Dangote Cement Plc (DANGCEM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Dangote Cement Plc Full Year 2022 Investor Call. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Temilade Aduroja. Please go ahead.

Thank you. Good morning and good afternoon. It is my distinguished pleasure to welcome you to Dangote Cement's Full Year 2022 Investor Conference call. My name is Temilade Aduroja, Head of Investor Relations. On this call today, we have our executive management team, which will provide clarity on the recently released full year 2022 results. Chairing this call is our GMD, Michel Puchercos, he is supported by the acting Group CFO, Gbenga Fapohunda. Michel will take us through the presentation. And thereafter, we will proceed to the question-and-answer section. Please welcome our CEO, Michel Puchercos.

Thank you, Temi. Good afternoon, everyone. Thank you very much for taking the time to join us today. It is my pleasure to welcome you all to this conference call to discuss Dangote Cement's financial results for the year ended December 2022. As you all may know, this will be my last investor call with Dangote Cement as I retire from the Board of Directors and as CEO, effective 28th February 2023. It has been my utmost honor to serve as CEO of Dangote Cement and to stick with you all through this medium quarterly. The Board has approved the appointment of Mr. Arvind Pathak as Group Managing Director of Dangote Cement Plc effective March 1, 2023. I welcome and wish Mr. Arvind Pathak all the best as the new CEO of Dangote Cement. Now let us begin on Page 2, which shows an overview of our achievements in the year 2022. On the financial side, the group revenue was up 7% to NGN 1618 billion with EBITDA and profit after tax were up 3.5% and 4.9% to NGN 708 billion and NGN 382 million, respectively compared to the same period last year. In terms of volumes, group volumes were down by 5.1% at 27.8 million tonne, elevated by the high base effect of 2021 due to inflation and energy supply disruption. However, our natural consumer promotions back of Goodies, which began in July, helped in the improvement of market share in the third and through the first quarter for the year. Furthermore, we commissioned our alternative fuel fleet system at Obajana Line 1 and 5 and Ibese Line 2. This strategic move is to protect our margins amid a high operating cost environment characterized by raising prices of coal, diesel and gas. Turning to Page 3, you can see we achieved a lot in 2022. In recognition for our tremendous progress in environmental and climate disclosures, the CDP reviewed our rating upward from B minus 1 to B, the second consecutive upgrade in 2 years. In addition, our shareholders approved a repurchase of up to 10% outstanding shares in an AGM held in December 2022. The buyback program is undergoing regulatory approvals. On Page 4 and 5, we highlighted the current macroeconomic environment of Sub-Saharan Africa and Nigeria, in particular, touching on key economic indices impacting the economy. According to the IMF, the Russia trade prices and inflation contribute to a significant slowdown in global growth in 2022. Inflation showed to multi-decade high prompting rapid monetary policy tightening. Sub-Saharan Africa is estimated to have grown at 3.8% in 2022, slower than the 4.7% rebound in 2021. This growth supported by elevated coal prices and the relaxation of stringent pandemic measures, which drove cement [ dement] across our markets. Dangote Cement countries in operation all grew in 2022 with the Republic of Congo, Mali and Senegal, growing at the highest rate. In Nigeria, headline inflation reached 33.8% at the end of December with the CBN raising the monetary policy rate 4x last year to 16.5%. Currently, the MPR is at 17.5% higher than where it ended in 2022. On Page 7, we give a snapshot of the value Dangote Cement has created for shareholders over the decade. On Page 8, we recorded increases in revenue and EBITDA that drove strong cash generation across the group. However, elevating inflation and the rapidly increasing prices of AGO resulted in a 54% increase in our selling and distribution costs, which impacted bottom line. To mitigate the impact of significant increase in energy and AGO costs, we continue to strengthen efforts in the usage of alternative fuel and as earlier noted, alternative fuel fleet system were commissioned at Obajana Line 1 and 5 and Ibese Line 2. This saw thermal substitution range reached 7.5% in December 2022. We recorded profit after tax of NGN 382 billion up 4.9% compared to last year, despite the NGN 53.9 million in unrealized foreign exchange losses from the depreciation in some Pan-African countries. However, record group EBITDA of NGN 700 billion, up 3.5% was supported by a robust cost control measures, mitigating inflationary pressure. We recorded earnings per share of NGN 22.27. On the operational side, group volumes were down 5.1%, the lower volume was elevated by the high base of 2021. Our operations, relying on cement and clinker imports namely Ghana, Sierra Leone Cameron were impacted by the global supply chain challenges. Page 9 highlights our financial performance on a quarterly basis. The surge in prices of our input cost and significant foreign exchange fluctuations from Q2 impacted our operations. However, we proactively implemented a robust cost reduction strategy and the performance improvement plan across the group. This resulted in a significant improvement in EBITDA in Q4. Group EBITDA increased by 34.8% on a quarter-to-quarter basis in Q4. We also recorded a quarter-to-quarter increase in volumes in Q4. Page 10 shows a detailed information of our profit and loss for the period. Looking at Page 11, you can see that our cash from operations is growing at a strong rate. Investments continue to prepare the group to capture market growth across territories. Net debt is at NGN 422 billion as at end of December 2022 with a net gearing of 39.2%. Our balance sheet on Page 12 remains resilient with a cash balance of NGN 283 billion as of the end of 2022. On Page 13, I will go over our performance in Nigeria in more detail. Our Nigerian operations sold 17.8 million tonne of cement during the period, down by 4.1%. The slightly lower volume was due to energy supply disruptions, which impacted production. The energy disruptions were due to low gas availability in Nigeria. This negatively impacted our ability to maximize production during the period. Although we experienced heavy range in the third quarter, the successful innovative national consumer promotion, back of Goodies-Season 3, improved our market share in the third through the fourth quarter. The National Consumer Promotion has made NGN 238 million and NGN multimillion across all states in Nigeria. During the period, we exported 748 kilo tonnes of cement. Our Nigerian operations recorded an EBITDA of NGN 658.8 billion, up 8% despite significant distribution costs. We were impacted by the significant rise in AGO due to our national coverage, which results in longer distance to customers. On Page 14, sales volume in Pan-Africa were approximately 10 million tonnes in 2022, down 8.1% due to the global supply chain disruption and increasing cement and clinker price volatility. Extended maintenance and repairs in Congo and Senegal led to the reduction in volumes compared to 2021. We also commenced clinker export from Congo to Cameron. Over the next few pages, from Page 15, you will see the performance breakdown of our Pan-African operations. Now moving on to our debt and liquidity from Page 19. We show a time line of our activities in the debt capital market from our maiden bond insurance in 2020 to historic NGN 116 billion bond issued in April 2022. I want to thank the investment community for the strong confidence in the company. Our track record of attracting the debt capital market remains strong. This is evident in the number of recognition received in 2022. That showed Dangote Cement as a strong player in the Nigerian capital market. In February this year, we successfully issued NGN 90 billion series 4 and 5 commercial paper notes under our NGN 150 billion domestic commercial paper issuance program. This was to support working capital management. As you will see on Page 21 and 22, capital structure remains robust, and we are solidifying our strong balance sheet with available liquidity. This liquidity, including strong cash flow generation of NGN 686 million in full year 2022 and undrawn short and long-term financing lines and vehicles allow us to cover short-term obligations. On Page 24, 26, we highlight our constant efforts on sustainability and governance structured around the 7 sustainability pillars of The Dangote Way. Page 24 discusses the institutional pillar and shows our strong governance framework with a focus on board member diversity. We currently have a 27% cement board member representative on our board. On Page 25, we provided the total amount of our investment in corporate social responsibility at NGN 1.6 billion and also providing a breakdown of these investments across our country of operation. On Page 27, we show how we have continued making different significant improvement on our environmental pillar and are strengthening our alternative fuel initiatives. We are increasing waste management solutions in our countries of operations and are focused on leveraging the secular economy business model. We have implemented a robust cost reduction strategy which increased use of alternative fuel to improve our energy mix and the use of CNG, compressed natural gas, for trucks in the rising AGO cost environment. Our AF thermal substitution rate was estimated at 4.3% for 2022 versus 2.6% in 2021. Worth emphasizing is the fact that our AF thermal substitution rate reached as high as 70.5% in December, reflecting our tremendous progress in transitioning to cleaner energy. In addition, we recorded a reduction in CO2 emission and water consumption per tonne in comparison to 2021. Page 28 provides further clarity on our long-term environmental and climate disclosures that earned us the 2 consecutive upgrade to B by the CDP. The social pillar on Page 29 demonstrates our social investments in 2022. To promote diversity and inclusion, we launched Dangote Cement Creche to support women with child care and had a successful sustainability with Theme: “People, Planet and Profit –The Dangote Way”. I would like to thank everyone for joining us today, and thank you again to our investors for your continued trust and support in our business. As mentioned earlier, this will be my last call with Dangote Cement. Thank you for the support over the last few years and your continued support of Dangote Cement. Dangote Cement continues to position itself as the leader in the cement sector in Africa. Resolute to transforming Africa while creating sustainable value for our people, communities, investors and customers. Thank you very much.

Thank you very much, Claudia. We're now ready for question and answer.

[Operator Instructions]. Temilade, at this time, it seems like there are no questions on the phone lines. If I could please hand over to you for questions from the webcast. Thank you.

Okay. Let me read the question. The first question is, would we consider a dollar bond, a euro bond?

Good afternoon, everyone. My name is Gbenga Fapohunda, the acting Group CFO. Yes, we would consider it depending on how the FX availability within the country or within the continent improves, we're not taking it off the table, but something we would consider if the market improves.

Thank you. The next question is from [indiscernible] FBNQuest. Thanks for the presentation and congrats on the results. Can you please provide guidance on unit volume growth for Nigeria and Pan-African for 2023.

The growth in -- the growth will be related to GDP forecast, and this would be our best indicator. The year just started, not sure we are in a position to give a definitive answer to this to this question at this stage, especially for Nigeria in this electoral and presidential [indiscernible].

The next question is from [indiscernible]. Can you please give more color on 2023 outlook, especially for Nigerian volumes? I think Michel, just answered that question now. The next one is Dangote Cement has announced that he has intensified efforts towards waste-to-energy initiative by turning biomass scrap tyres, fly ash, oils to alternative fuel to power its plants. What is the latest update on this initiative?

Thank you for the question. I assume we answered quite in detail during the presentation with commissioning of new equipment in Nigeria. The plan is going as foreseen for other countries outside of Nigeria, and we gave substitution rate which is growing every day and currently above 7% for Nigeria, and we'll keep on growing throughout the year.

The next question is from [indiscernible] from FBN Bank. Please advise the current status on the closure of Obajana Cement plant.

I ask you this question refers to Kolistate, what we call Kolistate incident in October. As you remember, we said that the plant was stopped for 1 day, 2 days and the business restarted since then and has not stopped since. There are some legal issues, which are addressed in court between Kolistate and DIL but not impacting the business.

Thank you. The next question is from ARM Pensions. What specific alternative fuel feed systems have you installed in Obajana and to what extent do you expect the new installation to impact your [indiscernible] line?.

We are focusing for the time being on biomass, but also on scrap tyres because we have a huge pile of tyres due to a large fleet of vehicles. And we have installed the system scrap tyres, which will be set sufficient with the tyres we generate every year. Otherwise, we are focusing on biomass, which is largely available in Nigeria, such as [indiscernible] and others.

The other question from [indiscernible] investment. One is can you please give clarity to the foreign exchange losses as reported and how you intend to hedge against this going forward?

Gbenga, we'll ask you to answer the question.

Yes. The FX losses are largely driven by Ghana and our CFA countries. As an example, we had the Ghana Cedi depreciate from 6 Cedis to a dollar to about 10 Cedis to a dollar closing the year. In terms of what are we doing about it, we've started different strategies around the repayment -- around cross-border activities and around hedging, but it's more around repayment and managing exposures so that it's where we have dollar payment, dollar resources, dollar income that would use that to take liabilities that are dollar denominated.

Thank you. We have another question from Stanbic IBTC, [indiscernible]. Congratulations. Can you please give some color on the monetary asset gains related to Ethiopia subsidiary? And is there a possibility for other gains in high-inflation countries?

Okay. Thank you. Thank you, one, for this. Basically, this is driven by Ethiopia. The accounting losses that once you have inflation that sums up to 100% over 100% over a 3-year period, you would actually have to have accounting inflation in those markets. This has happened in Ethiopia, and it evaluated by the Big 4 and the government as well. So this gain, we don't foresee it happening in other countries. However, it does happen, we are prepared for it. We are ready for it. And in this case, it gave us a gain and I would say [indiscernible] subsequently if it comes up.

Thank you. Another question from Afri Invest [indiscernible]. How much rule would price adjustment play in your strategy to cope with inflationary environment in 2023? What initiatives are on the table to drive market share growth.

We are always keen to have prices -- price increase following inflation as much as the competition environment allows us to do so. The -- this being said, we have implemented a performance plan to control cost. So that -- is there pressure on the competitive environment on prices, we can compensate by cost reduction. So the strategy is twofold following inflation when possible, compensated by cost reduction overall.

Thank you. Next question is finance costs increased by close to 100%, not sure shareholders received this much in dividends. Is there any plan to replace debt with more equity.

So thank you once more. Basically, the increase in finance cost is mainly driven by the foreign exchange loss we spoke about. If you look at the net finance costs considering the finance cost and the finance income, it's relatively flat. It's the only difference is just the foreign exchange loss we spoke about, which is coming from Ghana and most of our CFA market. In terms of replacement of debt with more equity, our strategy is to maintain status quo and continue what we have in line with our board-approved policy.

Okay. Another question from 337 Frontier Capital. What is the motivation to increase capacity by 6 million tonnes per annum in Nigeria?

The motivation is the is the confidence of the management in Nigeria both and the confidence in the management in the leadership of Dangote Cement. This means the market will keep on growing. And if you want to sustain leadership market share, we need to anticipate the volume to be sold in a few years knowing that the plant can take 2, 3, 4 years, 3 years to be built. We are already anticipating 26 and further. So we -- at any point of time, we are always able to satisfy customers' requests.

Okay. Thank you, Michel. The question again to explain the monetary gains from Ethiopia as it wasn't very clear.

Okay. Good afternoon once more. Okay. Basically, I'll take a step back. In line with IAS 29 IPA inflation accounting, if you have inflation accounting inflation over a 3-year period, being more than 100% the accounting laws takes you away from your normal accounting into a hyperinflation accounting environment. That was applied in Ethiopia, because over a 3-year period, we've got inflation above 100%. So that is what tree up the gains on nonmonetary assets that we have in Ethiopia. I hope that clarifies it.

Thank you. So we'll be taking the last 2 questions. The first question is for Depot. Are we still looking at listing on the London Stock Exchange. And the next question is from Change Global Investment, Brian [indiscernible]. Are you starting to see inflationary pressures moderate on a year-on-year basis so far in 2023 across countries of operation with regards to inputs as well as general costs.

For the listing on the stock exchange. So we last answer still valid, which is on the table and be considered by the Board, but still waiting for the best opportunities and the best environment to move further. In terms of inflationary pressures, yes. Is it core? Is it freight? Is it of a product, we can see some of them like coal, for example, at lower prices in 2023 compared to 2022. So yes, we are already seeing lower or weaker inflationary pressure on in good cost.

And this regards with the last question from ARM Pension. What is your utilization rate? And do you expect this -- expect that -- do you expect that drive it upwards -- that you would drive it upwards?

The utilization rate is a simple question, which requires a very, very lengthy answer. It depends if you look at clinker, cement, dispatch trucking capacity. So allow me to make it short by saying, yes, we are going to create our utilization rate definitely if the growth in 2023 happens like economy like Nigeria, it should happen.

Okay. Thank you. We're done with the question on the webcast, Claudia. do we have any questions online?

Yes, we do. The first question on the phone lines comes from Moses Njuguna from EFG Hermes Kenya.

All right. Congratulations on your results. I have a couple of questions. Number 1 is related to Ethiopia and hyperinflationary accounting. Could you give us an indication of whether -- or what would constitute a reversion back to normalcy? under that IAS 29 accounting policy that you just mentioned? My second question is in relation to the expansion in Ogun state. Have you sourced the FX or how you're going to fund our projects. The third question is on the net interest expense. So I'm just trying to understand the evolution of that line item. If you look at the 9 months for the group number, it was about NGN 127 billion. And then you closed the year at NGN 130.4 billion. So that implies that in the fourth quarter, there was basically a very small amount in terms of interest expense. Could you just give me more color on that? And then the last thing that I have is [ now directed ] to Michel. Thank you so much for your time during your tenure at Dangote. I'd just like to get your view of what was your greatest challenge and greatest achievement during your tenure at Dangote.

Thank you very much for your kind words. While Gbenga is preparing the answers to your questions, I can answer the last one. So challenges has been constant. If you remember, 2020 was COVID. 2021 was 10% growth. 2022 was is a very high inflationary pressure, and 2023 for especially Nigeria with the presidential electorial period for another uncertainty. So I guess the pride is to transport to all these challenges, highest results for the group. And I guess, leading that team has been the owner, I will never forget.

Thank you Okay. Thank you. So I will start with the first question. What constitutes to reversal for the IPA inflation accounting in Ethiopia. It's basically following the accounting rules in IAS 29, if the last 3 years, inflation is less than 100%, looking at the trends, we might not have the same impact this year. That's one. The second question about funding inventory. Yes, some of the funding has been gotten. However, there is a strategic plan to get the remaining, which we are on track on funding is not a problem for us. In terms of the third question, which is on interest expense, it has actually been driven, as I said earlier, by our FX loss that we have in Ghana and most of the CFA markets like Senegal, basically, that's the main driver of our interest expense.

Just clarify, just to clarify, like I said, yes, in the fast, I do understand the difference when you say that, it was largely driven by the FX losses. But my question is in the fourth quarter, it was barely any interest expense coming through if you look at the fourth quarter. If you look at the first 9 months, the NGN 126 billion, I know that's largely driven by FX losses. But what happened in the fourth quarter to ensure that you closed the year at NGN 130 million.

So okay, now going down to details. Basically, I'll give an example with Ghana. Ghana got up until started the year with 6 Cedis to a dollar, got up to 15 when the last quarter, actually reduced from 15 Cedis to a dollar to 10 Cedis to a dollar. So we've got a lot of appreciation. We got that in Ghana, particularly and in some of the other markets in Pan-African were led by Ghana.

And in terms of just asking for the analyst community, how am I supposed to think about this line item going forward over the next 3 years in terms of as a percentage of your debt.

So how this Can you throw more context around that, please?

In terms of weighted average.

In terms of foreign exchange. The foreign acting market it's market-driven. In terms of strategies we have around it. It's about managing the debt portfolio. It's about our hedging strategies and other management initiatives like taking dollar loans where we have enough FX facilities to add to FX [indiscernible] deal with it. So there are different strategies to tackle this.

Thank you. That will be all for Q&A for today. If you have any follow-up questions, please send an e-mail, [ [email protected], ]and we will email you your responses in due time. To close the call, I'll just pass over the call to Mr. Michel Puchercos for final words. Thank you.

Thank you, Temi. Let me say that, first of all, after 3 years, there is a very strong team heading Dangote Cement. And from after tomorrow, a very strong CEO is coming. He knows the company for more years than myself. So a strong CEO and a strong team to start with. Second, it has been proven that in 2020, 2021 and 2022 irrespective of the challenges, especially last year, strong inflationary pressure, but in 2021, very strong growth. In all cases, the company shows growth and outstanding results. So this is what I foresee for the future. Nothing more to add. Again, thank you very much for your support and your confidence in the company.

Thank you very much, Claudia. You can close the call.

Thank you very much. Ladies and gentlemen, that does conclude today's conference. Thank you very much for joining us. You may now disconnect your lines.