Derichebourg SA (DBG) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I want to thank you for taking the time to attend this meeting where Pierre Candelier, the group CFO; and myself, will present to you the number of last fiscal year 2023, 2024. The group has operated in adverse market conditions last year. First, we had the geopolitical risks driven by the war in Ukraine and in the Middle East, then the slowdown in the European economy. In addition to that, our recycling industry is really depending on 2 sectors. One is the car industry and the second one in the construction. And as you all know, the car industry is struggling and the construction is almost frozen. In addition to that, we had high electricity prices, even if they are lower than the previous year, they still remain at a high level and high interest rates, which has impacted, obviously, our financial expenses. And the last thing that I wanted to mention, the group has been victim last year, last November by a cyberattack that didn't stop our operations, but has an impact -- a significant impact on our numbers during almost 3 to 4 months. Despite all these adverse market conditions, the group has been able to generate almost the same EBITDA number than last year, EUR 330 million, has been able to generate almost EUR 100 million of free cash flow. And all this, thanks to our business model, where we're monitoring our margins, tonnage, working capital, CapEx and also because we have implemented since now 3 or 4 years, the development of niche businesses, which is very profitable. And in a future slide, Pierre will show you, I mean, the impact of this segment in our business, how it has evolved over the last years. And also monitoring the level of inventories in our business. So -- and the last thing is the results of Elior that, I mean, have showed significant improvements even if the net result is still negative, but the EBITDA number has increased significantly. Okay. Now I will leave the floor to Pierre to go through the details of our financial numbers.

Thank you Abderrahmane. So I will just emphasize on the very good second half year that we had, thanks to all the factors that Abderrahmane explained. Indeed, it is the best half year that we had in the past 2 years with in revenue close to EUR 1.9 billion, but also in EBITDA, EUR 188 million. So -- and we would like to -- in order to emphasize on the strategy, which we consider very appropriate, the new sorting lines that we started in the last 18 months, which are listed on the screen, the 6 of them, we will show you a picture of them later in the presentation, but they brought additional EBITDA amounting to EUR 5 million in the second half year compared to the first half year. I will go -- I will spend a few minutes detailing the numbers. The revenue is the same than last year, EUR 3.6 billion. The EBITDA is nearly the same than last year, EUR 330 million compared to EUR 335 million. The EBITDA ratio is exactly the same than last year, 9.2%. And the current EBIT is a bit lower than last year, EUR 173.5 million. But as we have invested, we have more depreciation. Last year, we had a lot of nonrecurring positive items, which we do not have this year and which -- but big amounts last year, EUR 50 million on the disposal gain on the multiservice, EUR 13 million gain on the disposal of the 8 yards to -- as the European Commission asked us, and we do not have this item last year, which translates in a lower EBIT, but the current EBIT is more the aggregate to look at. We had additional more finance costs this year due to a full year of high interest rates. Last year, the interest rates were increasing. This year, they were stable, but at the top of the level, and they have started to decrease in the beginning of this year. We have lower income tax due to lower pretax income. As Abderrahmane El Aoufir explained, last year, Elior contributed to EUR 39 million negative result and this year, negative EUR 20 million. The net income attributable to shareholders is EUR 74.8 million compared to EUR 137 million last year. It's a decrease by 45%, but the cash result is only decreasing by 20 result. The Board of Directors, which took place this morning, proposed to the AGM to pay a EUR 0.30 dividend per share, which is a 28% payout ratio of the net income and 2.9% dividend yield compared to yesterday closing price. We will go division by division. First, Recycling and then Public Sector Services. In the Recycling division, the revenue is also stable, EUR 3.4 billion. The EBITDA is EUR 289 million compared to EUR 307 million, which is a decrease by 5.9% and the current EBIT is EUR 148.6 million, compared to EUR 174 million. The EBITDA ratio is very close to last year, 8.5% compared to 8.9%. Abderrahmane El Aoufir described in a few words the economic environment in which we operated, which was not very good. Nevertheless, we have a resilient result. The ferrous scrap volumes, they have decreased by 5.7%. The average price were nearly the same than last year, EUR 2 per tonne lower. The margin were lower for the ferrous scrap because they were negatively impacted by the cyberattack in the winter. And during the rest of the year, the market was also not as good as in prior year. On the nonferrous side, the volumes are stable and the margin improved. It is a mix of the results of the strategy. We have sold products with higher added value incorporated because we went further in the transformation process. And also, we benefited a bit from a price increase, which took place during the months from April to June. If we look at the volumes metal by metals, the trends are a bit different. We have single-digit increase for copper brass, which is copper related and also lead, for which we had a very good year. And we have single digit in volumes for aluminum, mainly aluminum ingots due to the automotive industry situation. And the aluminum, which are more dedicated to the building industry are more stable and also single-digit decrease in stainless steel. A few words about our -- a few figures about our industry -- our company. We delivered last year 4.4 million tonnes of ferrous scrap, 695,000 tonnes of nonferrous metals. Incorporated in that number, we have recycled 643,700 tonnes of end-of-life vehicles, 376,000 tonnes of WEEEs, fridges and so on. We have produced 73,500 tonnes of aluminum ingots and 38,000 tonnes of lead ingots. Just 2 slides in order to describe the economic environment in which we operated. Of course, we are correlated to the general industry because we sell to steel mills and smelters, and we buy also waste from the industry. So you see that over the years, the trend is rather negative. One factor to mention, which impacts only the ferrous scrap market is the importance of the Chinese steel export semi products. You see that since July 2022, the Chinese semi product steel exports have increased significantly due to the electricity price in Europe. Chinese did not have this increase and they produce lower semi products, which they export to Europe and also to Turkey. And it's not very good for our customer. So it also impacted our sales. What is important, and we will spend a few minutes on that is decarbonization of the steel industry. You know that the traditional way of manufacturing steel, which is the blast furnace is very detrimental to the environment because it contributes to roughly 5% of the greenhouse gas emissions. And in addition to that, they receive for the time being, free [indiscernible] emissions that they will have to buy in a few years. So they have to find a solution, and they are trying to move either to direct reduced iron through hydrogen or to move to EAF. EAF, I would say it's already a mature industry, which is lower intensive in CapEx, more flexible than the blast furnace because you can switch off your steel mills during the weekend, which is not possible for the blast furnace. And if you want to replace your blast furnace with DRI through hydrogen, it's a huge CapEx. And I must admit that 2 or 3 years ago, there were plenty of that type of projects and most of them, except 1 or 2 are on hold for the time being due to the difficult market condition for the steelmakers. That's the reason why that we believe that I would say that our -- sometimes people consider low-tech EAF has a lot of future because it's already mature and the production cost in the future of that steel mill is already known, and it will be lower than the DRI steel. Just a few words on the prices. On the upper left part of the page, you have the ferrous scrap E40, which is the ferrous scrap, which comes out from our shredders. You see that, of course, the prices change every month. But on average, they were stable during the year. On the other graph, it's nonferrous metals. I just would like to emphasize on the increase in the -- from all the metals in the spring, of which we have benefited. And -- but at the end of the year, the prices were lower. It's the first year in the history of the group that the nonferrous metal are so high in the percentage of our revenue. It's not the first year that they are higher than ferrous scrap, but to such extent, it's the first year. Why? We had a small decrease in volumes and I would say, no price effect on ferrous scrap. And we have no volume effect on the nonferrous metals, and we have a positive effect on the price, which means that now we have EUR 1.5 billion in ferrous scrap, EUR 1.7 billion in nonferrous metals, where unit margins are generally higher and service, it's a bit decreasing. The bridge of our EBITDA in the Recycling division. Last year, we had EUR 306.6 million EBITDA. We sold in January 238 yards, which contributed to EUR 2.7 million EBITDA in the beginning of the prior year, which we did not have this year. We have a decrease by EUR 43.1 million of our gross margin plus service revenue. So as we said before, it's more than that for ferrous scrap, and it's partly offset by increase in margin in nonferrous metals. For confidentiality reasons, I answer directly to that question. We do not communicate on unit margin on each segment. And we have a decrease by EUR 12 million in staff cost. We have, of course, savings, but we have also less variable pay. And also, I would like to emphasize on the impact of electricity saving, EUR 10 million due to a bit lower prices that we determined at the end of '23. And we also have savings on oils, consumables and maintenance cost, which is more related to the volumes in the ferrous scrap. If we look by country, we have the same impact, the remedies in France, minus, EUR 2.7 million. We have a decrease on a like-for-like scope in France, which is EUR 12 million. The Spain is very profitable in our group, and it once again improved its profitability by EUR 8 million. We had a difficult year in the U.S.A., which is EUR 8 million lower compared to prior year. The other countries, it's not so significant. If there is only one slide to remind or to keep in memory after this presentation, I would say it is this one. Abderrahmane El Aoufir, since he is CEO, he has tried to develop niche business in order to be different to our competitors, also to leverage on our network. Every month, we buy on our 285 yards, plenty of different quantities. And that we do not buy at the top of the price because we buy them among different quantities. And we leverage this network to create a dedicated sorting line, on which we concentrate all the qualities that we want to sort on that line. And a competitor, if he does not have the network and he wants to buy the same line, he has to buy at the top of the price, the input -- the inbound quantities. So what we classify as niche business, it's heavy media plant, it's refining aluminum, refining lead, WEEEs, cable shredders, also in the Paris area, additional waste that we take in order to render service to the people, bring also ferrous and nonferrous metal to us and so on. There is a number of area. And we wanted that in the past to have in the region of 25% of the revenue and 25% of the EBITDA. And this year, we have by far exceeded that percentage. And you see that on the red part, which is, I would say, the traditional ferrous and nonferrous metal, just shredder and also sorting nonferrous metal, but not with a lot of industrial process, which is what do a lot of our competitors, our result would have been a lot lower by a large amount. And now 36% of our EBITDA is in the niche business, which are more resilient. If you look at the lower part of the presentation, also more profitable. Of course, we can also question how we allocate head office costs and so on, but they are more profitable. A few pictures of what we have invested in the '24 last months. This picture, it's -- we do not classify this one as a niche business. It's our St Pierre de Chandieu shredder. It's close to Elior. And we did -- we already had a shredder there, which was 30 or 40 years old. And we have completely refurbished and built a new one. And if you look on the upper part of the left picture, we have a specific sorting line, which we did not have before in order to prepare additional material, which either can be sold directly, which are not ferrous scrap or that we can sell to some other yards of our group. So it's a very powerful shredder, and we are now equipped for the next 40 years with this tool. The other picture, it's more niche business. We -- now we sort and we treat fine fractions in Bernes-sur-Oise, which is close to Paris before we had this sorting line. We put in landfill these materials. And now we are able to find a 12% metals and very expensive metals in this facility. And when you implement such a facility, it's -- you don't operate it at 100% in the first month. You have to make adjustments to the machines. And it's -- indeed, it took us nearly 1 year to have a good yield and profitable -- very profitable results on that line. On the right bottom part, it's a new sorting line in Coulombiers. It's a tool which we did not have in the group, where we shred aluminum, and we sort it with optic sorting and also metallurgical sorting, and we are able to sell that to people who manufacture green aluminum, thanks to the product that we sort and process. We invest in France, but we also invest in other countries. So on the left part of the picture, it's a new heavy media sorting line that we have in Spain. I would say, dry heavy metal sorting line, not with floating. And now with the -- it's really a progress which was made in the last 10 years, but in particular, in the past 5 years, all the sorting lines and metallurgical lines. There is a lot of, I would say, inside and software also, and we benefit from that. A new fridge treatment, the WEEEs is a very important segment for us. We invest a lot in that in Bonneuil. And in the next months, we will start a new boilers line in the same plant. I will finish for the picture part with the cable shredder in Escautpont that some of you may have visited. And also, it's the second one that we have in the group, and we will build new ones because copper is a very metal, which has -- we have visibility on the future of that metal due to the electrification even if we have some doubts on the rhythm for the automotive industry, but the electrification of all the devices, we are very confident in that, and we will buy additional sorting tables in the coming months and year. The public sector service is the best year ever. You will see a few bridges. We have only a positive impact. We -- it's difficult to find the negative impact this year. Of course, we have decided not to continue in the Marseille contract. So we have less revenue, but you will see that it impacts positively the result. We have started a new contract in la Réunion, new contracts in Canada. We have extended our revenue in all the regions where we operate, which translates into an increase in revenue by 5%. And we also have an increase in EBITDA by 30%. And now the EBIT, which is for that activity, it's really the aggregate to look at. We have a double-digit operating EBITDA, which is, I think, best-in-class in the industry in France. How do we have this increase in EBITDA? So the Marseille contract was loss-making at the end. So we stopped and we do not have losses anymore. The new contracts in la Réunion and in Canada are very profitable, and we benefit from that. And also for the additional revenue that we have in the other regions, they bring additional EBITDA. We are very happy with the 20% EBITDA margin in that industry. And we looked at negative effect in the EBIT, but we did not have. On the holding segment, nothing to say, except that we had last year nonrecurring costs, which were classified in recurring due to the preparation of the contribution of the multiservice business to Elior, which we do not have this year. On Elior, we will be very fast because they have already communicated on their results, which are improving significantly. They have improved by EUR 200 million their EBIT in 2 years, which is very impressive. They still have a negative impact because they have nonrecurring cost by EUR 30 million. They have a deferred tax income issue, which impacts the net income. So unfortunately for us, the only line that we have in our accounts is the last bottom line of the P&L. And we have also 48% of EUR 41 million, which is minus EUR 20 million, which impacts the equity consolidated method line of our P&L. So we had nearly EUR 100 million free cash flow, EUR 330 million EBITDA, which we used at 57% in order to invest in the industrial tool. We managed well, I think, this year, the working capital requirement, which brings additional cash by EUR 30 million. We paid EUR 25 million dividends, EUR 45 million finance cost and EUR 27 million income tax. We already spoke about that. So we are happy with that because we have a lower -- the balance between CapEx and EBITDA is satisfactory this year. Of course, we meet our financial covenants. I would say that as a financial director, I have one personal satisfaction in this closing is that now our equity exceeds EUR 1 billion. It's the first time in the history of the group. For the rest, there is no specific additional item to point at. We have a very good liquidity headroom over EUR 500 million. We do not draw on our FCF, and we do not draw on our overdraft because we have cash on our balance sheet. And also, we have a good visibility on all our financing lines. A few words on our CapEx. As I said before, we reinvested 50% of our EBITDA in the CapEx, EUR 30 million in public sector service. We had new contracts, and we had to invest in order to start the contract, EUR 156 million in the recycling business. How do -- they made this EUR 156 million? We invested EUR 25 million in our shredders, a part in order to finish the Lyon shredder, of which you saw the picture, but also the part which are more maintenance CapEx on other shredders. On our shares, we invested EUR 15 million. We invested in 4 new shares, but also we have to maintain the 100 -- over 100 shares that we have in the group. We invested EUR 13 million in the WEEEs, mainly development CapEx in order to prepare new boilers line. We invested EUR 18 million in post-trading technologies and refining technologies. It's a balance of maintenance and development shredders. We invested, I would say, EUR 37 million in cranes, loader, forklift and trucks. It's maintenance CapEx. We have to replace every 10 years our tools. We developed new yards, which we opened EUR 9 million. We had EUR 16 million, and I would say, more than that, which are regulatory CapEx where each year, we have to invest in concrete and other technology and also fire preventing water treatment, dust prevention and so on. A few words on our return on capital. You can see it through different eyes from the accounting view, from the market cap view and from a year adjusted view. So how do we compute that? It's EBIT after tax. I know that some people, they compute it pretax. We compute it after tax divided by equity, net debt preprovision. So we are around between 7% and 8% from accounting and market cap. But for the time being, we have nearly EUR 307 million asset on our balance sheet, which for the time being, do not bring anything from the EBIT line in our group. And if we adjust for that, we are over 10% ROCE, which is, I would say, what we want to have on a long-term basis. We have -- for, I would say, the equity investor, we have done a part of job that you usually do, which is -- so we have an enterprise value, which is EUR 1.4 billion, which is a market cap at the end of November, plus our net debt. We have the value of Elior based on the market cap of Elior, which means that the enterprise value that we have for recycling plus public sector activities is just EUR 1.1 billion. I did not want to say just, but it's beyond my control. And if we divide that by our EBITDA, it's 3.4x. I will hand over to Abderrahmane El Aoufir, who will speak to you about the outlook for the year, which started on October 1.

Thank you, Pierre. Our outlook for the long term, we are pretty confident about the changes that the steel industry will make a lot of projects to switch blast furnaces into electric arc furnaces. And this will require a lot of scrap metal. The demand will be higher. We are all aware that, I mean, given the current economic situation, a lot of projects are frozen for the time being. But at least two, I mean, the first one will start in the end of 2026. It will be in Sweden. It's the company SSAB. The second one in Germany, it's Saarstahl. They are in Germany on the border with [indiscernible], and this will start in 2029. And the works have already started. And in addition to that, for example, in the copper, there is a lot of demand, and we are also trying to keep the added value within the group. For example, the compressors coming from the fridges, we shred them and there is only 10% of copper there. And we will shred them, put them in the chopper to get the copper there. So our objective is to go after all what is strategic metal. And as you may probably know that Nexans, one of the cable producer in France is opening a smelter in the north of France in Lons, and they will consume about 80,000 tonnes of copper -- of mixed copper starting 2027. So this is obviously help us, and it will generate to create demand for copper. The same thing for aluminum. The aluminum, a lot of consumer and consumers now, they want to what we call green billets and they ask the people like hydro aluminum to introduce some recycled aluminum in their production, and this is what they are doing. So the demand of aluminum is quite good, and it will be even better in the future. And we have a project also in lead in the production. We have a significant market share in France and in Spain in lead. We have 2 breakers, one in France and one in Spain, and we have a refinery in Spain, and we have a project to invest in a refinery also in Normandie. It will be -- if we have the permits -- it will be state-of-the-art of technology. And this will allow us also to integrate the added value within the group. For the short term, if the market conditions remain as they are, I mean, they are not good, but if they are okay, we think that we are going to benefit from a low electricity price. We think also that the ramp-up of all the sorting lines and the ones that we will start this year, for example, in Bonneuil, there is a fridge plant that is quite new and a boiler plant that will start in January. So the ramp-up of these lines will help us also to generate some EBITDA. We will have also the financial -- the interest rate that will go down, I mean, according to our forecast that, I mean, will reduce the financial costs. And we hope, I mean, with all the protection measures that we have implemented in the group to protect our system that we wouldn't be a victim another time of the cyberattack. We have spent a lot of money in this area, and we are doing tests to see if people can include our system or not. And for the time being, we are pretty confident that this wouldn't happen, but you never know. So given all what I have mentioned, we are expecting an EBITDA at least of EUR 350 million for next year. And obviously, as soon as the situation of the markets improve, we -- this number will go up. I want to mention in addition to the last slide that Pierre has presented that our group since 4 years, since 2020, we have bought #1 in Spain, [indiscernible]. One year later, we have bought #2 in France in the recycling [indiscernible]. Two years ago, we have bought a significant stake in Elior. So -- and the financial structure of the group is still very strong, and we are respecting all our covenants. So just to confirm that the business model that we have is very strong and resilient. And I think now we can leave time room for any questions. Please feel free if there is any question.

Arnaud Palliez, CIC Market Solutions. I have 3 questions. The first one is on the future of electricity prices. As you know, the regulation is going to evolve in France with the end of RN. And in this context, are you -- do you plan to sign some midterm contract with an electricity supplier? It's the first question. The second one is about the niche businesses. If I'm right, you mentioned a target of 25% of the total revenue. This target is now past. So do you intend to put in place a new target and to have more ambition on these niche markets? And the last question is about the fact that the steelmakers are postponing their CapEx. So in this context for you, is it going to have some impact on your own CapEx, on your own capacity? The important investment you made last year in capacities, are they going to get the expected return? Or are you concerned about these delays that are being implemented by steelmakers?

Okay. If I take out the energy price, I mean, we have a contract with a power company, which we try to hedge every month, almost 10% of our consumption, okay? What we are seeing now that, I mean, the prices are lower and lower than the previous years. This is due to different reasons, the start of the new nuclear plant in [indiscernible]. Also, we had a very rainy season last year and this year. So all the hydraulic sources of power have been implemented. And the last thing that we don't have any problem in importing gas. And as you know, this year, France has exported electricity to different countries in Europe. So this is, for us, a good thing, and we have already covered, I would say, 30% to 40% of 2026 of our energy, of our electricity for France, I'm speaking. Niche businesses. We have already, I mean, for the time, we have at least 4 other projects to come. We are implementing cable shredder in Madrid that will start according to our provisions in May, June. We have 2 boiler treatment facilities, one in the east of France that will start in September and the other one in Lyon region that will start in December 2025. We have another shredder -- cable shredder machine that will go to Saint Marcel, which is in north of Lyon. And we are -- obviously, as soon as there is an opportunity, we invest to have the return. And the other project, the last one is the fine fractions. We have a project in Marseille in Increase in revenue principally driven by new contracts in La Réunion to treat the fines because the first one has been very successful for us. And we have this project for Marseille. Above this, the slowdown in the switch from blast furnace to electric furnace. I would say that our problem in the industry is not to sell. I mean we have always been able to sell. There is no problem. The problem for us is in the purchase side, and it's on the volume. We have always been able to sell domestically or internationally, overseas. So I don't see any impact because the projects are delayed. I don't see any impact.

Julien Thomas from TPICAP Midcap. I have 3 questions, if I may. The first one is about H2. So could you please explain us what happened? Because in June, you published a warning saying that you couldn't make up the loss of the half of the year. So it seems that in a 3 months' time, a lot of things -- positive ones happened. And if I look from a market perspective, it seems that your main -- the market you are provided with waste, the construction, construction, automotive, just kept on decreasing. So what happened in your own performance? The second one is about your niche business. Are these businesses ROCE accretive because it seems that this business require from new facilities, new dedicated facilities a bit longer inventory cycles, so that you can make a kind of arbitration between the cycles among your commodities. And the third one would be about your target for 2025. Because if I look only on your cyberattack impact plus the energy costs, you have already a EUR 20 million bump in EBITDA. So it's already the EUR 350 million. So it seems that you are cautious, obviously, given what happened this year, it's really reasonable.

We said at least EUR 350 million.

Very clear.