Dangote Cement Plc (DANGCEM) Earnings Call Transcript & Summary

Good morning and good afternoon, ladies and gentlemen. Welcome to the Dangote Cement H1 2020 Results Conference Call. [Operator Instructions] I will now hand the call over to Temi Aduroja, Head of Investor Relations. Please go ahead.

Good afternoon and welcome to Dangote Cement's H1 2020 Results Call. My name is Temilade Aduroja, Head of Investor Relations at Dangote Cement. On the call today, we have our CEO, Michel Puchercos; Group CFO, Guillaume Moyen; and Deputy GMD, Arvind Pathak. We have the presentation on our website, and you can go over there and download it if I haven't already sent it to you. Over to you, Michel.

Thank you, Temi. Good afternoon, everybody. It's my pleasure to welcome you all to this conference call to discuss Dangote Cement's financial results for the first half of 2020. I trust that you and your families are well and staying safe. Before I take you through today's presentation, I just want to reiterate what I said in our last results conference call, which is Dangote Cement is committed to protecting our employees, customers and communities by being fully compliant with the health and safety measures. We are also committed to providing super services and deliver high-quality products to our customers. I will touch on this again later but for now, let me take you through our H1 2020 results. On Page 2, you can see our progress so far in 2020. We have broken it down into Q1 and Q2. In the second quarter, April numbers were affected by lockdown in some of the countries in which we operate, but we saw some recovery in May and June as lockdown and restrictions eased. On Page 3 of the presentation, you can see our H1 2020 performance compared to H1 2019. Group revenue was up 2% to NGN 477 billion, supported by higher realized pricing. Group EBITDA was up slightly to NGN 218 billion despite the impact of coronavirus-19 in our operations. Again, we recorded a record-high profitability margin of 22%. On the operational side, group volumes were down by only 1.5% to 12.1 million tonnes, which is a strong performance considering the significant impact of COVID-19. Nigeria volumes were down 2.4% overall, but up 1.8% when considering domestic cement sales only. We are delighted to have commenced our first shipment of clinker from Nigeria to Senegal. In Pan-Africa, sales were up 0.7% despite lockdown in South Africa, Ghana and Congo. As you can see, these are strong results considering the situation we are facing. On Page 4, we show even more about the impact of coronavirus-19 on the group operation in the second quarter. On this slide, we show a visual time line of the various restriction measures placed across our operations. Some of our operations experienced a total lockdown in April, mainly South Africa, Ghana, Congo and Nigeria. As such, group volumes for that month were down. As lockdown began to ease in May, all our businesses became operational. Business levels in May and June showed a marked improvement on those recorded in April. On Page 5, we focus on Nigeria showing the impact of COVID-19. Our major market, Lagos, Abuja and Ogun, were completely shut down for 5 weeks. Lockdown and restrictions in Nigeria varied by state. However, most states had interstate travel ban and curfew, which impacted our transportation costs. Now on Page 6, you can see the financial performance in more detail. Our profit before tax was up 4.7%, and we recorded a strong EPS of NGN 7.45, up 6.3%. Turning to Page 7, you see our first half EBITDA development in more detail. I am pleased to report that our Pan-African operations have achieved the highest-ever quarterly EBITDA contributions at NGN 16.9 billion in Q2. We are certainly moving in the right direction in Pan-Africa. Looking at Page 8, you can see that our net debt is just NGN 372 billion as of June 30, 2020. Our balance sheet on Page 9 remains resilient in this context while positioning us to seize opportunities. In Page 10, you can see our achievements in Nigeria where we commissioned our Apapa Export Terminal and from which we did our maiden shipment of clinker to Senegal. Our strategy is to export clinker to West and Central Africa by sea going forward. Although sales were down 2.4% from last year due to lockdown in key areas of Nigeria, revenues were up 1.2% owing to higher realized prices. Domestic volumes were also up at 1.8% despite the impact of COVID-19. On Page 11, you can see that we achieved a record-high EBITDA margin of NGN 31.5 billion and 21.7%, respectively, in Pan-Africa. As mentioned earlier, the lockdown in South Africa, Congo and Ghana affected sales in Q2, but we still experienced volume growth of 0.7%. Ethiopia, Senegal and Cameroon delivered strong performance. We have also reduced our cash cost in 6 of our 9 operations. Over the next few pages, from Page 12, you will find highlights from our Pan-African operations. We saw volume growth in Cameroon, Congo and Ethiopia. We maintained good market share of 38%, 35% and 30%, respectively, in these countries. On Page 13, in Senegal and Sierra Leone, volumes were up as well. In Ghana, we had a 17% decrease in sales compared to last year due to the lockdown in April. The economy in South Africa remains subdued, and the cement market is depressed. The lockdown in the country affected our sales, which were down 9% year-on-year. In Tanzania, sales were down 4% from H1 '19. The commissioning of our power plant has been delayed due to travel restrictions preventing commissioning engineers entering to Tanzania. The cement market in Zambia is down by 18% as infrastructure investment has been put on halt as sales were therefore down from last year. Now moving on to our debt and liquidity. Over the next few pages, from Page 15, we have demonstrated our robust capital structure and diversification of our debt. In the quarter, Dangote Cement successfully completed the issuance of NGN 100 billion Series 1 5-year bond and successfully completed the issuance of NGN 100 billion Series 15 and 16 commercial paper notes at attractive rates. Both transactions were oversubscribed and demonstrate our track record of accessing the local debt market. On Page 17, we show a strong balance sheet with available liquidity. This liquidity, including strong cash flow generation, allow us to cover short-term obligation despite the COVID-19 environment. Page 19 and 20 are very important as we highlight our next phase of growth, building Africa's cement supply independence. We are now focusing our export expansion strategy in West and Central Africa. Our vision is to make the region cement independent. Dangote Cement plans to serve West and Central Africa from our Nigerian factory and therefore, eliminating the need for importation of clinker from Asia or Europe. I'm delighted to report that we began our first successful clinker shipment from Nigeria to Senegal in June. We are on course to ship more clinker across West Africa and commence shipment to Central Africa in H2 2020. The benefit of our export strategy, which you can see on Page 22, are significant. Investors opened up while we expand in Nigeria where we are not at 100% capacity utilization. But as we export, our capacity utilization in Nigeria will increase. We will also benefit from lower clinker costs in our Pan-Africa operations, gain foreign exchange revenue and, of course, enjoying the benefit of being part of ECOWAS. On Page 23, we highlight our continuous efforts on sustainability and governance. We released our 2019 combined annual report and sustainability report. The 2019 report is structured around the 7 sustainability pillars of what we call The Dangote Way. This emphasizes our ambition to embed The Dangote Way in each of our decisions. Despite the challenging environment in which we operate today, we strongly believe that sustainable value creation for all our stakeholders will be based on our ability to fully align the cultural, environmental, economic, operational, social, institutional and financial pillars of The Dangote Way. Finally, on Page 23, you will see what we have done in our little way in response to COVID-19. Dangote Cement has spent close to $1.9 million in H1 2020 in ensuring the safety and protection of its people, customers and communities. Thank you very much, everyone. I would like to conclude the presentation before we open up the call to the Q&A session by thanking our investors for their continued trust in our company and support. This is an exciting time for us and I am humbled by the fact that we continue to be in a strong position as demonstrated by this set of results despite the current challenges. We are very fortunate to be successfully operating in the building material sector across the African continent. Thank you very much.

Thank you, Michel. We will now open the call for question and answer.

[Operator Instructions] Your first question is from Uwa Osadiaye from FBNQuest.

I have two questions. The first one is around the share buyback. There's been a lot of talk about this recently. So I just find out -- I would like to find out when this will take place anywhere from -- and if you're in a position currently to discuss around pricing of the program. And the second thing I'd like to understand about being can you please provide an update on commissioning of the power plant in Tanzania? And I'd also like to find out if those production challenges that some had in H1 are now resolved. And if you don't mind, provide the build and outlook on what H2 would look like in Tanzania.

Okay. And thank you for your questions. I will ask the Group CFO and DGMD to answer, starting by share buyback in group CFO. Gil?

Good afternoon. Thank you for your question. The decision around the share buyback is pretty much the same level than what we have discussed at the end of the Q1 results. The company is looking at several dimensions to make this decision. There was a decision from the Board to give us access to this solution to return cash to the shareholder. I would say, from a company standpoint, we are looking at, first, obviously, the level of the share price and also the liquidity environment for the company and for the market to launch this kind of decision. So at the moment, we are still reviewing it. And obviously, at the moment, we will see an opportunity to launch it. That will be announced in Q3. The other dimension, which is important, is that there are some legal boundaries around the way we can execute in term of measures and also in term of size of the buyback, so we will remain fully compliant with this regulatory constraint.

Good afternoon. Arvind Pathak speaking, deputy GMD. As regard to Tanzania, we have completed all erection job. The power plant erection is complete. And unfortunately, time during the period when COVID restrictions were there under travel. And what we did is we have 2 online uses with the help of the OEM supplier for the power plant and our strong technical team. We have commissioned the peripheral equipment in the power plant. Now for having a complete commissioning of power plant, which is called the final commission, the need is there to have the OEM plus some important vendors. As you know, the intentional restriction for travel still continue. We are exploring the possibility on airlifting them by chartered plane. And if all goes well, I think before the end of the Q3, we should have the power plant running. As regards to the challenges, the challenges of the quarter 1 has been overcome. And in quarter 2, we are producing satisfactorily whatever is permissible within the power plant capacity that we have, just to answer the question.

Your next question is from Yassine Touahri from On Field Capital -- On Field Research, I beg your pardon.

Yes. I will have 3 questions. First, maybe could you give us a little bit more color about the legal boundaries in term of method and size of buybacks? If you have anything quantified, that would be very helpful. And then a second question on your export strategy. How much clinker would you like to export from Nigeria by near term? And based on the current low export price that you can get from the clinker, what kind of EBITDA per tonne would you expect to generate on those exports? That would be my second question. And then the third question. Oil price are substantially lower than they were last year, even if they have recovered. Do you see any impact on the Nigerian economy, whether it's on private construction or infrastructure projects for the second part of the year in 2020? That would be my third question.

Okay. Thank you for your question. I will address the part related to the buyback. So in term of methodology, we have 2 options, which are made available by the authorization we got from the local SEC, which are open tender and market price buyback. In the market price buyback, we have the opportunity to offer a premium, which is limited to 5% around the existing price at the time we are executing this transaction. In term of volume, the upper limit is up to 10% of the registered shares. At the moment, we have not decided upon now the methodology nor the size of the buyback. But obviously, that is heavily dependent on liquidity questions and the appetite for the company to return cash to the shareholders and those methods.

For export strategy, the -- so one terminal is operating. The second one is expected for Q3. The strategy is, of course, to supply our own subsidiary first. And as I said, to collect U.S. dollar, which is, of course, in this environment, very, very critical and the value goes beyond that measurement of EBITDA. As far as volume is concerned, you can size it with a subsidiary. Otherwise, it will be, okay, up to a number of vessels, 2, 3 vessels per month per terminal. And this is kind of a long-term vision. Oil price and Nigerian economy. So really, the oil price effect on raw material or cost and then infrastructure, Gil will give some words later. What we can see is a very strong market, as we have said in May and June. However, the big investors like these construction company were not as strong as the local market. We see them growing now, and we don't see advertising any negative impact on the cement market. Overall, Nigerian economy, I will let the more expert people to speak on this part plus on the economy effect. But on the market, the oil price did not affect negatively the market so far, and we expect a very strong July as well. And this is why I would say very prudently, we're not avoiding to say a mistake in terms of what COVID can bring in the next month as nobody was able to foresee it in the past very clearly. So let's be prudent and stay vigilant as well.

Next question is from Onyeka Ijeoma from Vetiva Capital.

I have a couple of questions here. The first one is I noticed that we have some tax -- the effective tax rate in the second quarter for the group was quite low. I'm wondering if you could share some color on what drove it. Also, I saw some new headlines that the company has resumed the buyback program for 2020. Can you give an impact on -- can you possibly shed some light on how you expect it to impact average revenue per tonne for the year? Also, are we seeing the same -- I mean we've seen since lockdown, there have been an improvement in cement demand from -- that are coming through. Are we still seeing this same level of volumes in Q3? Or how have they progressed? And finally, I know you've answered this, but I did not hear you clearly. Can give some color on how much can you probably expect to export from Nigeria for the rest of 2020? And what's the expected EBITDA margin would be?

Thank you for your question. Just to clarify, at this point, we're not really giving details on EBITDA margins for the individual companies and also for our export strategy. In terms of volumes, we already answered this saying that we will be sending volumes to our subsidiaries around Africa. And then we mentioned 2 or 3 vessels a month from each terminal, and that's the long-term plan for the export strategy.

Okay. Maybe I can comment on the tax aspect of your question. There is a change at the end of H1 results compared to Q1, mainly driven by the change in regulation, which occurred in Nigeria, regarding the Pioneer tax treatment of lines arising at the end of their Pioneer period. So historically, we would have a double taxation under the commencement rule, which was supposed to impact us in 2020 in term of payments. This rule has been changed and therefore, we had to adjust our tax treatment in 2020 in that regard. I think it's detailed in our financial statements. But if you have further details that you want to gather around this topic, please feel free to e-mail our Investor Relations team and we will be happy to provide further elements. And for -- maybe for the promotion, we definitely remain shy in term of providing visibility on the numbers around the spending and the contribution it will bring, but maybe the operations people can give some views on how we are starting this process and eventually, we can mention that the first winner received is a transfer today for the first million. So we made the first millionaire today.

Two? Okay.

Two. Two millionaires as will be -- yes, 2 brickmakers became millionaire this week.

Next question is from Babatunde Obaniyi from United Capital Plc.

I would like to know about your side in order to find out if you increased pricing in H1 aside the increase that came on board in February. That's the first question. And the second one is on your -- the 400% jump increase in volume in Pan-African operation, what's responsible for this jump? And do you also -- and exports make up from one region to another? If so, could you share details about which region in particular? And the final question is on logistics. Are you at any point in time considering reducing your reliance on counting on logistics and using more third parties? That's it for my question.

I will answer H1 prices in Nigeria. Everything related to Pan-Africa, if it's pricing of clinker, I will ask the deputy GMD to answer. For Nigeria, the answer is simple, no price increase in H1.

Pan-Africa has been our focus area for the last few quarters. And it normally happens that any new investments you take, it takes some time to get the appropriate market share, which is a ratio of your CapEx each year. And we also undertook an extensive review of our cost structure. Where do we sell the product mix, our partners model? And I think as a combined effect of that, you see a very significant improvement in the Pan-Africa in this quarter and this half year linked. Thank you.

In logistic, we -- no intention to change the currency.

Your next question is from Gbolahan Ologunro from CSL Stockbrokers.

So my questions are just 2 questions. So the first is, can you provide the exact sales volume sold in South Africa that's in numeric terms? And the second question is with regards to cost of sales, I observed this grew by 4.6% in H1, which is -- had growth in revenues. So can provide an insight as to what led to the increment in cost of sales? Then looking ahead, how do you expect it to evolve in the subsequent quarters, taking into consideration the devaluation of the currency. That will be all for now.

I will answer the sales volume in South Africa, and I will let Temi and Gil here to give some -- detail the cost of sales on the question. So we do not share sales volume in South Africa for a regulatory reason.