Dangote Cement Plc (DANGCEM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Dangote Cement Full Year 2023 Investor Call. [Operator Instructions]. Please note that this call is being recorded. I would now like to turn the conference over to Temilade Aduroja. Please go ahead.

Good afternoon, everyone. It is my pleasure to welcome you to Dangote Cement Plc Full Year 2023 Investor Conference Call. On the call today and leading this conversation is our Group Managing Director; Mr. Arvind Pathak, he will be supported by the group CFO, Mr. Gbenga Fapohunda. Arvind will take us through the presentation. And thereafter, we'll proceed to question-and-answer session. Over to Mr. Pathak.

Thank you, Temi. And good afternoon to everyone. Thank you for taking your time and joining us today for this call. It is my pleasure to welcome you all to this conference call to discuss Dangote Cement's financial results for the year 2023. I'm pleased at Dangote Cement's impressive performance for the financial year 2023. This positive full year outcome is a combination of the strength in the diversity of our operations across Africa, and our sustained drive to contain costs amidst in accelerating inflationary environment. Let's begin on Page 2, which shows our geographical spread across the African continent. In this period, we completed our 0.45 million tonnes Ghana grinding plant, bringing our total installed capacity to 52 million tonnes per annum. This includes 35.3 million tonnes per annum in Nigeria and 16.75 MTPA in Pan-Africa. We are also in the final stages of completing our 1.5 MTPA griding plant in Cote d’Ivoire. This would further increase our total capacity aligning with our long-term vision of making Africa self-sufficient in cement production. On Page 3, we examined the macroeconomic environment to the Sub-Saharan Africa emphasizing resilience in the cement market despite challenges. According to IMF, Sub-Saharan Africa, SSA, is projected to grow at a faster pace of 4.0% in 2024, up from an estimated growth of 3.3% in 2023. While an uptick in growth is expected in the period, underlying challenges holding inflation, currency depreciation and a growing burden of most significant risk to the growth outlook. Despite the underlying challenges, we see the African cement market is resilient with substantial growth potential giving its burgeoning youthful population and abundant untapped land and mineral resources. On the same page, we highlighted the performance of our operating currencies against the dollar, currency depreciation and FX liquidity with the biggest risk faced in the region in 2023. All currencies in the countries we operate, except CFA depreciated. In last 1 year, Naira has moved from 461 to 1,621 at the end of February '24. This represents a negative mark on the effect on already elevated input cost and foreign currency denominated trade loan balances. To mitigate impending foreign exchange volatility, Dangote Cement is strengthening local input sources of material and intensifying the use of alternative fuels. In addition, foreign currency utilizations will announce FX earnings on export and reduction in FX dependence are also being implemented. On Page 4, we highlighted the various network economic indicators in our home market, that is Nigeria. Economic growth slowed to 2.7% in 2023, lower than the growth of 3.1% in 2022. While headline inflation grows at a 27-year high of 28.9% in December. On Page 5, we presented highlights of our achievements in what could be described as a challenging year. On the financial side, group revenues were up 36.4% to NGN 2,228.1 billion. The strong growth in revenue is coming from both the Nigerian and Pan-Africa business. Consequently, group EBITDA cost has a double digit growth of 25.1% to NGN 886.1 billion, while PAT was up 19.2%, NGN 455.6 billion. Given the impressive performance, the Board has proposed an annual dividend payment of NGN 30 per share for the year 2023 financial year, subject to shareholders' approval at the AGM. On the operational side, our Pan-Africa business witnessed healthy growth with the volume up 12.7% to 11.3 million tonnes. We commenced operation at 0.45 million tonnes griding unit in Ghana and commissioned the CNG station at Tanzania, while also strengthening clinker exports from Nigeria and Congo. As a part of our broad measures targeted strengthening efficiencies in cost management, I'm pleased to mention that we have completed 10 alternative fuel projects across our operations. Innovating new and effective base of being business should drive our costs, upscale our services, and improve our margins in light of the challenging economic environment. Page 6 details our performance in the period. Group volumes were down slightly by 1.8% to 27.3 million tonnes, owing to a mix of factors, including election uncertainty, cash unavailability, and the sharp currency devaluation, all of which impacted our Nigerian sales. Notwithstanding revenue and EBITDA were up 36.4% and 25.1% to NGN 1,297.6 billion and NGN 886. 1 billion, respectively. Our full year 2022 results are a demonstration of the strength in the diversity of our operations. Our diverse operations acted as a cushion, providing resilience to country-specific risk. Our Pan-Africa business continues to gain momentum with volumes up 12.7%, supported by healthy volume growth from Senegal, Congo, Ethiopia and Zambia. Consequently, we recorded a 123.2% increase in the Pan-Africa revenue to NGN 925.9 billion. While EBITDA rose by over four-folds to NGN 263.7 billion at a margin of 28.5%. We are happy with the contributions coming from our Pan-African business and we would continue to maximize the potential of the region to further consolidate our group's performance. Page 7 shows that income statement of the group with impressive performance in both top and bottom lines. The group recorded an FX loss of NGN 164.1 billion, mainly due to the impact of our foreign currency obligations, following the steep devaluation of Naira. Our earnings per share were up by 18.8% at NGN 26.47. Our balance sheet on Page 8, remains resilient with a gross cash balance of NGN 447.1 billion. And net assets at net NGN 1,725.8 billion, as at the end of December '23. Looking at Page 9, we showed an analysis of cash inflows and how we prudently allocated this cash to deliver value to all our customers. We prudently allocated capital to dividend, income tax, CapEx and share buyback. Cash of NGN 838 billion was generated from the operations for FY 2023 with a total of NGN 102 billion spent on CapEx, while NGN 338 billion and NGN 166 billion were paid as dividend and taxes respectively. Additionally, NGN 41.2 billion was allocated to share buyback, as we successfully repurchased 0.71 percentage of the total shares outstanding. On Page 10, we dwell further into our Nigerian operations. Sales volume from our Nigerian operations impacted by a mix of factors, such as election uncertainties, currency crunch and significant devaluation of the Naira. Notwithstanding Nigeria's revenue grew by 7.7% to NGN 1,297.6 billion as we adjusted prices in line with the current economic realities. Nigeria's EBITDA tossed at NGN 650.3 billion, relatively flat from the prior year with a margin of 50.1%, in line with our drive on cost efficiency, the commission alternative fuel system in Okpella and Ibese. Again, our commitment to make Africa self-sufficient market in cement and clinker production was reinforced in this period, owing to the increased clinker export from Nigeria. On the same page, we showed the average dollar price of our cement across our operations for the year. The average cement price across our countries of operations in FY 2023 comes in at $98.8 per tonne. Our Nigerian operations cement price was $103 per tonned, which is in line with the average African cement price for the period. Page 11. Further highlighted the strong performance of our Pan-African operations, with the sales volume up 12.7% to 11.3%. The stronger volume in the period was driven by improved cement demand from Senegal, Congo and Zambia. While Ethiopia contributed strongly to EBITDA, supported by the reduction in cash costs. Senegal and Ethiopia operated to the maximum capacity in the period. Accordingly, Pan African revenues were up 123.2% to NGN 925.9 billion, while EBITDA recorded a four-fold increase to NGN 263.7 billion, with a record margin of 28.5%. We are pleased with the strong performance we achieved in our Pan-African operations. In addition to the solid performance in Pan-Africa, we are making great progress in our expansion plants in the region. Over the next few pages, from Page 12, you will see the updates from our Pan-Africa operations. Ethiopia, Senegal, Cameroon, Ghana, Zambia, Congo, Tanzania, and South Africa all saw growth in volumes compared to last year. In South Africa, we have reached great heights in alternative fuel usage, with Dangote Cement South Africa, achieving an average thermal substitution rate of 41.8% in 2023. In Zambia and Congo, strong volume growth was supported by improved exports to neighboring countries. Lastly, Ethiopia and Senegal are operating at full capacity and contributing strongly to Pan-African EBITDA. Now moving on to our debt and liquidity on Page 16, we showed a time line of our activities in the debt capital market. In 2023, we issued over NGN 357.7 billion Series 4-12 Commercial Paper for working capital, I would like to thank the investing community for the strong confidence in the company. As you will see on Page 17, our capital structure remains robust as in addition to maintaining strong credit ratings from global rating agencies, we have sustained a minimum leverage ratio. This has supported our liquidity profile. On Page 15, we showed the group's clear and consistent capital allocation, comprising dividend payment, CapEx, tax, and share buyback. Of the NGN 838 billion cash flow from operation, 40% was distributed as dividends, while 12% was used for growth investments. A significant amount of our CapEx for the period was spent on Ivory Coast and the 6 million tonnes per annum Itori plant in Ogun State. While we also returned additional capital to shareholders through our buyback program, this was 5% of the net cash flow from operations. On Page 19 to 23, we highlight the group's export strategy. Dangote Cement has strengthened the export incurred on our vision to make the region self-sufficient in cement production. This will enable sufficient effects for our operational needs and optimize Nigeria's current production capacity. We will focus our expansion in Western Central Africa, while optimizing our Eastern African assets. On Page 24 and 25, we highlight our continued efforts on sustainability and governance structured around the 7 sustainability pillars of The Dangote Way. Page 25 discusses the institutional pillar which shows our strong governance framework with the focus on Board member diversity. We currently have a 27% female board members representatives on our board and 5 independent directors. Page 27 shows our sustainability highlights in the period. We are making significant improvements on our environmental pillar and are strengthening our alternative fuel initiatives. Our alternative fuel thermal substitution rate increased to 9.7% in 2023 versus 4.3% in 2022. While we grow process 293,000 tonnes of biomass and commission 10 alternative fuel projects across the group. On the social front, Dangote Cement spent NGN 2.4 billion on social intervention activities across the group, 2023. We commenced various employee welfare programs to cushion the impact of a high inflation environment, while we continued our short-term incentive and employee recognition programs. I would like to thank you everyone for joining us today, and thank you again to our investors for your continued trust and support in our business. I'm very optimistic about the future of Dangote Cement and confident in our strategy and growth prospects. Dangote Cement company continues to position itself as a leader in the Cement sector in Africa. We remain focused on our commitment to sustainable growth that benefits all the stakeholders. I look forward to a progressive 2024 with you all. Thank you very much.

Thank you very much. And we will now open the call for question and answers.

[Operator Instructions] At this moment, we have no questions from the conference call. I will now hand over to webcast questions. Apologies. We have just gotten a submission for a conference call question. The question is from Adedayo Ayeni from Absa.

Okay. Hello, can you hear me?

Yes, we can.

Okay. Awesome. Maybe my first question is in the volume evolution for your Nigerian business. So if you look at the breakout of the volume for the Nigerian business, what's looks like the Nigerian business. There's a trade purchase, a cement trade purchase line, which has grown significantly since 2023. And you're now -- at least for the last year, that number is above 4 million tonnes that was purchased. So could you please explain and help me understand the dynamics? Where is that Cement being purchased from? And what impact is this purchase having on -- what impact are we seeing on margins from this purchasing? Like I said, where is that purchase coming from? And maybe lastly is, if you're purchasing and you're not producing from any of your -- you're cutting back production from your plants, these plants that we know that Dangote Cement has and that are listed. What is the utilization looking like for some of those plants given that now you're purchasing? I'm just trying to understand why we're seeing purchases? And what impact is that -- what impact that is having on efficiency of the plants that are being cut back in terms of production?

Okay. Thank you so much. My name is Gbenga Fapohunda. Thanks for the question, quite insightful. So the purchase we talk about in the financial statement is just a structural purchase. We have Obajana line V, which is a company that will set up for the production of one of the cement lines. And we also have Okpella. The way it is structured is they actually sell to the existing business just from a structuring perspective. So these are 2 new lines, construction and production lines that we've set up basically sell to the existing business. I hope that answers that part of the question. So it's not a purchase from outside. It's just a purchase from new entity selling to existing business just to make the flow easy.

Okay. Thank you for that. But also just to follow up on that, thank you. So my -- if that is what you are seeing, that means that you're cutting back, if you say it is all from a structural perspective, then some of your plants in terms of output, they are being cut back. So where is -- which of your plants is being affected by this structuring? What is the long-term plan? And also, just so I'm trying to understand what is the capacity of -- so this purchase is coming from Okpella, like you said, I'm saying 4 million. I thought Okpella had like a 3 million installed capacity. So there's an extra 1.09 million coming from somewhere. Assuming you're running Okpella like 100% utilization, so where is that extra coming from, if you don't mind?

So there are 2 of them. We have Okpella and we have Obajana line V. We call it DCP PLC. So we call it Line V. So it's part of the -- it's a company set up as part of Obajana, but it is an independent company. So we are talking about 2 different entities, not just Okpella. They both have about 3 million tonnes each roughly.

Since we have no further questions from the conference call. I will now hand over to webcast questions.

The first question is from Abubakar Ibrahim. What are the sources of energy of the company in Nigeria? How much did the company spend on energy in 2023 in Nigeria? What is the budget for 2024 and energy projects for the firm?

Yes. I'm Arvind Pathak speaking. The sources of energy is wide spread across the plants. We source -- when I'm talking of energy, I'm talking of fuel also, I'm talking of the power. Our sources of energy are natural gas, our sources of energy is coal, our sources of energy is alternative fuel and also one of our plants we purchase power from the grid. As far as exact numbers are concerned, do we have them right now or we can...

We can get back to them.

We can get back to you, what is our absolute number in energy usage in Nigeria and our budget for 2024.

So the next question is from [ Natalia from EMIM. ] Please provide the guidance on the volume growth in Nigeria and Pan Africa operations.

Going forward?

Going forward, yes, guidance.

Nigerian market looks to be strong, and we are seeing a double-digit growth compared to what we had last year, in the Nigerian market. Pan-African market is also showing buoyancy, but not to the sake of same extent in Nigeria, and we expect it to be around let's say, single-digit growth. And maybe it will not reflect entirely because some of our plants, we are already operating at the full capacity.

So going on to the next question. This is from Brian Mugabe from Change Global Investments. I've been seeing a number of press reports. Is there any real political pressure in this regard in terms of price increase of cement taken across the sector?

It will not be fair to say pressure. Yes, there have been an engagement on this and very constructive engagements, where it was not just one sided. It will also discuss what are our challenges, what are our issues, and how we can collectively work in the interest of the nation. And that's what we are working on. So there is no such pressure as such.

Next question is from Abigail Alabi, Vetiva Capital Management. Given the current economic challenges, are we going to see a reduction in capital expenditure in Nigeria or across the group? That's the first question. The second question, given the recent directed by the federal government to reduce pricing, what is the current ex factory or retail price? And do we have a possibility of price stability?

As far as the capital expenditure is concerned, I think in my opening remarks, whatever I could have shared in the public domain, I have already explained. We had taken up a big expansion of 6 million tonne capacity at the Itori, which is in Nigeria. And also, we have taken 2 lines, expansion in Ivory Coast. And the balance are in the just strategic discussion, something and maybe at the appropriate time, we'll let it -- know it publicly.

And this is if from [indiscernible] Cardinal Stone Partners. What is the plan or strategy on increasing volume production in Nigeria? And this is the same question on Cement prices and in line with what the government says. Is there a price cap? And does it affect supply and margin growth?

I think I've partly explained it, we already have in capacity. Now the discussion that we are having is what are the constraints which could be both internal as well as external, which prohibits us to come up with a full utilization of the capacity that we have. And we have a road map. We also have something on the external parts, we have a road map in consultation with the concerned authorities. And, a, by both removing such hinderances which come in the way of producing to our capacity. B, also the new capacity, which we put in Itori, by which we try to cover up the -- every look-in corner of the country where I can -- Cement can be supplied.

We have another question again from Abigail Alabi, Vetiva Capital. Given the ongoing FX crisis, what percentage of your loans are FX dominated? What percentage of the loans are FX dominated?

The percentage of loans that -- let me take a step back, just to give you context. About 40% to 50% of operating costs are FX-denominated. So in terms of the percentage of loans that are FX denominated probably about 30%, 35%.

Next question from Olayinka Adesanya, SBG Securities. Please, can you provide the thermal substitution which achieved in the Nigerian business for 2023. Also, what percentage of your fire usage will be attributed to gas?

In 2023, we achieved a TSR of 10% as against the 4% that we have it in 2022. As far as the gas percentage is concerned, if you are talking of the firing in the kiln, which is a thermal source of energy, it could be around 50%.

Thank you. The next question. As regards tax expenses, there was a decline despite PAC growing. This is from Isaac, WSTC. Could it be from tax waivers for combination in new plants? What is the reason for the tax reduction?

Okay. Thank you for that question. The lower tax being shown in the numbers are due to 2 reasons. One is the lower taxable profit for Nigeria, and the second one has to do with the deferred tax assets from our FX loss. This has nothing to do with tax waiver or any [ pioneer ] incentive.

I've read all the questions on the webcast. I think there is a question on the call, on the phone.

Yes. We have a question from James Ola-Adisa of Chapel Hill Denham.

Okay. So your financials so that the average effective interest rates went up by about 500, 600 basis points. And expects that interest rates go higher. Does that affect your finance costs in any way? Secondly, what amount of FX losses should we expect to see? Just a ball park number for 2024, if possible.

Okay. Thank you for that question. The first one is with the interest -- the interest rates that was in the market going to affect our business, yes, it will. But we have our strategies as well as how to manage and deal with it. The second question is, where do we forecast the FX to be? Seriously, we have no crystal ball. We don't know where it is going to be. However, the question is what are we doing about it as management? What plans do we have to mitigate it? I can share some insights as to how we try to manage some of this. We're doing more of exports, we are doing a lot of imports substitution. So we are using local coal for imported coal. We are using more CNG, compressed natural gas for AGO. So a lot of cost reduction initiatives. Actually, I've been put in place to mitigate this FX loss because in a way, it's a cost. So how do you manage this cost in the future, that's the main. And lastly, a lot of repatriation from our Pan-Africa businesses. we've invested in them. We are getting a lot of monies back. Last year in 2023, we got over $200 million back. So just to throw some light and put some insights as to how we intend to deal with it. Thank you.

We have a follow-up question from Adedayo Ayeni of Absa.

Okay. So I've got 2 questions. So the first question has to do with demand elasticity in Nigeria. So for 2 years in a row, you have reported a contraction in volume growth, right? It has been negative volume in Nigeria, a negative growth. And given what we are seeing with your gas costs -- and not only you, with peers as well. It is a range of price increase that you have to take to reverse the Nigerian business to sort of like a 54% type EBITDA margin level, especially given that it contracted to 50% last year. So my question is, January to where we are, are we -- essentially given where prices are. Are we seeing increased elasticity levels? Because it's difficult to estimate what elasticity levels could be in Nigeria? Especially given the trend, especially when there's no FX available and new home buyers sort of think of real estate as a store value. Is that relationship still holding, is that still in place? That despite even with increased cement prices, volume growth is to sort of on the line -- on the underlying volume, which is too strong. What is the relationship that we are currently seeing between prices and volume? That's the first question. My second question has to do with the -- I'm trying to remember what my second question is, I think, I spent a lot of time -- sorry, my second question has to do with the rest of Africa right, the rest of Africa. Now if you look at your EBITDA margin for last year, it's almost doubled compared to the previous year. On an outlook basis, what sustains -- in your view, what sustains the margin at that level? Because that's a huge step up from FY '22. What sustains your margins at that level in the rest of Africa? And thirdly, specifically on dividends -- on dividends, you've hiked your payout ratio above 100% of your reported net profits. So what is the determining factor now? I mean, so typically, what is your dividend policy looking like? Is there dividend policy, we can work with. And what is your -- what is it hinged on? Is it hinged earnings? Is it hinged on free cash flow? Is it as management decides that depending on your short-term needs for this business? How do I model out your payout ratio for this business?

Okay. Let's first start with your first question, which had actually 2 questions in it. One is you had made a right observation from the numbers showing that the 2 consecutive years, the volumes have marginally come down maybe more in the previous year less in this year. But you have to look through even beyond that. See, '21, which is your benchmark, why -- which you are comparing, was an year when the whole world came out of COVID. And there was a cap demand and surge was seen not only in Nigeria, I can tell you with my little international experience, we have seen it everywhere in the world. So your comparison against that high base. But if you go back to '20, you will find the trend would be the same or not much different. Now as far as demand elasticity is concerned, let me tell you, cement demand -- before I explain to you, I'm just trying to restrain myself to talk more because of the limited amount of time. See cement in a construction of any project or a house, forget about infrastructure project, is highly around 20%. So just to give you a very long ended example, suppose tomorrow, the cement price were to become very abnormally low. With that 20% impact, nobody will take a call to make an investment. So normally, it is investment related, which depends upon various other factors. What are the competitive venues people have for investment? What are the general macroeconomic conditions of the country? So the elasticity with reference to prices are not very high. That means neither by decrease or increase in price beyond a certain limit will make a big delta. Having answered that, I think what is driving our fame in rest of Africa is we have been able to give the same value propositions, what we have successfully provided in Nigeria. What were those? Those where we made this country self-sufficient in the production. We started exporting from those countries to the neighboring countries. We improved the logistics by having our own investment in the trucks, putting up a mega plant of big sizes and waving all state-of-art and thereby the efficiencies so and so forth. And it is these factors which are driving our margin. I think I've answered your questions. right?

Dividend policy.

So basically, I'll take the last question around dividend policy. I'll take it from 2 perspectives. The first one is our policy generally is to pay between 80% to 120% of our profit as a dividend. The second part of it is we're sitting on a huge reserve. I know largely you have dividend being declared from retained earnings and reserves. So we are sitting on over NGN 1.6 trillion. How do we return all this value back to our shareholders? How do we give value back to our investors. So those are some of the factors driving our dividend policy.

Thank you. And let me just quickly go over some questions on the webcast as well. Isaac Osaro, please, the first option as regard the lower tax rate was unclear. The Nigeria market profit before tax.

Okay. So thank you for that question. So if you go to our financial statement, and maybe after this, you can engage privately as well. Our profit from operating activities actually declined from NGN 485 billion to about NGN 396 billion company. So that's all we mean by our taxable profit from Nigeria reduced, which is a significant part of our tax payable for the group.

Okay. And I'll take these 2 questions together from Natalia, EMIM, EBITDA margin in Pan-Africa stood at 28%. How sustainable is this? The second one from Isaac again, the currency transmission reserve jumped by 720%. What could the reason be?

EBITDA margins of this magnitude, maybe it is on the upper end of the well performing companies. So yes, it is on the upper percentile. But it's not something which is beyond the world. So we don't see any reason why we should not be able to sustain it given the factors which I reiterated a while ago.

Thank you. Currency translation.

Okay. So the currency translation question, it's actually related to the valuation and as the GMD said last time. Virtually all currencies within areas of operation, naturally devalued aside from the sales currency. So basically, what has happened is from that we got a lot of currency translation amounts or reserve from that. That is what you see sitting in that account.

Okay. There's a question again about federal government intervention and prices. I think we've answered this again, so we'll just move on to the next question. This question is from [ Onyeka ]. Can you provide your current ex factory price per tonne?

We could provide. But then, for example, since we are -- unlike some of our competitors we are not located in some regional basis. We have across the country, we have got establishments, whether it is plants, whether it is depots from which we serve the market. So it would be a very difficult for me to give you one number since we are on a call. If any specific market you have in mind, we could always give them.

Okay. And you can just send us an e-mail as well on the ex factory cement price so that we can respond to you on that. And thank you. These are the questions on the webcast for now.

Thank you. We have no further questions on the conference call either. I would like to hand back for any closing comments.

Thank you very much. I think we had some very interesting questions and some of them, in the questions, we have got some insight for our way forward. Thank you very much for all the support.

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