the reason. Not because we are not able to pass it right. But if you sign a contract, then you have to fulfill a contract for this reason. We are going to increase the price, let me say, for the next year, for sure.

Gentlemen, there are no more questions registered at this time.

Then thank you very much for your interest in Cementir Holding, and we wish you a pleasant rest of the day. Thank you.

Thank you. Bye bye.