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

Good day, and thank you for standing by. Welcome to the Imerys First 9 Months and Third Quarter Results 2021 Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, CEO, Alessandro Dazza. Thank you. Please go ahead.

Good evening to all of you, and thank you for joining us today to review Imerys results for the third quarter and for the first 9 months of 2021. With me, next to me here this evening, Sébastien Rouge, our CFO. For sure, third quarter was a challenging one, characterized by growing inflation on all fronts and further supply chain disruptions. And I believe, frankly, that the next quarter will be just as challenging. However, also in this context, Imerys has shown solid performance as you will see in the coming slides, underlying the quality of this company. Let me now share with you a few highlights of the quarter as well as some key financial KPIs. First of all, the group continued to outperform markets by delivering, again, double-digit organic growth, 18.6% to be precise, carried by good commercial performance of the team and, of course, continuous recovery of most of our end markets. And we will go in more detail later on. Supply chain and logistics remain an issue, both in terms of cost and even more worrying, availability. But again, I'll go in more detail if you wish. Inflation accelerated clearly in Q3 compared to the last time we spoke end of July, in particular, around energy and certain raw materials the group utilizes. Imerys pricing also accelerated in Q3 with a 3.6% increase versus previous -- prior year. Again, more details, there is a specific slide on this later on. Sales were up 21% at more than EUR 1.1 billion for the quarter. Bottom line, current EBITDA grew by 18% in the third quarter to EUR 194 million, corresponding to a margin of 17.6% on sales and 18.2% for the 9 months. This is in line with our 2021 target and above 2019 levels. As a result, net current income for the first 9 months more than doubled to EUR 233 million versus last year. Furthermore, as already communicated at the end of July, we signed an agreement to divest our North American hydrous kaolin assets, mainly serving the U.S. paper and board markets and a revenue of approximately USD 76 million. I'm convinced that this market, as we said at the end of July, needs consolidation to address declining demand. And our assets are best placed with the Thiele Kaolin Company, a family-owned business, which will extract the most value from these great assets. At the same time, this will allow Imerys to continue its active business portfolio management and to refocus on activities and markets offering higher growth perspectives. I would also like to update you briefly on the U.S. talc litigation. I'm sure you have read our recent press release on October 14, in which we explained that on October 13, the day before, the court overseeing the North American Chapter 11 cases issued a ruling that certain votes, certain ballots cast in favor of the plan of reorganization will not be counted. This means that the approval of the plan now falls just short of the required 75% majority vote, to be precise 73%. Unfortunate. This rule -- this ruling is expected to result in a resolicitation of the votes on an updated plan, which will extend the Chapter 11 time line into 2022. Importance, and I would say even more important, we do not expect this development to affect the terms and conditions of the agreement with Imerys and the North American talc entities is currently embodied in the plan. Though unhappy about the delay, we remain very confident that the Chapter 11 process will find an end next year. And the group continues to consider that the balance of the provision in the financial statements as of the end of 2020, practically unchanged to today, is appropriate to cover the expected financial impact of the Chapter 11 process on the group. And I will, of course, answer questions should you have any. If we now move on to Slide 6, you look about -- a bit about markets and growth. You can see that revenue continued to rebound in Q3 with another quarter of record double-digit organic growth, 18.6% as I mentioned before. We will deep dive a little bit on each key end market in the 2 following slides. And you will see that some of them have now returned to precrisis levels, probably faster than expected, maybe a year ago, with the exception of automotive and paper and only partly iron and steel. On the right in the pie chart, we have added to the markets we address. We have added a symbol plus, minus to show what we would say current market dynamics, which I will comment again when going through the single markets on the following slides. So we start on automotive. This is the market today causing the biggest worries, at the moment. As you can see, significant decline in production practically everywhere in the world due, as I'm sure you know, the shortage of electronic components on a global scale. At the moment, we assume that the situation will last well into 2022, clearly impacting our sales. And I remind you that automotive is an important market for Imerys, 7%, 8% exposure for the group, but not only in terms of direct sales, also indirect sales, typically iron and steel. What is, however, important and give us good hope for the future as demand for cars is strong. So there will be -- there must be eventually a rebound when availability constraints will be removed. If we now move on to iron and steel. Good growth in the quarter, except for Asia surprisingly. But the impact is due to a significant drop, for the first time in years, a significant drop of production in China, 10% -- minus 10% mostly relating to CO2 emission reduction targets imposed by the government. In this regard, I think these are recent announcements around future potential, future policies around CO2. I would like to point out that China, a reduction of production in China steel and aluminum, which is what is in discussion, could have a tremendous impact outside of China, boosting, among others, European and U.S. producers. Needless to say that this will have positively impact on Imerys sales, as these are markets where we are much more present than we are in China. So more to come and trends to be followed with attention. If we now look at construction, markets enjoyed again a healthy level of activity globally despite, in some places, shortage of workforce and raw materials. However, I do believe that the big growth that we have seen in the last 12 months, the big catch-up costs, first wave of COVID is largely behind us. Good level of activity but not the strong growth of the past. Of course, some health could come if this announced well-published infrastructure program in the U.S. is rolled out rapidly, to be seen. Looking at paper. After a strong rebound, you see on the left side of the bottom graph, after a strong rebound in Q2 though comparing to a very low base Q2 last year, paper markets continue to recover even if at a bit slower pace partly due to constraints in capacity relating to past closures. Today, paper is short. Not shown here, but a word on consumer goods, which continued to progress well or very well, thanks to the removal, in particular, of all the confinement measures in most countries. Industrial markets as well, clearly picking up on the back of good economic activity. We now look at Page 9, probably an answer to many questions you might have around inflation and pricing. Inflation has been clearly accelerating in Q3, in particular, around energy, all forms of energy and in particular, in Europe, which had an increase of 60%, 70%, 80% and sometimes even above 100%, definitely unexpected when we spoke last time and unforeseen in this magnitude. The group reacted, reacted rapidly, although the implementation and the respect for our customers has forced us to give some delay and some ahead information, which is not always the case when we receive from -- typically from governments increases in energy costs and energy prices. As you can see, our efforts on pricing clearly scaled up also in Q3 with an increase year-on-year of 3.6% compared to 1.5% for the first half. Specifically on the quarter, given the rapidity of the increase in energy was not enough to fully compensate the cost in Q3, more about -- more in relation to timing rather than magnitude. But we do expect to see a positive balance going forward as we see it on a full year basis still today. So full deployment of our price increases still to deliver in the remaining part of the year. Once again, for the 9 months, we remain positive, which underlines once again Imerys ability to pass through cost increases to the market even when extraordinary. I now hand over to Sébastien to go a bit more in detail on Q3 financials.

Thank you, Alessandro. Good evening, everyone. Let me walk through some of the key aspects of our first 9 months and third quarter financial performance, and we'll start with revenue. Sales reached EUR 3.3 billion in the first 9 months, a 16% increase versus prior year. This corresponds to an organic growth of 17.3% versus 2020, which was mainly driven by a EUR 413 million volume increase. We maintained a positive price mix of 2.2%. That is a EUR 60 million positive contribution to revenues for the 9 months period. As Alessandro mentioned before, for Q3 only, price mix was 3.6%, accelerating versus first and second quarter. The revenue also includes a still significant negative currency effect of EUR 75 million. This mainly reflects the depreciation of the U.S. dollar against the euro in the first part of the year. You notice that this trend has reversed in the third quarter. The EUR 52 million perimeter effect relates to the net positive effect of recent bolt-on acquisition: Haznedar in Turkey, Cornerstone in the U.S., Sunward in Taiwan and Hysil in India, and the disposal of kaolin operations in Australia. 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 sales of EUR 1.8 billion in the first 9 months of 2021. All geographies saw improved trends with like-for-like revenue up 17.6% versus Q3 in 2020. The group faces some persistent logistic constraints, especially in the Americas with an order backlog remaining quite high. If we look at our different markets, on the positive side, the overall rebound in activity was supported by sales of paints, rubber, polymer and ceramic products in the construction industry, the better performance of filtration and agriculture markets in the consumer goods sector. We note an improvement in the paper and board demand. Sales in Asia Pacific region continued to be strong with 30% organic growth in the third quarter, thanks to the continued high demand for carbon black and synthetic graphite for mobile energy. On the other hand, the automotive market continued to suffer, in particular, from the global semiconductor shortage. Looking now at our High Temperature Materials & Solutions, our second business segment, which recorded sales of EUR 1.5 billion in the first 9 months of '21, representing 44% of Imerys consolidated revenue. This business segment was more severely impacted by the weakness of its underlying markets for 2020. In the last quarter, the recovery continued to be solid in all geographical areas with Q3 sales up 21% year-on-year, while growth is 17.5% over 9 months. The business continued to benefit from dedicated commercial initiatives and from the strong underlying market recovery. The rebound was supported by high demand of the iron and steel, abrasive and foundry segments. Demand of specialty binders for construction also increased. In Turkey, Haznedar integration continued to perform above expectations. And in India, the new greenfield plant in Vizag continued to ramp up and serve the dynamic domestic refractory and construction markets. Now how does it look like for the group profitability as a whole? Current EBITDA for the first 9 months of 2021 reached EUR 594 million, up 34% -- 31% year-on-year. This evolution reflects the strong volume contribution of EUR 205 million with an average ratio on sales of around 50%. The positive perimeter effect of EUR 11 million due mainly to bolt-on acquisition, which performed well as I just said. The continuing positive price mix, EUR 39 million, which compensated for the 20 -- EUR 32 million increase in variable costs, a consequence of extremely high inflation on freight, raw material, energy and packaging costs. We note an increase of plus EUR 75 million of fixed cost and overheads, in line with the sustained level of activity. Currency has a negative impact of EUR 18 million. As a result, current EBITDA margin improved significantly from 16.2% for the first 9 months of 2020 to 18.2% in 2021. One important reference point is also 2019. Profitability for the first 9 months is better than the one of 2020 and also better than the 9 months of pre-crisis level. The combination of positive factors gives the group a strong operating leverage. The positive effects of cost reduction that took place in 2019 and '20 and the ongoing disciplined price mix enables Imerys to take full advantage of the volume recovery. In spite of mounting inflation, Imerys EBITDA in the first 9 months of the year exceeded 2019 level, both in absolute terms and in percentage of sales. If we look now again at 2021 and the other element of our income statement. The increase of current EBITDA in absolute terms drives the sharp increase of current operating income. Net financial result was negative at EUR 30 million in the first 9 months, below last year, thanks mostly to ForEx and GM impact. Income tax expense of EUR 90 million corresponds to an effective tax rate of 27% to be compared with 28% in the same period last year. Net income from current operations does double versus last year, reaching EUR 2,033 million. Finally, net other operating income and expenses booked were very low at EUR 17 million in the 9 months of 2021, stable versus last year. And I mean, lower than last year and stable as compared to the first half. Net income from current operations per share is at EUR 2.75 and also almost double compared to the first 9 months of 2020. Now back to Alessandro for the conclusion and outlook.

Thank you, Sébastien. So now let me rapidly wrap up this presentation by saying that the group is confident that the business will remain strong in the coming quarters. So the comparison basis will be a different one as the big recovery is behind us. I remind you in this regard that Q4 last year was already positive. So we posted organic growth of almost 2% in Q4 2020 compared to 2019 prior to COVID. Still, we do expect demand for our specialty mineral solution to remain sustained across most markets, hoping also in a recovery of automotive next year and therefore, well into 2022. Pricing discipline, tight cost management should continue to offset the impact of higher input costs, inflation. Import has been probably never seen before in terms of rapidity of the increase of this high environmental -- high inflation environment, sorry. In this context and under the current market conditions, Imerys confirmed its guidance. And to be precise, we target to achieve revenue probably above the EUR 4.2 million and the current EBITDA in the range EUR 735 million to EUR 755 million for the full 2021, a significant improvements compared to the EUR 630 million recorded last year. We will continue to serve our customers in this challenging context and in a durable way. Imerys has just had the first Biodiversity Day in October on a group-wide basis globally, worldwide, which underlines our -- and reaffirms our commitment to responsible development. Thank you for your attention. And I now open the floor to your questions.

[Operator Instructions] And your first question comes from the line of Sven Edelfelt from ODDO Securities.

So 3 questions for me if I may. Firstly, I would like to come back on the guidance. I'd like to understand why you are giving around EUR 735 million, EUR 755 million, knowing that your consensus is already at EUR 750 million? Why not just saying that consensus is, in your view, consistent with market expectations? It seems to me that you are not very comfortable with this consensus. And therefore, you might expect the low end of your guidance. That's the first question. The second one, I would -- can you remind us your hedging for 2021 and possibly for 2022? And also, it seems to me with that regard that the future are pointing to a lower energy cost in 2022 compared to H2 2021. Is it something that you see as well? That's the second question. On the -- yes, maybe a third one on -- obviously, the volume has been very impressive, margin a little bit less, if I may say. I understand it's a lag between pricing and the energy cost. So why not going for an automatic pass-through to customer to avoid this lag?

Thank you, Sven. I will ask Sébastien to comment on the hedging for this year and for next year. I'll start with your first question, Sven. We never commented on consensus, and therefore, we will not -- we will continue not to comment on consensus. We issued a guidance in July, which was around an EBITDA margin close to 18, between 17 point, I would say, 6, which was our past 2019. So for me, 17.6% and 18% was our target on revenue around close to EUR 4.2 billion. We have precised it now that we have more visibility which, if you do the math, transforms into the range I have mentioned. Yes, I do target to be on the upper side of this range. But for sure, the events of the last 2, 3 months have led us to be more cautious. The increase in energy, in general on the energy factor has been extremely rapid, unexpected. And it does take time to pass through, which partly answer and I use it to answer your last question. We are not a commodity, fortunately. And therefore, you don't pass through automatically. You don't have index formulas. You sell a specialty product that has a value for the customer, and there is a relationship with the customer. Customers that today are understanding and receptive of price increases, well explainable with energy, raw materials, logistics. But we do care to explain, to see them, to negotiate and implement, which or in a normal world allow us to do it without impact. In Q3, specifically, it did cost us some time effect, some phasing effect because energy, nobody calls you. You get it in your bill next week, being electricity, oil, gas, which is not the way we do with our customers. I see our capability to pass it through with the required time, and I see the advantage going forward with this approach. It will turn around 1 day because I don't believe that these levels of pricing for energy are sustainable in the long term. Therefore, probably past winter or past the peak, there will be a reversal, then we will enjoy the very same treatment. The potential reduction that we will have to grant our customers will not come on the same day as energy goes down, but it will come after a negotiation, after a due time for implementation. And if you look back historically, when costs turn downwards, Imerys typically makes a lot of money because of the lag effect. So we might pay some now, and Q3 probably was the most difficult one. I'm convinced to have a better Q4. But all of this will come back 1 day in the other direction. So no commodity, pass-through is not an automatic transaction. It is a cooperation and collaboration with our customers. In terms of energy itself, Sven, I -- we cannot -- we are preparing for the worst and be happy for the better. We are planning these energy prices to last in the future. Therefore, we are equipping our team, informing our customers, that's the new normal. And therefore, we have to recover these costs through pricing in the market. Then I'll be very happy to have a good surprise sometimes next year to see a drop. But logistics, we said it in July. It's going down. We see no increase anymore, but no signs of a downturn. Now people have pushed it to December and even into Q1. Semiconductors, we said after the summer, it will be better. At the end of the year, it would be better. Today, everybody expects no improvement before well into 2022. So yes, I do believe we are leaving a peak, but we are preparing for this peak to stay, and that's the way we go into 2022. Looking forward to good news, but to be protected on the bad news. On the hedging side, Sébastien?

On the hedging, I mean, we -- for Q4 this year, we are hedged around 80%, I would say, as normal. It means that we still have a portion of our expenses that are on the spot. As you know, we have a systematic and progressive hedging. So throughout next year, we have the Q1 of next year, which is already for energy hedge depending on the countries around 60% to 70%. And when we go forward throughout 2022, it goes down. And it averages close to 50% for the full year, a little bit less in some countries. I do not 100% share your view that the forward are normal. When we look at that in very much detail, we still see extremely brutal movement, not only of the spot, but also the forward. And right now, we have forward rates for energy that are still very high for the second part of 2022. And that's why we are working at protecting ourselves, also commercially and not only financially, because we also do not want to lock our ourselves and our customer with very high rates on the long run.

And maybe, Sven, to complete on your last questions, you mentioned the margins. There is a slight deterioration of the margins, which is more a mechanical effect of the pure cost increase price increase, which raises the denominator and the numerator. But I would say that the past is a translation of the inflation into cost and prices. That has a light impact on the percentages themselves.

As your next question comes from the line of Mourad Lahmidi from Exane BNP Paribas.

Three, please. The first one is on the variable cost inflation. I think that when you talked in July, you mentioned EUR 60 million inflation in the second half of this year. Where do you stand now? Can you just give us an update on this figure? The second question is on the fixed cost increase that you -- we've seen in Q3. I was just wondering what's behind that wages of the costs? And finally, a question specific to freight costs. Can you share with us how much of your freight costs are contract-based versus spot-based, please?

You're correct. We -- in July, we announced that we do see a potential increase of variable costs on the full year between EUR 60 million and EUR 70 million kicking in after Q1 because Q1 was still, let's say, neutral compared to our assumptions. This number, we have done the same math now. This number has become EUR 120 million. So there has been an increase of approximately EUR 50 million for the full year in our views compared to July, which is if I tried to explain the split, the vast majority of this is relating to energy. Probably half of it or more. Logistics has not moved much, a few millions. So what I said before, logistics has probably reached the peak. The remaining part is mainly around certain raw materials, which did not move so much on the first part of the year and are catching up now. The best example is around aluminum. If you look at the aluminum metal has increased 30%, 40%, 50%. And accordingly, alumina, which is one of the key raw materials for the group, has increased almost 80%. So this is the big change. In terms of rates, we do have parts which is contracted, part which is bought on the spot and part which is hedged over the year. As always and as Sébastien was explaining before, when you enter the year, you are mostly covered. The coverage decreases as you go through the year, because you tend to be cautious on the long-term commitment. So today and to give you a figure which I think is key, compared to our original assumptions for the year, freight costs have a higher impact of approximately EUR 30 million for the group, which, again, we are trying to pass on to our customers typically through surcharges. So significant, but not in the magnitude of the increases this position had worldwide this year. In terms of fixed costs, Sébastien?

I would say fixed cost, we have 2 major impacts. One is a little bit mechanical. You remember that Imerys did not take last year any structural measure to reduce its capacity. And I think we really enjoyed this decision by having the ability to rebound. On the other hand, we took advantage last year, and it went up to Q3 of the different governmental support that were in place throughout 2020 and that we have a mechanical reversal of that. The second impact that we can highlight is mostly around maintenance. We have done very large efforts last year where we were not using our facilities in the full run to contain maintenance costs. Obviously, now that we are running, I would say, even full speed in a fair amount of sites, it has mechanically increased both the usage of the maintenance and also the price. As you know, we speak a lot about the price of variable costs, but also there is some tension on the maintenance, whether it's labor, subcontracted labor or spare parts, et cetera. So that's the second main driver of the increase of fixed costs, which is really linked again to the increase of activity that we have encountered throughout the quarter.

Okay. I have a follow-up one. As we go into 2022, is it fair to expect some carryover effects of the variable cost spike that we've seen in the second half of this year? I mean, these things should be sticky. What can you basically speak a little bit about that?

What we -- if I take -- if I give you my opinion, I do believe there will be sometimes mid of next year an inflection of inflation. So a reduction post winter, post Chinese New Year, a reduction hopefully and probably in all -- sorry, in all sectors and components. This being said, currently, we are planning to live with this inflation for the full year. And we are entering 2022 assuming, once again, the worst and therefore, being equipped and then be surprised if it gets better. So we are considering this is the new normal, and that's what the group has to face. And that's what we are working on in collaboration with our customers and with our sales teams.

Okay. Very helpful.

Yes. I think hoping today is not the right word, it's only facts. And facts today say this inflation has never seen before, and that's what we have to face. And frankly, I'm glad that we still manage quite rapidly to pass it through with still relatively good volumes, as you have seen in the growth that we have posted, still with good demands and cooperative customers.

No question at this time. [Operator Instructions] Our next question comes from the line of Jean-Christophe Lefèvre from CIC Solutions -- CIC Securities.

No, this is not exactly the right name. This is Jean-Christophe Lefèvre-Moulenq. Sorry. A follow-up question regarding that of Sven. Can I assume that all things being equal, the EBITDA margin you guided 18% full year in July, will there be not hit? And secondly, can we assume a further price hike announcements over the fourth quarter versus the 3.6% of the third quarter?

Jean-Christophe, if you recall, our guidance was close to 18% and above '19. '19 was 17.6%. That's why our target was 17.5% to 18%. That was our target that we see coming in. There might be a mechanical effect of higher cost, higher sales purely relating to inflation, which might cause some dilution in points after the comma percentages. What is key is that the business remains solid, and we pass through these costs hopefully a bit more as we go forward. And that's why we do not see any need to correct previous guidance, although inflation is really impacting the industry in the world today. And to second question, clearly, yes. What we have implemented in Q3, which is 3.6, is not a full-scale impact. There is more to come. It is launched. It's being implemented. If you ask me to do -- to give you my best guess, I think it would be close to 5% or above 5% in Q4. It should give us between 3% and 3.5% on the full year. Hence, we will need another step in 2022, considering that we assume the world to remain at this level of inflation. It's too early to finalize 2022. We are working on our budget on our assumption. But in principle, we will need a further push to cover the full-scale impact of inflation in 2022.

No question at this time. [Operator Instructions] No question at this time, speakers. Please continue.

Okay. Then I think time to close this call, and I do thank you for the time this late evening. Once again, we are proud of what this group is doing in terms of organic growth and in terms of resilience of the model. We do expect the business to remain strong going forward in a strong inflationary environment. But with the proper adjustment of our prices, we will continue to deliver growth and profitable growth into 2022, I'm convinced. Thank you, and have a good evening. Thank you. Bye-bye.

Good evening.

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