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 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. Good afternoon and good morning, and welcome to Cementir Holding 2021 9 months results. My name is Marco Bianconi. I'm here with Francesco Caltagirone, our Chairman and Chief Executive, who is ready to take any questions you may have at the end of my short 15 minutes presentation. I'm here also with [indiscernible] of the Investor Relations team. We've distributed the press release and a presentation deck. So I'm going to go through the presentation now. Starting with Page 2, with the 9 months results highlights. The group reported results in line with expectations, with revenues up 12.4% year-on-year with cement volumes up by just over 8%, driven by Turkey, Denmark and Belgium. Also, aggregate volumes were strong, up by almost 10%, and ready-mix volumes were up over 20% year-on-year. EBITDA reached EUR 215 million, up almost 21%. These results are due mainly to good performance in Turkey, Belgium, to a lesser extent in Asia Pacific and the U.S. EBITDA margin expanded to 21.3% from 19.9% in the first 9 months of last year. We have to remind you that 2020 figures were impacted by EUR 5.6 million of one-offs. EBIT reached EUR 133 million, up 36.5% from the year before. Profit before tax was up 49%. And net financial debt reached EUR 100 million and was reduced by over EUR 118 million year-on-year, including EUR 28.8 million of share buyback and EUR 22.3 million of dividends paid. Moving to Page 3. On the main geographies, Nordic & Baltic, which accounts for just over 50% of our EBITDA, here, result was better in terms of sales and trading across all business lines with domestic cement volumes up 7% due to increased market activity. Also, white cement exports were up 6%, and also ready-mix and aggregate volumes were up strongly, up 8% and 27%, respectively. EBITDA in Denmark was down by 5.5% due to higher raw materials, fuel and electricity and operating costs, mainly in the cement business. In Norway, ready-mix sales volumes were up by around 6%. And there was after a slow start, since March, a significant recovery due to the start of some important projects. The Norwegian krone appreciated around 4.5% versus the euro. In Sweden, there was a favorable weather and robust construction activity, leading to sales volumes up in ready-mix and aggregate by 9% and 5%, respectively. The Swedish krona appreciated around 3.9% versus the euro. On Page 4, Belgium and France, which accounts for around 22% of group EBITDA, here cement volumes in the period increased by around 3%, thanks to favorable weather and market growth. Ready-mix volume growth was around 19%, thanks to a kick-off of some major projects in the period. Aggregate volumes were up 10%, with strong domestic and exports also to France. EBITDA in the period was up almost 16% to EUR 47.9 million, benefiting from operational leverage and better pricing. On Page 5, North America accounting for around 8% of group EBITDA. Here cement -- white cement volume growth was up 6%, mainly driven by Florida and while New York, California and Texas results were more or less in line with last year. Revenue was broadly unchanged also due to a currency translation impact because of the 6.3% U.S. dollar devaluation versus the euro in the period, but EBITDA managed to go up by 9.5%, thanks to good cost control and -- despite higher purchasing costs. Asia Pacific, which accounts for around 8% of group EBITDA, here in China, reported white cement and clinker sales volumes up 8%, with an EBITDA up by over 16%, despite higher raw material and fuel costs. In Malaysia, white cement volumes were up by around 21%, driven by exports and -- where volumes grew by around 24%, mainly driven to better sales to Australia and the Philippines. Export pricing declined due to mix effect and some FX impact as well. EBITDA overall increased by around 3.4% in the period. In Turkey, here, cement sales increased by over 63% in local currency, with cement volumes up 8%, 17% in the domestic and minus 23% in export. Average cement prices were up in local currency, and also ready-mix volumes were up strongly by around 40%. We have to notice that in the period, the Turkish lira devalued by around 28% versus the euro. Despite that, the group reported strong EBITDA improvement year-over-year. And we have to remind you that 2020 EBITDA included EUR 3.1 million of one-off costs. The last business unit, Egypt here, accounting for only 3% of group EBITDA. White cement volumes increased by 20%, and export volumes increased by 30%, and overall, EBITDA was up by 6.5%. This is despite a 5.5% devaluation of the Egyptian pound versus the euro. Last slide here on the full year guidance, which is unchanged after an upward revision after the 6 months results. So we expect for the year revenues to reach around EUR 1.35 billion and EBITDA range between EUR 295 million and EUR 305 million, net debt of around EUR 30 million, and a CapEx of around EUR 95 million. So this ends my presentation. Now Francesco Caltagirone is happy to take any questions you may have. Thank you.

[Operator Instructions] The first question is from Bruno Permutti with Intesa Sanpaolo.

I have a few questions. The first one concerns the Baltic region. I would like to understand better -- I saw that there was an improvement of the EBITDA margin in Norway and Sweden and a decline in Denmark due to the explanation you gave about the energy cost, the purchase cost. I'd like to understand the dynamics there. So what we have to expect in the coming quarters? And if -- what are the reasons for the difference between the 3 countries? And second point concern the -- concerning Turkey. If you can give us an idea of what is going on in the Turkish market. So what are your expectations in terms of volumes above all and prices for the full year? And so if there will be compensation in terms of prices and of higher demand of the significant Turkish lira depreciation. And if I may, a third question, more general on the CO2 rights. If you can -- when you outline your 2023 outlook and financial targets, you assume a shortage of CO2 rights for if I remember, 600,000 tonnes per year. I would like to understand if this figure is still a correct assumption. And how you will manage -- how you think you will manage the CO2 rights price increase if there is room in your view to transfer on prices the CO2 price increase we are seeing on the market. And in general, I would like to understand, which is your view on the market as a whole because it seems like there could be a significant demand in many countries for infrastructure and at the same time, I would like to understand if you see room for a significant price increase in the next few years for cement?

Okay. So starting from the first question about Baltic region. The reason why Denmark, it seems that underperformed the other Scandinavian countries, mainly because we produce cement only in Denmark. And we have ready-mix in Norway, Sweden. And so most of the cost inflation hit the cement. And then the second reason is, because in Denmark, we signed mainly the 80%, 85% of the contract for the year during this season. So we have signed last year, 12 months ago, with a different cost basis. And so we will see, for sure, an increase in the profitability next year because now we are signing the contract, and we are, let me say, including the full amount of cost inflation from energy to electricity. The second question about -- is about Turkey. Turkey is continuing to have a very healthy market, mainly boosted by 2 reasons. The first one is internal. When you have very strong inflation above 20%, the demand for real estate is higher to defend the investment base. And so the household demand is strong. On the other hand, Turkey being outside the ETS system, is not involved in terms of cost with CO2. And so most of the European countries, especially in the Mediterranean are sourcing cement from Turkey, because even if the freight rates are quite high with the CO2 at EUR 60, they buy cement from Turkey. And for this reason, the export from Turkey increased from an average of EUR 10 million in the last 10 years to EUR 30 million this year. And I think that this will remain for the next 2 or 3 years because there is -- with the CO2 -- if the CO2 increase, some player, especially [indiscernible] that they cannot hedge with or source from other production internal to their perimeter, they probably prefer to gain EUR 60 of margin on CO2 and lose EUR 20 margin on cement, because this today is the reason why a lot of people -- a lot of companies buying cement in Turkey. So we expect even if we are still seeing a very strong inflation and devaluation of the Turkey -- of Turkey to have a good market, I think that the year is quite, let me say, and also -- but going into 2022 and 2023, that will -- it will be the year of election. The market should be supported both by internal and external demand. On the CO2 rights, it is right. It is true that in our, let me say, actual industrial -- 3-year industrial plan, we are short of 600,000 tonnes of CO2. We are going to update our plan end of January, early in February. And we are today seeing that this shortage will be reduced from 600,000 to 400,000 tonnes. But on the other hand, the price in the former industrial plant was EUR 30. So now it's at EUR 60. So at the end, if we just make the calculation, there is an increase of EUR 4 million, EUR 5 million as a whole. And I think in our balance sheet it's something that is very manageable. Then also is whether there will be the rollout of FUTURECEM that after a very slow start now with the CO2 at EUR 60, the cement is becoming more competitive in terms of cost and also of more environmental friendly. So we think that we should end this year with figures above 40,000 tonnes of FUTURECEM sold. And next year, we should be around 250,000 tonnes of cement. So involve -- the usage of clinker in the FUTURECEM is lower, nearly 30% compared to normal Portland cement, and this is why -- the reason why we are lowering this, let me say, need and also because we have -- we are changing some of the receipt of cement like most of the other players because we want to reduce the CO2 -- the carbon footprint. And I don't know, there is also -- the last question was about, what are our view about the demand for cement. We continue to see some strong demand from household, and this will be, let me say, joined by extra demand by the other, let me say, infrastructure plan in the various countries. So I expect that like what I already told, as you know, the ETS system asked more or less to reduce the CO2, 3% each year for the next 10 years. So we see the market that should grow more or less everywhere and the demand that in 3 years -- the supply that in 3 years should be carved around 9% because of the CO2 allowance. So this create a sort of perfect mismatch to, let me say, probably what we are already seeing in most of the sector to ask for a price increase, because when you have bigger demand and lower availability, and then also from 2025 we will have the border adjustment. So everything that is imported from outside will be taxed with the price of the CO2 at that time. This is our base scenario that we continue for sure for the next 3, 4 years to see a very, let me say, healthy demand. And also we should see, beside the cost inflation, the price that will increase because in most of the European country we see a mismatch between supply and demand.

And if I may, just a follow-up on this last question. In your 2023 targets, you already accounted for a price increase, an annual price increase on average.

Yes. I think that -- as you are seeing, I think that our company, even in the third quarter, that for most of our competitors has been quite complicated in terms of cost inflation. We have shown some resilience. For sure, the price we increase was lower, but also the cost base was lower. So in terms of profitability, we are completing now the process to update the industrial plan, but more or less, let's say, we maintain the view in terms of profitability that we gave at the beginning of the year even for 2022 and 2023.

The next question is from Federico Belluati with Kepler.

The question is regarding the Turkish market. We have seen a solid performance, but I'm wondering what's your expectation regarding the movement of Turkish lira and the effects on the performance?

As you can imagine, it is difficult to forecast the value of the Turkish lira even in one month. So what we put in our -- this scenario is just to take the forward point that we have. So this is just, I think -- that the rates applied to the actual exchange rate and bring -- [ than brought ] forward. What also we see is that when you have this kind of inflation, beside the devaluation, you update the price nearly every month, even weekly. And so compared, for example, with Denmark, where we can fix the price every 12 months. Here, when you have this kind of inflation, devaluation, the effect or the negative effect with a strong market should be limited to few weeks or months. So I don't -- I cannot say which will be the rate in 12 months, but let's say that usually -- and this is what -- been also in the last 24 months that even with a very huge inflation and devaluation, you see that in Europe, the margin are, let me say, in a completely different mode compared to 12 months ago.

The next question is from [indiscernible] with SEB.

Well, two questions. First, I wonder if you see a scope for market share gains in Sweden given the problems with permissions for HeidelbergCement that are currently in place. And then I also wonder regarding FUTURECEM, what is the price -- the production price of FUTURECEM compared to conventional cement, if you disregard the cost of CO2 emissions?

Starting from FUTURECEM, the cost of FUTURECEM, let me say, without CO2, is nearly 20% higher than Portland cement. But then if you have CO2 and the clinker ratio now with the CO2 at EUR 60, it's more convenient, let me say, to buy FUTURECEM. And on the issue on the plant of Heidelberg, it seems to be a bigger issue. Then also, I am aware of being in the sector for the last 25 years that everywhere around the world, usually then probably, 6 months -- by 6 months, they are going to renew, let me say, these licenses. So for the time being, the situation, I think from the moment that Heidelberg is a huge group is managed internally by Heidelberg sourcing from, let me say, the perimeter. If for sure, the plant to be, let me say, limited in production or let me say close down the production for the [ core issue. ] There might be an opportunity for us because we are just in front, let me say, of Sweden. And actually, we serve just the southern part of Sweden, but we have been contacted by some of Swedish customer just asking if we are ready to supply. I say that today it is difficult to supply because as I said, the demand is quite strong, and the allowance put a curb in production. So [ or ] the price of cement will increase the price of the CO2, otherwise no one is motivated or incentivized to produce even 1 tonne more because it is taxed at EUR 60. So I don't know where the market will settle, speaking about the whole Europe, but the issue about the supply in cement, even in this case, when you have, let me say, production problem is an issue, and we have seen already in the electricity or even in the call that the supply chain is tight, let me say. And this is my view so far. So Heidelberg, for sure, it is scalable to manage the situation so far. I don't know what they will do if -- but this is -- we are not fully aware of what is happening or what will happen in the next 12 to 24 months for this plant in Sweden.

The next question is from Tobias Woerner with Stifel Europe.

Two, if I may. Firstly, with regard to your balance sheet, which is still in -- which is in outstanding shape. Can you give us a sense of how you [ perceive ] the M&A pipeline at the moment for you? And how it -- how you would describe it? In which areas or geographies you would ideally like to consider? And then secondly, you've got your share buyback ongoing. Could you just update us where you are on that at the moment?

Starting from the second question, the buyback is finished, and we bought nearly EUR 29 million, that is close to 3.6 million of shares, that is 2.2%, so -- and this is -- and it ended at early in October. The first question was -- sorry, could you repeat the first question, please?

Yes. Just your balance sheet is very strong. It's in great shape.

Yes, M&A. Yes, I remember, sorry. And yes, we will be -- we would be, let me say, net financial position that is close to neutral at the end of this year, and we produce closer to EUR 180 million of free -- industrial free cash flow. So there are the possibility to invest this money and the cash that we will produce in the next few years. The issue today is that the ETS system has been just drafted and has to be approved by the all 27 countries, and probably, it can be amended in various part and also in the timing. So today, frankly speaking, it's difficult to understand, especially in Europe, the value or the prospective value of an asset because, let me say, it also involve the price of the CO2 that might be the double or the half, I don't know. The reason where we would like to expand is mainly the mature market because also the border tax adjustment will hit, I think, the emerging market. And so we don't know. Turkey has announced that they will join the Paris Treaty, but how and when. Also, you have seen in the COP26 that China and even India are not, let me say, very clear in terms of when they will want to join and at which level. So today, it's very difficult to evaluate an asset. This doesn't mean that we don't, let me say, follow the market. We believe that the special -- the big player that are probably forced by activist in their, let me say, shareholder base compared to us where we have nearly 70% of the company. They might be [ forced ] to, let me say, reshuffle the portfolio or to like [ if already are doing ] to move towards a different portfolio structure. So what we believe is that some of the assets, especially in Europe, might come to the market in the next couple of years. This means that if it is something that is close to where we already have the footprint so we are -- we can create synergy because the issue is still the allowance that you will have. So let's say, if I have the opportunity to buy a plant close to one of mine to close 1 of the 2, and then to upgrade [indiscernible] to take, let me say, the allowance, it is something that we can do, let me say, easily. To buy in a new region has the risk, let me say, that I say I don't know which number I can put in my model. So I repeat that I believe that we need another 12 to 18 months to understand better where and when we can invest. Till the, let me say, the good opportunity arises, I think that we will stockpile the cash, even because -- even if it's a big, let me say, cash flow. You are aware that in this sector then -- the acquisition, funds are quite large when you want to buy an asset. And so even if we stockpile cash for 2, 3 years, I think, it's something reasonable. And it's -- even it's in our DNA because in the last 15 years we have shown that we have invested in some years and then not invested even for 5, 6 years. But I think -- I believe that we want to see that we -- the risk are balanced with the opportunity to expand the company.

I mean you just reminded me looking at the net financial debt again, and that's been hopefully great results in the first 9 months. And if you generated a similar amount of cash as you did in the fourth quarter last year, which was quite significant, you'd easily beat your EUR 30 million debt target. Any sort of more color on the cash generation here, if possible?

For sure, let me say, we will beat because our, let me say, target even include the buyback. So without the EUR 29 million, we should be already now at 0, right? Because we should [ end at ] EUR 30 million. So I think that probably we should -- including the buyback, better than this EUR 30 million, that is an overperformance of what is our, let me say, target. But let's say, I think that being at the half of November, I think that we might, let me say, have a better number in terms of net financial position. Then also you have to take in account that the exchange rate that has to be calculated at the end of the year, especially for Turkish lira and other emerging markets can affect the net financial position. So if the Turkish lira devaluate another 10% in one month, I don't know. So if the things remain stable, the number will be better for sure.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Okay. So thank you very much for attending our presentation, and we wish you a pleasant rest of the day. Thank you. Have a nice evening.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.