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

Good day, and thank you for standing by. Welcome to the First Quarter 2021 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Alessandro Dazza. Please go ahead.

So good morning to all of you. Thank you for joining us today to review Imerys first quarter 2021 results. Next to me here this morning, Sebastien Rouge, our CFO. I would like to start by sharing with you a few key messages which characterize this quarter. I would say, for sure, a strong one for Imerys. First, the group showed good commercial performance and benefited clearly from a continuous recovery in end markets and demand for its products. I'm pleased to underline an organic growth of 6.3% for the quarter, with sales above EUR 1 billion. All of this despite a general sanitary situation, which in certain countries still remains difficult, as we well know in France. Our EBITDA grew by 11%, and our EBITDA margin also improved significantly to 17.3% for the quarter compared to 16% in Q1 of last year, which is 130 basis points. So not only increasing volumes but also good cost control, cost management and a positive price-mix contributed to this performance. As a result, current operating income is up 41%. Net current income for the quarter, almost 50% plus at EUR 73 million for the quarter. Imerys also continue to invest for the future, in particular, with the capacity expansion in the fast-growing market of lithium-ion batteries for electrical vehicles. You might remember a few weeks ago, we announced a large capacity increase at our Belgium operations for a CapEx of EUR 60 million to be spent over the next 24 months. Another, I would say, important topic to be highlighted in this quarter is the approval by the creditors and plaintiffs of the plan of reorganization of the North American talc entities, but I will give you a bit more details on this at a later stage today. If we now move on to the next slide, you can see here that sales continued to rebound in Q1. As I mentioned before, organic sales improved significantly year-on-year. And sequentially, revenues were up 7% in Q1 '21 versus Q4 '20 after an increase of 8% Q4 on Q3 2020. So I would say, momentum is confirmed. The group, again, outperformed underlying markets, as you will see in the coming couple of slides. If you take a closer look at our end markets, here, you have automotive and iron and steel. You will notice that globally, these markets did continue to improve in the first quarter, thanks in particular to the strong rebound in Asia and notably in China. This being said, we are still far from precrisis level, especially in Imerys main markets. It's Europe, North America. To be noted, that the North American European automotive markets were also hampered by supply issue around semiconductors and chips, as we all read in the newspapers, but are expected to rebound rapidly once these issues are solved. If you look at construction, for sure, markets enjoyed continued recovery, especially in Asia, with Europe showing mixed trends according to geographies. On the top right, you see the differences between countries, some recovering faster than others. North America positive and probably will benefit in the second part of the year from the expected $2 trillion infrastructure plan recently announced during discussion with the American government. Paper market remained low, as you can see in the table, with a slow recovery due to COVID-19 restrictions, especially with regards to traveling, homeworking and school attendance. However, the outlook for the rest of the year, we believe, is more positive, with some rebound expected, thanks to stronger industrial activity and travel recovery. First positive signs are already emerging in Asia, in particular, China and India. On the next slide, you see as a result of what we just said. Imerys managed to post sales volumes increase of 5.8% for the quarter and sequentially, a recovery from the peak of the crisis in the second quarter of last year. If we now move on to Slide 10. As initially mentioned, Imerys EBITDA rebounded in the first quarter of the year, both in absolute terms and in percentage, lifted by growing volumes, good operational performance and a positive price-mix. 2021 Q1 EBITDA is the highest in the last 3 years, showing that our efforts over the last, I would say, 24 months are starting to bear fruit. Before moving to a more detailed analysis of our financials. I would like to give you an update on the ongoing Chapter 11 process of the North American talc entities. First, and important, the plan of reorganization has been approved by the creditors and claimants on April 14 with the majority of approximately 80%, therefore, well above the required threshold of 75%. This is the next important milestone in this long story. The confirmation hearing on the plan by the court of Delaware is now expected for this summer with a potential final approval of the plan and closure of the Chapter 11 process by the end of 2021. In parallel, the sale of the assets of the North American talc entities to Magris, a Canadian private equity fund, for a purchase price of USD 223 million has been closed on February 17, 2021. We confirm that the provision set aside by the group to resolve this litigation is considered, as in the past, appropriate to cover the expected financial impact of the plan for the group. I would like now to hand over to Sebastien, who will comment in more detail our financial performance. Sebastien [Foreign Language]

Thank you, Alessandro. Good morning, everyone. And let me walk through some of the key aspects of our first quarter financial performance, starting with revenue. Sales reached out EUR 1.058 billion in the quarter. They are reported up 2.9% and 6.3% organically versus Q1 last year. This is mainly driven by a EUR 56 million volume increase. As highlighted, we maintained a positive price-mix in this business context, EUR 5 million positive contribution to revenue for the period. The revenue also include a negative currency effect of EUR 52 million. This mainly reflects the depreciation of the U.S. dollar against the euro as compared to Q1 last year. And the EUR 21 million perimeter that we see on the chart relates to the net positive effect of the recent bolt-on acquisition, Hazdenar group in Turkey, in particular, as well as Cornerstone in the U.S., Sunward Refractories in Taiwan and Hysil in India. It also takes into consideration the disposal of Kaolin operations in Australia, but all in all, with a net positive contribution. If we now look into more detail at our 2 business segments and their respective markets, starting with Performance Minerals. This segment generates 56% of the group's turnover with a global sales of EUR 596 million in the first quarter of 2021. All regions saw an improvement of the trend in Q1, with like-for-like revenue up 7%. This compares to plus 4.7% in the fourth quarter of 2020. You will note a weaker growth in the U.S., which is, in our case, mostly due to specific adverse events in Q1, shipping containers unavailability and winter storms have hampered temporarily our ability to serve the market. If we look now by application, filtration and life science market performed well. Ceramics and construction-related and automotive-related markets continued to recover. On the other hand, paper markets remain weak across the different geographies; early signs of recovery came from China and from India. Reported under Asia Pacific, we enjoyed a brilliant growth of our graphic and carbon activities, in particular for mobile energy. As Alessandro said, the group has launched a capacity expansion to further support the dynamic growth of this market in the next months and years. If we look now at our High Temperature Materials & Solutions, our second business segment totaled EUR 470 million sales in the first quarter of '21, representing 44% of the group's consolidated revenue. This business segment was more severely suffering from the weakness of its underlying market throughout last year in 2020. In the first quarter of '21, the recovery is more visible with sales being up 4.7%, while they were down 0.9% like-for-like in the Q4 '20. The business benefited from an acceleration of the production of iron and steel and from the improvement in the automotive sector, especially in Asia, in China and India, in particular. In the meantime, building and construction market remained solid. Now how does it look like in terms of profitability for the group as a whole? Current EBITDA for the first quarter reached EUR 183 million, up 11% year-on-year. The evolution reflects a volume contribution of EUR 28 million with an average ratio on sales around 54%; the positive perimeter effect of EUR 4 million due mainly lead to our bolt-on acquisitions, which performed well; a continuing positive price-mix, plus EUR 2 million; as well as a favorable variable cost impact still in this quarter of EUR 2 million. We had also an improvement of EUR 2 million related to fixed cost and overheads. Finally, we had a negative impact on currency for EUR 11 million. As a result, current EBITDA margin improved significantly from 16% in Q1 '20 to 17.3% in Q1 2021. If we look now at the rest of our income statement, increase of current EBITDA in absolute terms has driven the sharp increase of the current operating income. Net financial result was negative EUR 12 million, well in line with last year. Same thing for the income tax expense, EUR 20 million corresponding to an effective tax rate of 27% compared to 28% in Q1 last year. Net income from current operation does improve significantly at EUR 73 million, which is a 49% improvement since last year. Finally, net other operating income and expenses booked were very low at EUR 1 million in the first quarter of '21. All in all, net current -- net income from current operations per share is at EUR 0.87, up 39% compared to last year, and this takes into consideration the share that were issued through the payment of scrip dividends in 2020. Back to Alessandro for the rest of the comments.

Thank you, Sebastien. Let me now wrap up this short presentation on our results, but saying that Imerys can count on strong and solid fundamentals for the future. After a good start of the year in Q1, we do expect demand for our specialty mineral solutions to continue at a good pace in 2021, driven by what we believe is an economic -- general economic recovery. Caution remains a must as recent developments in India unfortunately remind us, but we are optimistic on the future. Moreover, Imerys is set to benefit from its leading market position in recovery markets -- in a recovering economy, sorry, its innovation strength and from the recent capacity increases and acquisitions. Consequently, we do confirm our commitment to improve profitability in 2021 and to do so in a responsible and durable way. Thank you for your attention, and I open the floor to your questions.

[Operator Instructions] The first question comes from the line of Sven Edelfelt from ODDO.

Yes. I had a few questions. So the first one is on the organic growth, which seems to me, nevertheless, a decline, however, improving. If I restate this from the lockdown in Q1, it seems that the growth has been broadly stable. And when I look at Saint-Gobain, like-for-like, it was 12% on the industrial side. Is it because you are more exposed to thermal engine rather than electric? Also, correct me if I'm wrong. But I believe you have a 7% to 8% exposure to China, which was already very weak in Q1 2020. So I just wanted to better understand the reason [indiscernible]. And also, if you could quantify the impact of the shortage in logistics in the U.S. That would be helpful. That's the first question, which is a bit long, I guess. I would have another question on the disposal of the paper business, the few sites that you did. Can we have more number on that? On the fact that there is no number, does that mean that there is more to come there? And also, have you finished your asset review? These are all my questions.

Thank you, Sven. I chose not to compare ourselves to Saint-Gobain, considering that there are many differences in our businesses. But I can still comment on our organic growth and to address specifically the questions you have mentioned. First of all, in terms of engines and technology in automotive, I would say, the automotive market is very important for this group. If you look at our pie, you will see around 7%. In reality, I would say, probably even more because automotive drives also iron and steel and drives part of the industrial applications because of machinery and so on. So it is an important one. Are we more exposed to thermal engines than electrical? No, I would say, to both. The car needs [indiscernible], the car needs abrasives, a car needs plastic pieces, which contains high-performance fillers. All of these are minerals and solutions that Imerys offers, independently from the engine. Then when you look at the engine specifically, for sure, an electrical engine is an easier component than a mechanical -- sorry, a thermal engine. A thermal engine will require probably more minerals to be produced. At the same time, electrical engines have lithium-ion batteries where we supply both synthetic graphite and carbon black, which are key additives to make batteries perform. And the growth in these fields is extreme. To conclude, I would say, if you ask me the best solution is in hybrid because you have both engines, so we win twice, which is the technologies that I see developing the fastest over the next few years before probably the world moves to a full electric side. So I would say, in general, automotive is important and growth in automotive for us is important. If you look at figures, Q1: Europe, minus 3%; North America, minus 5% compared to last year. So we cannot say that the underlying markets are booming. If you interpret the figures, I think they are recovering, and they will recover very strongly. Today, there are issues in the supply chain, especially around chips. And I believe we all read the newspapers that a lot of producers had to stop lines because of lack of components. Partly it's logistics chain, but really the lack of conductors and chips is semiconductors and chip is impacting production. So this might have an impact on our growth, reducing it now, but I am convinced this market is set for a long, steady recovery because we need to replace the cars we did not replace in the last, basically, 12, 14 months. Second element you mentioned is China. I agree with you. We are exposed around 7% to China. Last year, China suffered ahead of Europe and the U.S. This year, it's back. So I would say, but it's still not the main market. On the contrary, the U.S., which represents almost 30% of our sales, had an exceptional Q1 last year. And if you look in details at our 5 business areas, you will see that the one that posted the lowest growth -- organic growth is exactly the U.S. Reasons are, one, last year was strong. And if you recall, COVID impacted the U.S. first in end of April, May. So Q1 was really still COVID-free in the U.S. Secondly, we have the highest order backlog out of the Americas in our history. We're talking about tens of thousands of tons, which are ready to be shipped and are waiting for containers and for vessels. The supply chain is really clogged. So we're talking about millions and millions of goods waiting to be shipped because of this, let's say, strong demand and slowness of ramping up of the logistics chain worldwide, container ships, container boxes and so on. So this is -- this is, I would say, what is impacting currently organic growth, still, in my opinion, a 6.5%, very reasonable number. Last but not least, Europe is not completely out of the crisis. We have markets, which are typically solid, like consumer goods, our filtration business, wine, beer, cosmetics. As long as Europe doesn't reopen, there will be less consumption, events, restaurants, bars, going out. And I'm sure if you check results of cosmetic companies, you will see that they have similar issues. So I think the world is coming out of this crisis, but we are not back at its full potential. So I'm happy on this organic growth, but I think there is more to come. Sven, on the second question on paper, we did not communicate figures because it was a transaction with a private group. That's the agreement that was taken up to disclose. We disposed of 50% of our joint venture that, yes, was addressing mostly the paper and board market. It's a great technology. We have the right to continue using it under a license agreement, which will allow us to continue selling the technology and the products, our specialty minerals, which is what is very important for us. But we do believe that in the hands of the new owner, you will find a new boost, especially in application outside our world. So it was, I think, a good move for both parties, and I'm very glad that the employees and our colleagues working there will find a new house, a new home and development. Part of the agreement was also to divest the sites producing this product, although we will continue to be exclusive supplier of the mineral solutions. So once again, limited impact for Imerys and probably the best for the business. Last, in general, on paper, but on all our businesses, yes, our analysis has been concluded. We have a way forward, which is to focus on growth, on growing markets, on growing applications, but to manage also cyclical and declining ones in the proper way. And at the moment, we will be in a position to give more information, if any, we will do. But you will understand these are, in any case, at the moment, confidential. But we see that the management of the company on its cost base, fixed cost, overheads and variable costs, even in this inflationary area is very well under control, and the performance is coming back very strongly.

Sven, any follow-up question?

If you're asking, yes. Just a clarification, actually. Can we have more detail about the $117 million appeals court that has been thrown out? I believe it's a different topic than the Chapter 11 subject, but it would be good to have a comment from you. I have had a lot of questions from investors about this topic recently. So could you comment on that, please?

Sven, I'm not sure I understood the question [indiscernible]

Are you referring to the appeal of Johnson & Johnson that was...

Yes. Exactly. Exactly. Exactly. It's -- for me, it's a completely different topic, but can you comment on that one?

I think we cannot comment on this one. We are completely separate from that, so we prefer not to comment. The quick word that I had with our legal teams is that it cannot -- it can in any -- in no case be about a bad point for us. But I -- we cannot be more specific.

Next question comes from the line of Benjamin Terdjman from Kepler Cheuvreux.

Yes. Just have 3 questions on my side. First one is on prices. So how do you see the prices going forward after the 0.5% you recorded in Q1? Do you see further increase in the context of general inflation on raw materials? Second one is on your guidance of EBITDA margin. Well, you didn't provide a figure, but can we expect you to recover the 2019 level? And finally, last question is on your tax situation. Could you explain maybe why you are more conservative regarding the timing of the resolution? Initially, if I remember correctly, it was in the summer of this year. Now you prefer to indicate by the end of the year. So could you maybe be more specific on that?

Thank you, Benjamin. On prices, yes, we did our job at the beginning of the year with a further increase compared to last year. I believe there is more to come. Typically, price negotiation go into the beginning of the year. So I'm sure the full effect might not be seeable in only one quarter. And by the way, price-mix, variable costs balance should be seen on a full year basis because it could move or let say, could have a phasing in a year because of your inventories because of your negotiations. What for sure you point out correctly is we are experiencing a very inflationary wave with most of inputs resources becoming more expensive: energy, packaging, chemicals, raw materials, logistics costs. And therefore, it is our responsibility and duty to pass on to the market such increases. That's what we are discussing with very openly and transparently in a cooperative way with our customers. We will need some surcharges on freight, on containers, on vessels. And today, I would say the market is receptive to listen because it's quite widespread and, I would say, in the news every day. Important for me, once again, is to keep this balance in the right direction as we have done in the past, and I'm convinced we will continue in the future between price-mix and variable costs. This will have an impact on our EBITDA, and therefore, on our performance. Yes, we will keep our costs under control, but we also need the top line to support. It's a bit early in the first quarter of the year with a pandemic that is, yes, fading, but not gone to give a full year guidance. I hope to be able to do this with a bit more reliability in 3 months when we talk again, middle of the year. We remain confident, as I said, to beat, clearly 2020. Will we be at 2021? Give me a few more months of safety, and then I will answer these questions. So we are 130 basis points ahead of last year Q1. So I would say we are on a good way. If I look -- although you didn't ask, but if I look at the pace of recovery on the Q1, the best month of the quarter was clearly March and by far. If I look at our current order intake, I believe April will be a good month again. So the world is recovering, and demand for our products is really gaining base. So we do look at a good 2021. Sebastien, I don't know if you want to add numbers too, but I think it's a bit early in beginning of the year.

To remind you, 2019, we were at 17.5%, 17.6% to be precise EBITDA margin. Not out of reach.

Okay. And on the talc litigation?

Yes, on the talc litigation. The the final hearing -- first of all, I remember about a year ago when we started the discussion, I mentioned that there were 3 milestones to reach an exit. One was signing a plan of reorganization, which was done in May last year. The second was to get approval by the plaintiffs and creditors. This was done in April. And the third one is a final confirmation by the relevant court. Then there are a couple of other formal steps, but are more formal than in the merit. So 2 out of 3 have been reached. The third one, which is just as important, is the final confirmation by the bankruptcy court. The hearing, which was scheduled originally for the end of June has been moved to the 14th of August. In July, the court doesn't work. Reason for this delay is that there are objections, as in the past, and the court wants to give proper time to all the parties to analyze, review, commence repair. And there are also a lot of depositions which have been requested by the different stakeholders, and the court needs the time to listen to each witness and party's interest. So next step is in August. I hope it will be kept. It's a lot of documents, a lot of discoveries. So my fear is more on the timing rather than on the outcome. I remain -- we remain very optimistic on a positive outcome of this process, but the timing depends really on the volume of work ahead of the court. That's why we carefully say it's after August. And by the end of the year, we should have this as well as further formal steps like the final confirmation by federal court. It's the best we can say today. The date is set, but we know there are a lot of work by lawyers and the judge to get there.

[Operator Instructions]

Okay. Since there are no more questions, I would like to thank you once again for dedicating time to our presentation, and stay safe. And I do look forward to seeing you or hearing from you in 3 months. Thank you very much. Goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.