Dangote Cement Plc (DANGCEM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Dangote Cement unaudited results for the 9 months ended 30 September, 2020. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Temilade Aduroja, Head of Investor Relations.

Please go ahead. Good afternoon, and welcome to Dangote Cement's 9 Months 2020 Results Call. On the call today, we have our CEO, Michel Puchercos; our Group CFO, Guillaume Moyen; and our Deputy Group Managing Director, Arvind Pathak. You can get the presentation on our website, which is www.dangotecement.com. We will also have a question-and-answer session after the call. Thank you very much. Over to you, Michel.

Thank you, Temi. Good afternoon, everybody. I trust that and your families are well. It is my pleasure to welcome you all to this conference call to discuss Dangote Cement's financial results for the first 9 months of 2020. I'm thrilled to be here today to share the developments that we have made in 2020 despite what has been an incredibly challenging year for most businesses around the world. So let us begin on Page 2, where you can see our progress so far in 2020. We have broken it down into Q1, Q2 and Q3 2020. We experienced a very strong third quarter, in fact, our strongest quarter in terms of EBITDA and strongest third quarter in terms of volumes. This quarter has demonstrated the ability of Dangote Cement to meet the strong recovery of the cement market in Nigeria and Pan-Africa after a challenging second quarter. If we compare 9 months 2020 to 9 months 2019, group volumes for the 9 months were up 6.6%, and group EBITDA was up 17.1% at a 46.6% margin, with group revenue was up 12% despite a tough environment. I wanted to briefly touch on the macroeconomic environment on Page 3. It will come as no surprise to you that Sub-Saharan Africa has been hit by the double effect of COVID-19, and the commodity market decline in 2020. And as a result, the region is estimated to contract by the 3%. Some of the countries in which we operate have been affected by this decline in growth, namely Nigeria and South Africa due to their reliance on commodities. However, growth is expected to return in 2021. We are already witnessing a recovery across our operations in the third quarter, which is our strongest third quarter to date. Group volumes are up 24% year-on-year and 23% quarter-on-quarter, whilst our Nigeria volumes are up 40% year-on-year and 33% quarter-on-quarter. Ghana, Ethiopia, Senegal and Tanzania are expected to grow in 2020 despite the impact of the pandemic. On Page 4 of the presentation, we highlighted the work that CACOVID and intervention initiatives set up by Aliko Dangote to combat COVID-19 in Nigeria and indeed, the Aliko Dangote Foundation itself has carried out during the pandemic to protect its people and customers. We remain fully committed to this course to ensure the safety and well-being of our communities. Moving on to Page 5. You can see our achievements in Q3 in more detail. As I mentioned earlier, this was our best quarter in terms of EBITDA, which was NGN 136.9 billion, up 60.6% year-on-year. We also achieved our best third quarter in terms of volumes, with a total of just over 7 million tonnes sold across Nigeria and Pan-Africa. In Nigeria, we witnessed a strong appetite for real estate investment and the recovery of infrastructure spending, including more concrete rules. Sales volume in Nigeria were up 40% in the quarter, and our Pan-African operations showed a distinct improvement following lockdown and restriction measures that were put in place earlier in the year. In fact, Pan-Africa's EBITDA was up 48.8%, with a record high EBITDA margin of 23.5%. Net profit for the quarter was up 135.1%. On Page 6, you can see how our business has remained robust during the 9-month period, both on the financial and the operational side. On the financial side, group revenue was up 12% to NGN 761.4 billion, supported by higher volumes. Group EBITDA was up 17.1% to NGN 365 billion, following a strong group performance. Pan-Africa achieved a record high EBITDA margin of 22.4% for the 9 months. On the operational side, group volumes were up 6.6% and to 19.2 million tonnes despite the impact of COVID-19 in Q2. This clearly demonstrates what the strong third quarter we have had. I'm also pleased to report that we continue to fulfill our export strategy and have exported 6 clinker vessels to Cameroon in this quarter, 7 vessels, if you include the shipment to Senegal in June. Our income statement on Page 7 highlights our financial performance in more detail. Our profit before tax was up 37.6%, and we recorded a strong EPS of NGN 12.25, up 34.6%. Looking at Page 8, you can see that our net debt is just NGN 262.4 billion as at September 30, 2020. Our balance sheet on Page 9 remains resilient, whilst positioning us to seize opportunities. On Page 10, I would like to draw your attention to Nigeria and our exports. Total sales volume in Nigeria were 11.9 million tonnes, up 10.2%, thanks to less rain in 2020 than 2019 and an increase in real estate activity in the quarter. We also recorded a strong EBITDA of NGN 316 billion, up 14.5% despite the impact of COVID-19 in Q2. So far this year, we have exported 174KT of clinker to West and Central Africa, and they've also resumed the cement export by Road to ECOWAS in the third quarter after 10 months of border closures. Nevertheless, cement sales by road will be restricted. So we are exploring the possibility of exporting cement by sea. The increase in domestic and exported volumes has resulted in significant fixed cost absorption, which is very positive for us. On Page 11, you can get a clear picture of Nigeria's considerable recovery in the domestic market from Q2 to Q3, following a weak second quarter owing to COVID 19. We have disclosed the volume growth from Q3 2019 to Q3 2020 and 9 months 2019 to 9 months 2020, which is significant owing to the catch-up effect from suspended projects in Q2. Our innovative marketing programs and less market disruption with reduced rains. The low interest rate in Nigeria is also driving strong demand for real estate investment, which is supporting the construction sector. On Page 12, you can see that our volumes in Pan-Africa were up 3.7% to 7.5 million tonnes despite lockdowns and restrictions in Q2. Again, this demonstrates the recovery of the cement market in the third quarter. Revenues were up 9.1% to NGN 232.6 billion, supported by higher realized prices and volume growth in the third quarter, most notably in Ethiopia, Congo and Cameroon. We achieved a record high EBITDA of NGN 52.1 billion, up 37.9% and a record high EBITDA margin of 22.4%. Senegal continues to perform very well. Over the next few pages from Page 13, you will see the updates from our Pan-African operations. We observed the year-on-year volume growth in Cameroon, Congo and Ethiopia. We maintained good market share of 39%, 38% and 29%, respectively, in these countries. In September, our Congo plant experienced its highest have a month of cement sales since the commissioning of the plant. On Page 14, in Senegal and Sierra Leone, volumes were up as well, with Senegal close to full capacity. In Ghana, we had a 21% decrease in sales compared to last year, mainly due to a shortage in supply as well as restrictions related to COVID-19. On Page 15, we are pleased to report that sales in South Africa increased by 7% year-on-year following a surge in home improvements. Demand has continued, resulting in growth of between 25% and 30% in Q3 2020 year-on-year. Although sales were down 7% in Tanzania, we achieved our highest ever orders and dispatches in September. The commissioning of our power plant is scheduled for this month. We project huge cost savings and power availability at the plant subsequently. The cement market in Zambia is down by 18% as infrastructure investment has been put on hold due to a depressed macroeconomic environment. Now moving on to our debt and liquidity from Page 17. If you remember, in our first half 2020 results call, I discussed Dangote Cement's successful completion of the issuance of NGN 100 billion Series 1 5-year bond and the successful completion of the issuance of NGN 100 billion Series 15 and 16 commercial paper notes at attractive rates. Both transactions were oversubscribed and demonstrates our track record of accessing the local debt market. As you will see on Page 18 and 19, our capital structure remains robust, and we are enjoying a strong balance sheet and liquidity. This liquidity, including strong cash flow generation, allows to cover short-term obligations despite the COVID-19 environment. Page 21 to 23 highlight our next phase of growth with a focus on our West and Central African expansion strategy. Our vision is to make the region cement independent. Dangote Cement plans to serve West and Central Africa from Asian factories, therefore, eliminating the need for importation of clinker from Asia or Europe. 7 clinker vessels have been exported to date with our maiden vessel exported at the end of June. The benefit of our export strategy, which you can see on Page 23, are significant. As we continue to export, our capacitization in Nigeria will increase. We will also benefit from lower clinker costs in our Pan-African operations, gain foreign exchange revenue and, of course, enjoy the benefits of being part of ECOWAS. On Page 25, we highlight our continued efforts on sustainability and governance, structured around the 7 sustainability pillars of 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. Our national consumer promo, which you can see on Page 28, has been well received and extended to December 15. Thank you very much for joining us today, everybody. And thank you again to our investors for their continued trust and support in our business. This is an exacting time for Dangote Cement, and we are very fortunate to be successfully operating in the building material sectors across Africa. We look forward to economic recovery and continuous growth across our markets in the rest of 2020. We will now open the call to the Q&A session. Thank you very much.

[Operator Instructions] Our first question is from Tunde [indiscernible] of Stanbic IBTC Pension Managers.

So I just have 3 busy questions, and the stress is on the possibility of the volume growth. So what is your expectation for Q4? And if possible, you could share some of the projects you are currently working on it. And second question is on the share buyback. At what price -- at what time do you intend to start the share buyback? And at what price that you're looking at? And the final question is on the London IPO, [indiscernible] is the new management investing too much talent on the London IPO. I wanted to know no issuance concentration. Is this something you are looking forward to do [indiscernible]?

Guillaume can I let you deal with the Q4 share buyback and IPO?

Thank you. Michel. I would say, on the sustainability of the volumes, we usually do not share guidance on the situation of the market in which we operate post quarter that release. However, what we mentioned for Q3 is that we have seen a very strong demand maintained during the entire quarter. So at this point, what we can comment on is that there is no indication that this trajectory is expected to change drastically in the short term. Regarding the share buyback, this is a question which has been with us since the beginning of the year, it has been a decision from the Board to enable the company to return cash to the shareholders in additional from the current -- the way, which includes mainly the dividend payment. We understand that some of the buyback option and the potential to impact the company valuation and eventually the share price itself. Basically, the way we look at it at the moment is the -- that the current environment remain relatively volatile. And so we try to figure out what is the right timing for us to operate this buyback program, considering the operational and liquidity dimensions of the operation, in addition to the impact on the valuation. And regarding the London IPO, this is a process which has been initiated by the Dangote Cement Group and evaluated at various stage of its story. We have, I would say, initiated several actions in the past. At the moment, the way we can look at it is by saying that we are considering different dimensions, including the way we can position Dangote Cement as an attractive investment, mainly for foreign investors will be the primary target of this type of operation. And what we are looking at is to evaluate the macro condition, sector trends and frontier market investment trends as an enabler to position the DCP shares properly on an international market.

The next question is from [indiscernible] of On Field Investment Research.

So I have 2 questions, if I may. The first one is on the cement volumes in Nigeria. It went up by around 40% in Q3. It will be very helpful to understand a little bit whether it is because Dangote is gaining market share? Or it is because of a structural market demand going up? And the second question is on the export. So apparently, you've exported more to West Africa, but so are Turkey and Algeria. So we are wondering, would you -- is it possible that you see some price pressure in the West African countries due to the increasing exports towards the market? That's it.

Let me try to answer you. Cement volume in Nigeria, I would say both. The market has been very strong. And definitely, we gained market share. The growth seems to be much stronger than the market growth itself. The only conclusion is we took market share. I believe all strength, including marketing ones, national consumer promotion and network to mention only two did help in this period. In terms of export, I don't -- I'm not sure we saw the pressure you see the logic of export was explained in terms of fixed cost in terms of foreign exchange in terms of helping countries to become sufficient. And we -- when selling to Senegal and Cameroon, we sold to our own subsidiary. So I don't think this excel pressure was held. I hope I answered you.

The next question is from [ Wale Okunrinboye ] of Sigma Pensions Limited.

Some of my questions have been answered. I just have one question -- 2 questions, actually. One is on, during the protest we saw in October or rather there were some protests we had in Nigeria, what was the level of damage? Was Dangote Cement impacted? Did you see any damage to your trucks, your -- or what was your estimate of what happened and how significant is what happens to you? Secondly is, have you had any conflict issues on your side? Worker accidents, can you provide disclosure on those things, things like worker accidents, fatalities and things like that this year? I think that will be all for me.

Arvind, you may want to take the answer about protest in October.

Yes, sure. We had a protest in October, that's right, a nationwide protest. We had been having a very close look at where our trucks are, where are being monitored and where we see a lot of unrest happening and we have a very solid tracking system in place. And as a result of this tracking, we could move our trucks to safe havens relatively. But having said to that, there were some places where our trucks got unaware regarding this sort of hesitation that took place. Not much, I would say, looking into a scale of operation, I think there were 6 to 7 trucks which got damaged partially and fully. Coming to the factories, there was no conflict of the spillover of this doing operation. We enjoy a very harmonious relationship with our workers and our community and at all our operations, our operations were unaffected by that. Have I answered that?

Thank you, Arvind. In terms of your second question, maybe in terms of safety, Arvind, you may want to add in respect of plants.

In terms of the plant, we have a very robust system of safety in our plant. In fact, it could be compared on par with some of the industry leaders and is perpetually, we have been improving our safety centers and compliance. And this year, in our Nigerian operations, we had one fatality, and which was thoroughly investigated, and we could find where the areas of improvement of skilled obligation of our employees, and the necessary correction has been done. And since our employees are appreciative of the effort that we invest in the investment that we make in terms of creating infrastructurally our plants safe and also providing them with all the facilities, which can meet their operations set. I think is very well appreciated in all our forums that we have an employee. So except for one, which was not very -- was a very uneventful accident we had, by and large, we are in a very good safety report in the Nigerian operations.

Thank you, Arvind. In terms of road accident, we saw a 40% reduction in accident, which is a positive sign, but we still need to improve to grow further down.

The next question is from [indiscernible] of Meristem Securities.

I have just 2 questions. And one would be on your capital structure. I just want to get a sense if perhaps you could provide guidance on what debt-to-equity ratio you would like to maintain going forward? What should consider as optimal for your company? Then the second one is the road tax initiative by the federal government of Nigeria. If I'm correct, I want to say that DANGCEM is in talk with the government on the [indiscernible] bypass. I don't know where you are on that? And what's the prospects for the company?

Guillaume, can you take the answer on the capital structure?

Yes. Thank you, Michel. So for the capital structure, maybe there are 2 aspects to consider. The first is obviously that we are trying to maintain a quite disciplined balance sheet. So we have over the years on an annual basis, try to remain in the range of under 50% in term of ratios that you were referring to. Maybe the thing that I should point your attention to is that, as you are aware, the status of several of our lines, not only in Nigeria. Are moving out of the pioneer environment, which makes us taxable at higher rates on a regular basis. So that is also driving the way we do look at the capital structure in terms of leverage and benefit of the deductibility of interest rates, which was not available before. So you will see a lot of dynamic evaluation of the adequate ratios from a valuation standpoint over the coming years for us adapting to the situation from a taxability standpoint in Nigeria and abroad, as our various companies operating across Pan-Africa, are also demonstrating higher level of performance over time.

Thank you, Guillaume. In terms of road tax, I admit I'm not able to give you right away the comprehensive detailed answer. We can do that later. Unless Arvind, you have elements for the answer.

No, not really Michel. I think we'll give them separately.