Imerys S.A. (NK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Imerys Third Quarter and 9 Months 2020 Results. [Operator Instructions] For your information, the conference is being recorded. Now I would like to hand the conference to your speaker today, Mr. Alessandro Dazza. Please go ahead, sir.

Thank you, and good morning to all of you. Thank you for joining us today to review Imerys Q3 and 9 months 2020 financial performance. With me here this morning, Sébastien Rouge, our CFO; and Vincent Gouley, our Investors Relations VP with his team. I would like to start today by sharing with you a few key messages, which characterized the third quarter of the year. After the peak of the crisis in May, we have seen a slow but certainly continuous recovery in demand for our products. The month of September was clearly the strongest one since the beginning of the pandemic, with some sectors such as construction and consumers goods, and I will go in more details later on, almost entirely back to the last year's levels. In this context, we have managed to keep, again, a positive price-mix. And most important, we effectively delivered on our cost savings targets, thanks to the Connect & Shape transformation program as well as to the specific COVID-19 action plan we put in place starting in April. This allowed us to significantly improve our margin in the third quarter of the year. You see the figures on the right of this slide, showing an EBITDA margin moving from 14% to 18% on sales for Q3. Sébastien Rouge will give you more insights on this performance. While the transformation efforts and the deployment of the new customer-centric organization are largely behind us and we look positively to the future, strict cost management and cash generation will remain key focus also in the quarters to come, as the COVID-19 pandemic, unfortunately, as we all can see, is still with us and continues to affect the global economy, especially in Europe. Therefore, we remain committed to maintain a solid financial structure and a strong liquidity position. If we now move on to Slide 5, we can take a closer look to our end markets. We have observed a clear improvement compared to the second quarter of the year, while sales volume decreasing slightly, less than 12% in the third quarter compared to approximately minus 25% in the second quarter or, of course, compared to last year. All underlying markets showed a recovery in the third quarter, though at an uneven pace. Some markets did recover quite significantly. Automotive production is down 10% in Europe, flat in the U.S. compared to minus 70% in Q2, if you remember well. Construction was down 10% in Europe and only 3% in the U.S. after a double-digit drop for both regions in Q2. Industrials markets, in general, improved gradually but remain, overall, still relatively weak. As you can see at the bottom of this slide, steel production down 20% in Europe and 26% in the U.S. in the third quarter, still quite significant drops but much less than the sharp ones we have seen, 30% or more in both regions in Q2. Finally, paper markets remained heavily depressed, unfortunately, with production down 23% and 22%, respectively, in Europe and in the U.S. In this difficult market environment, we have once again managed to maintain a positive price-mix effect of 0.3% on revenue. This pricing effort resulted in a contribution of EUR 9 million to our EBITDA. I think this is even more remarkable considering that the group managed to benefit from a reduction in variable cost after inflation, EUR 4 million, as you can see, obtained mostly, thanks to the excellent work of our purchasing team. Please bear in mind that this is also part of the goals we have set ourselves with the Connect & Shape program, which continues to deliver in line or above expectations. And I will show you more on the next slide. A last comment on current trends. The generalized downward trends in many raw materials and energy seen in Q2 has stopped and even reversed on the back of the market recovery. It is now to be understood how this will develop following the recent flaring up of the pandemic and the lockdowns in all or part of Europe. If we now move to Page #7 and we take a look at fixed cost and overheads. I am very proud to confirm that such costs are clearly decreasing, and the drop is in line with our ambitious targets. The Connect & Shape transformation program, which continues to deliver as per plan, generated further savings of EUR 10 million in this quarter and EUR 35 million for the first 9 months of the year. We will deliver on our promise to achieve EUR 100 million gross savings by 2022 or earlier. As you might remember, when the COVID-19 started hitting the economy in April, Imerys launched a specific action plan to face the crisis. These actions helped reduce fixed cost and overheads by a further EUR 28 million in the third quarter and EUR 65 million for the first 9 months of 2020. As you know, the group has utilized mostly temporary measures to decrease staff costs by choice in order to be ready to serve the market upon its recovery. If the economy continues towards this progressive recovery, as I said last time, we should be in the lower end of the range of savings for the full year, which were assessed to be between EUR 70 million and EUR 130 million. I now hand over to Sébastien, who will comment in more detail our financial performance.

Good morning, everyone. Thank you, Alessandro. Let me walk through our financial performance for the third quarter and the first 9 months of the year, starting with revenues. The sales reached out EUR 2.8 billion at the end of September '20. They are reported down 15.9%. This was mainly driven by the EUR 504 million volume drop following the COVID-19 crisis. In this context, Imerys maintained a positive price-mix that contributed to EUR 21 million additional revenues for the period. We will note that the majority of the perimeter effect remains linked to the deconsolidation of the North American talc activities, that's minus EUR 17 million. And one point I wanted to note is that the revenue also include a negative currency effect of EUR 35 million, while this FX impact was positive in H1. This reflects the continuous depreciation of important operating currencies for Imerys, in particular, U.S. dollar and Brazilian real against the euro that have accelerated in the third quarter. Below this bridge, you can see the sequential improvement in revenue in Q3 versus Q2 that illustrates the progressive recovery in volumes that was commented by Alessandro before. If we look now into more detail at our 2 business segments and their respective markets. We start with Performance Minerals segment whose activities generate 57% of the group's turnover, with global sales reaching EUR 1.6 billion in the first 9 months. All regions saw an improvement of the trend in Q3 with like-for-like revenues down 8.6%, while this decrease was 11.6% in the first 9 months. If we look with our main applications, consumer markets that combines filtration, life science, agriculture, food and pharma, remain quite resilient even in Americas and in Europe. In particular, our recently acquired company, Cornerstone in the U.S., a company present in high-quality perlite for horticulture, developed very well in this context. Ceramics, construction-related material and automotive-related markets recovered progressively after being severely impacted by the crisis in Q2. On the other side, paper markets remained weak everywhere with further closure of paper mills. Also, we saw a strong rebound of our Graphite & Carbon activities that are mostly reported under APAC, which comes from the growth of mobile energy. Alessandro will come back in a few minutes about the announced capacity expansion in this market that we have recently spoken about. If we look at our second segment, High Temperature Market & Solution (sic) [ High Temperature Materials & Solutions ]. This segment totaled EUR 1.2 billion for the first 9 months, down 15.8% like-for-like in the third quarter as compared to last year. Revenue from High Temperature Solutions decreased by 19.5% at constant scope and exchange rate in the first 9 months. It benefited also from an improved trend in Q3 due to the gradual recovery of the thermal and foundry market, in particular, in Europe, driven by an improvement in automotive sector. In the Refractory, Abrasives & Construction, revenue was down 17.5% like-for-like in the first 9 months of 2020. During the third quarter, the refractory and abrasive markets continued to be weak, in line with iron and steel. On the other hand, the building and infrastructure application and cement, in particular, recovered strongly in the third quarter. If we look now at our profitability, a slide about the current EBITDA analysis. Current EBITDA for the first 9 months reached EUR 454 million, down 22% year-on-year. This evolution reflects lower volumes contribution, EUR 248 million, with an average ratio on sales of around 40%. It was partially offset, as Alessandro pointed out, by a continued positive price-mix, plus EUR 25 million; and more favorable variable costs, plus EUR 10 million contribution; and an important improvement of EUR 75 million of fixed cost and overhead, net of inflation, resulting from a strong contribution from our COVID-19 contingency plan, EUR 75 million growth in the first 9 months. This came in addition to the savings of our structural Connect & Shape transformation plan. Those savings totaled EUR 35 million in the first 9 months, that's -- adds up to EUR 61 million gross cumulated savings since 2019, well in line with our EUR 100 million target that we want to reach by 2022. The perimeter effect was also positive due to some bolt-on acquisition. And here as well, the currency impact, even though new on 9 months, reflects a negative effect in the third quarter for minus EUR 9 million that will actually probably continue in the fourth quarter. Going down to the rest of the income statement. The variation in absolute term of the EBITDA translates into a decrease of the current operating income, the net financial result at EUR 44 million in the first 9 months. Our Q3 financial result was well in line with last year expenses. And you remember from our prior releases that H1 2019 benefited from a one-off impact of EUR 17 million for the repayment of a Japanese yen private placement. The income tax expense of EUR 48 million corresponds to an effective tax rate of 28%, in line with 2019. As you can read, net income from current operation ended up at EUR 117 million, down 49% in the first 9 months. Finally, net operating income and expenses booked in other were limited to EUR 5 million in Q3, totaling EUR 21 million this year and significantly below last year level where we had large expenses for our Connect & Shape implementation costs. Consequently, net income group share totaled EUR 95 million in the first 9 months of 2020. I now hand over back to you, Alessandro, for the outlook.

Thank you, Sébastien. So despite this difficult context that we have heard, Imerys continues to invest for its future growth by developing its footprint geographically and by expanding its production capacity to follow market growth. In August, the group announced the signing of an agreement with the acquisition of a majority stake of 60%, with an option to purchase the remainder of Haznedar, a Turkish-based, high-grade refractory monolithics and bricks manufacturer and the leader in its country. This acquisition will complement Imerys' offering and develop its position in the growing Turkish market, the largest producer in Europe for cement and the second largest in iron and steel. Furthermore, this acquisition will give Imerys a cost-competitive production base strategically located between Europe, Middle East and Africa. This business generated $64 million in revenue and $17 million in EBITDA in 2019. The closing of this transaction, which is subject to antitrust approvals, is expected in the fourth quarter of 2020. In October, Imerys also closed the acquisition of Sunward Refractories with expected revenues of about $15 million in 2021, a Taiwanese producer of high-temperature refractory solution, which extends our market reach and presence in the growing Asian markets. Last but just as important, the group has recently announced an investment of EUR 35 million in its plant in Bodio, Switzerland to expand its production capacity of high-purity synthetic graphite for lithium-ion batteries mostly used in the booming industry of electric cars. This investment is the first of a series of capacity expansion projects the group envisages to support and accompany the expected growth of the electric vehicle market worldwide. Now a few final comments on my side on how we see the next few months. Although the group expects its end markets to continue to gradually recover, such recovery still remains subject to the potential impact of the sanitary situation on the economy, especially in Europe, and notably in light of the most recent unfortunate developments. Therefore, we confirm that we are not in a position to give a guidance for the full year 2020. A significant step was achieved in the sales process of the North American talc assets. A binding agreement was signed with one of the bidders on October 13, which sets a minimum purchase price of $223 million for these assets. This removes any risk of further financial impact on Imerys' balance sheet. All parties continue to work towards the completion of the related Chapter 11 process, which is expected to happen around the end of the first quarter of 2021 as a result of successive delays in the hearing by the court of the proposed plan. Strict control on costs and cash generation will remain a focus for the group also in the fourth quarter and maybe in the quarters to come, as the pandemic continues to affect the global economy. But with the new customers-focused organization largely in place, Imerys is now ready to take advantage of the recovery in underlying markets. The recent acquisitions and the capacity expansions show that we are investing for future growth. Last but just as important, Imerys' balance sheet and liquidity position remain solid. Thank you for your attention. And we now open for questions.

[Operator Instructions] We are now taking our first question from the line of Sven Edelfelt.

Yes. I had 3 question. The first one is on pricing. When I look at pricing effect, it seems a little bit below previous quarters in terms of revenue. It did started at 1.7% in Q4. Now it's 0.3%. I thought pricing was negotiated once a year. And therefore, is it part of your strategy to catch up market share? Or basically, is it my bad feeling here? Second question. When I look at consensus number for operating profit, it stands at EUR 281 million, and it implies minus 6% decline in operating profit in Q4. Are you comfortable with this level? And the third question, when I look at what's going on, on what you said about end markets, why are you not a little bit more optimistic in terms of upcoming organic growth? We see improvement in automotive, cement, steel. So basically, shouldn't this company do maintenance sooner rather than later? And therefore, shouldn't we expect a rebound in your volume afterwards in Q1?

Thank you, Sven. On pricing, your comments are, of course, correct because these are numbers, in fact. I see 2 reasons for the decrease in contribution, still contributing but at a lower level than in the past. One is clearly that Q2, we saw very low variable costs, especially in energy, and if you will, some contracts have some indexes, especially in transportation, vessels and similar things, very transparent towards us and the customer. Therefore, there is a certain automatic pass-through to customers. Still, as you correctly said, most of our contracts are on a yearly basis, and therefore, these light adjustments are limited compared to the overall contractual situation and overall values. The second item, in any case, is also correct, what you mentioned. We are fighting to gain market shares. As we said over the last 12 months, Imerys wants to grow organically, wants to take back what we might have lost in the past, and therefore, we are more aggressive in certain areas, in certain markets with certain products. I still cannot prove it because of the decline. The overall decline of markets is difficult to assess our market share, but we do track it internally. And I see very interesting figures coming up. So I'm convinced that in a more stable environment, we can show and prove that we will be beating underlying markets with our growth. I answer your third question, which is also relating to markets before going to the consensus. I'm not pessimistic, so I don't need to be more optimistic. I am. And to be frank, when I look at our Q3 and the development, July, August, September, at the end of September, I was enthusiastic. Markets were really picking up. Automotive in many countries was coming back to good levels. Finally, iron and steel was picking up, and we had a really strong September, frankly. The last 2 weeks put a big question mark on everything. What we see happening in Europe, maybe less in Asia and less in the U.S. But what we see happening in Europe forces us to be cautious. We don't know how long the lockdowns will last. We don't know how deep they will impact. For sure, in my opinion, less than before because they are less severe. But still, there will be consequences. Therefore, I prefer to remain cautious, although optimistic in the overall trend. And you know that if volumes come back after the cost savings and the cost cuts we have taken, I do expect our marginality to rapidly improve like we saw in Q2 -- sorry, in Q3 compared to Q2. Last question, your consensus. You know that we do not comment on consensus in general and even more complicated to do forecast today, as I said, following the recent -- very recent events. In any case, if we were far away, it will be our duty to officially comment. And you have seen we have not made any statement in this regard. Thank you, Sven.

Okay. Maybe just a follow-up. You said you are happy with the end of September numbers. Can you comment on October?

It's not closed yet. We see an October in line with September, so positive. When, this -- let's say, when the flaring up and the related measures hit or are hitting now, I think they will have limited, if any, impact on October. So we do expect an October at least in line with September. As said, not closed, but should be absolutely a good month again compared to what we are used to see lately. So absolutely, yes, there was a -- the trend was confirmed for the month of October.

We are now taking our next question from the line of Jean-Christophe Lefèvre-Moulenq.

Do you hear me?

Yes, very well, Jean-Christophe.

Excellent. [Foreign Language] A question on the Slide #12. This is magic number, EUR 75 million in fixed cost improvement, could we have, please, more flavor? Is that due to the good maintenance cost cutting? Or do we have further elements we don't know? Did you maybe close some facilities or shutdown?

Jean-Christophe, the EUR 75 million is largely coming from Page 7, which are basically all the -- to a large extent, originating from Page 7 or Slide 7, which are the measures put in place net of inflation, of course, in this year. Some of them are Connect & Shape, so our transformation program. Most of these costs are there to -- or cost cuts are there to stay. These are permanent savings. It's the change in organization. It's the reduction in certain overheads and fixed costs. Part of it, on the right of this graph in green, the EUR 65 million are what we always call temporary measures put in place rapidly to adjust our production to the drop in demand caused by COVID. As I always said, temporary, using often furloughs, chômage partiel short working and similar tools made available by different governments. Did we do this year any major restructuring or closing? No, there is always, here and there, small assets, which are closed, especially during the downturn, but so small that I think don't need to mention at Imerys level. If the economy picks up, we do believe we will need to ramp up especially our fixed cost; therefore, maintenance; therefore, our shifts in production, our people. We are discussing the budget for next year. I do believe that some of these fixed costs might be preserved. And therefore, even if we did not any major restructuring, we have optimized the way of working. So I am confident that some of these cost reductions might still remain with us even at demand levels similar to last year or to previous years. Last, Jean-Christophe, if the demand does not really pick up to the level we expect, we will transform some of these cost cuttings into definitive measures, and then, there will be, unfortunately, closures. And then we will communicate properly because then it might be more significant. But at the moment, I want to remain confident. The demand will come back to a level where we will need all or almost all of our assets.