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

Good day and thank you for standing by. Welcome to the Imerys Half Year 2022 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Alessandro Dazza, CEO. Please go ahead, sir.

Thank you and good evening to all of you. Thank you for joining us today again to review Imerys 2022 first half results. As usual with me here this late afternoon, Sebastien Rouge, our CFO. And as always, please let me start by sharing with you a few key messages for this semester. First of all, Imerys posted a very strong performance in this first part of the year, achieving record sales historically, close to EUR 2.6 billion, driven by a strong pricing effect needed, really needed to offset rising inflation, but also thanks to a good level of activity in most end markets. Though we live in a very challenging context, volumes are so far holding quite well. In particular, if we exclude, as we will see later on, the unavoidable impact of the Ukrainian crisis and the sanctions against Russia, as well as local lockdowns and restriction in China. All these events combined as you will see later on, had a negative impact on our volumes of approximately 1.5 percentage points in the first semester. As previously announced, we have continued to increase our prices to offset extremely high inflation. The efforts delivered a price effect of 16% in the first half, with a peak of 20% and above in the second quarter alone. I would like to remind you that this figure was only 12% in Q1. All these actions allowed Imerys to post a positive balance between price and variable cost for H1, as you will see in few slides. Our current EBITDA continued to grow with an increase of 11% versus prior year, reaching EUR 445 million for the semester. It is the best ever for this company. Sebastien will give you more details on this great performance later on. Net current income in H1 followed was close to EUR 119 million, double-digit growth compared to last year. And last comment on free operating cash flow positive, but clearly impacted by the strong activity level by inflation and by an increase in spending on strategic CapEx project, which we have recently announced and launched. Next to the half year results today, we are also announcing an important step in Imerys' long-term strategy. The group has entered today into an exclusive negotiation to sell to Platinum Equity, a global investment firm, operating companies in a broad range of markets, it's high-temperature solutions business for an enterprise value of approximately EUR 930 million. This divestiture is expected to be completed by the end of the year and, of course, is subject to the fulfillment of customary conditions, including the consultation with working councils. Short reminder for you, HTS is a global provider of refractory solutions for iron steel, for thermal, for foundry markets. This business generated last year EUR 800 million of sales and approximately EUR 470 million in the first part of this year, as you will see in the tables later on. The contemplated divestiture of this business would be an important milestone in the group's refocusing efforts towards its core high-growth specialty minerals business. It would improve our growth profile and once completed, it would also provide Imerys with additional financial resources to pursue our development strategy and in particular, in market such as Green mobility, where we are investing a lot, sustainable construction, natural solutions for consumer goods. We do look forward to presenting on a more wider scope our long-term vision, our growth strategy for the future at a dedicated Capital Market Day that we will host in the fourth quarter of this year. If we now look again back at the semester to organic growth at constant perimeter and FX, you can see that revenues continue to climb in Q2 2022. It is the eighth consecutive quarter-on-quarter revenue growth for the group. On the right side, the usual exposure to end market has not changed and of course, it has not been adapted to recent announcement on potential perimeter changes. We will go through each market in the next slides, starting by construction. As you can see from the figures and partly as I already mentioned during our last call in April, growth has slowed. It remains positive throughout the world, basically with the exception of North America, but we see a certain slow in this growth, partly driven by constraints, labor shortage in many markets, the U.S., but also Europe, inflation and raw materials. So especially on the residential side, we do see some slowdown. Iron and steel, another important market. Soft quarter Q2, you see a lot of negative numbers in the table for sure driven by rising energy costs and in general, more difficult macroeconomic conditions. I still believe that the reduction of steel exports from Russia and Ukraine, which have come to an halt, will benefit other producers in the rest of the world and Imerys will benefit from this trend, being our presence outside these 2 countries much higher proportionally. As far as Asia is concerned, we have India doing extremely well. Overall, the continent impacted by negative growth in China, again, partly due to lockdown restrictions, but also slowdown in the construction sector. Recent messages from the Chinese government to sustain the economy should, however, reverse this trend going forward. Moving to the next slide, automotive. Again, very disappointing Q2 even if in some areas, as you can see in the table Europe, North America positive worldwide still negative and especially worldwide still between 17% and 20% below pre-crisis level below 2019. Europe and America benefited certainly from a very low comparison basis last year when the semiconductor shortages really peaked. At paper, after a very strong Q1 cost inflation, but also some production issues affected the industry in Q2. The conflict in Ukraine has an impact on the raw material side, but also some strikes in the Nordics have impacted the production of some paper mills. In Asia, the business remained strong and growing and we do expect to continue to be so going forward. The final slide, 2 markets with definitely a positive trend. Consumer goods continue their recovery post-COVID. Yes, restrictions in China, yes, inflation might undermine a bit consumer confidence going forward with a potential effect on consumption. But we don't see that happening now rather towards the end of the year. Electric vehicles continue to be very dynamic in all geographies, boosting demand for lithium ion batteries and therefore for our products. Consumer electronics were a bit slower in this quarter, especially due to lockdowns in China was a big taker of such products. Let's now focus a bit on costs and prices. Thanks to the really great efforts of our sales teams, Imerys managed to offset the extraordinary rise of inflation in Q2. I think this is exceptional given the context. The balance that you see on this table, price variable cost was positive in Q2 and is positive for the entirety of H1, even though inflation has been continuously growing, especially in energy and especially in Europe. Now we also see this impact on fixed costs for instance maintenance, spare parts, even labor itself services. The inflation has an impact on these parts and that's why we present such impact on the right of the table. There were some in Q1, but of course, clearly less impacting than it is today. This balance, the positive balance confirms Imerys' strength even if it remains very frankly, challenging work and maintaining a reasonable relationship with our customers is a key for the long-term future of this company. I now hand over to Sebastien for some more details and analysis on our results. Sebastien?

Thank you, Alessandro. Good evening, everyone. Let me walk through some of the key aspects of our financial performance, starting with revenue. Sales reached EUR 2.56 billion, an 18.7% increase versus prior year. This was mostly driven by the EUR 360 million price increase corresponding to 16.1% price effect on sales, out of which 20.1% if we look at Q2 alone. The increase in revenue also includes a positive currency effect of EUR 101 million. This mainly reflects the strengthening of the U.S. dollar against the euro. There is a negative EUR 26 million perimeter effect, which relates mostly to the recent activity disposal serving the paper market, mainly our kaolin assets in North America and 5 Berlin activities. Finally, volumes were very slightly negative at minus EUR 29 million due mainly to the impact of the Ukrainian conflict and local lockdowns in China due to COVID outbreak. It means that as of today, demand continued to be strong even in our inflationary environment. Let's now look into more detail at our 2 business segments and their respective markets, let's start with Performance Minerals. This segment generated 54% of the group's turnover, with global sales reaching EUR 1.4 million in the first half of 2022. All regions saw an overall good level of activity in H1 with like-for-like revenues up 16.2% in Q2. Logistics remain constrained, in particular, in the U.S. for its export activities. If we look at the applications, ceramics and construction-related markets continued to be dynamic and more than compensated the automotive market decline, which continued to suffer from global chips availability issues. Reported under Asia Pacific, we continue to benefit from the continued growth of our graphite and carbon activities, in particular for mobile energy. The group has launched a capacity expansion to support the dynamic growth of the main automotive by 3 players. As you can see from the EBITDA, profitability of the segment is maintained at a good level in spite of cost increases. If we look now at our High Temperature Materials & Solutions, our second business segment totaled EUR 1.2 billion sales in H1, representing 44% of Imerys' consolidated revenue. The 18.4% organic growth of this business segment was supported by a price increase that offset energy cost inflation in the first half of the year. In Q2, the business benefited from well-oriented building and infrastructure markets, which compensated for the soft refractory abrasive market and automotive. The majority of the Russia and Ukraine impact for Imerys is in the HTMS segment. In India, the new greenfield plant in Vizag continued its ramp up. The profitability of the segment is improving as compared to last year with EBITDA reaching EUR 187 million. The segment took advantage of operating leverage with continuous growth since Q3 2020 and excellent performance in emerging markets, Turkey and India in particular. If we go now to the consolidated figures and the group profitability as a whole, current EBITDA for H1 reached EUR 445 million, up 11.2% year-on-year. This evolution reflects a strong price effect contribution of EUR 365 million, which more than compensated for the EUR 270 million net increase in variable costs and EUR 74 million increase in fixed cost, both a consequence of extremely high inflation impacted in particular, energy costs. We have also a currency positive effect of EUR 26 million. As a result, current EBITDA margin is resilient, you will note in the detailed financial, the sequential improvement of our EBITDA. In Q4 last year with the first wave of inflationary impact, EBITDA decreased to EUR 167 million. It recovered gradually to EUR 189 million in Q1 2022 and EUR 256 million in Q2 with EUR 445 million EBITDA in H1, it corresponds to 17.4% of sales. If we look now at the other elements of our income statement. In absolute terms, the increase of EBITDA drives the increase of current operating income reaching EUR 293 million, up 19.5% versus last year. Income tax expenses of EUR 75 million correspond to an effective tax rate of 27% in line with last year. Net income from current operation, group share and per share went therefore up 19.7%. The other income and expenses, including particular restructuring costs related to Russia and Ukraine, compensated by a capital gain on the disposal of our natural graphite activities. All in all, a EUR 15 million charge in line with last year. You will note, we also posted a gain of EUR 18 million on the net monetary position of hyperinflation countries in accordance with IAS 29 and this relates to our activities in Turkey. Net income group share therefore totaled EUR 192 million in H1. If we look now at the operating cash flow generated, we report a positive net current free operating cash flow in the context of very high inflation and continued supply chain difficulties. This figure includes an increase of EUR 32 million in strategic CapEx expenditure that will support Imerys development in the green mobility field and EUR 160 million increase in operating working capital as compared to December last year. Main driver of the increase is the inventory in quantity and value driven by the strong activity and inflation. Our working capital as compared to revenue remained stable compared to 2021 and will be a key area of attention now that we have early sign of supply chain normalization and some softening of the demand. Let's look now at the evolution of debt. The ratio of net financial debt to current EBITDA of June '22 was stable at a very good 1.9 level, same as in December '21. Debt servicing cost and other income and expenses mainly restructuring were limited to EUR 11 million and EUR 23 million respectively. The net financial debt increased therefore slightly as compared to December '21 after the dividend payment for the full year of EUR 131 million. It increased to EUR 1.53 billion, which is just under the June '21 level of EUR 1.55 billion. On this good note about Imerys sound financial structure, I hand over back to Alessandro for the outlook.

Thank you, Sebastien and let me wrap up this presentation with our outlook for the coming months. I think everybody reads the newspaper. So geopolitical tensions, tighter monetary policy, potential new restrictions in China, this will impact consumer confidence and therefore business activities, especially in the second part or towards the end of the year. Gas curtailments in Europe are also a risk. Still, as we have shown today, I'm convinced Imerys will continue on its path of profitable growth and will deliver this year again an improvement of EBITDA year-on-year and above market expectations. The second part of the year will be slower out of discussion, but our very wide geographical footprint, our diversified business, the continued growth of EV and the batteries world, our strategic CapEx which slowly are coming on stream and our ability to pass inflation on costs to the market, as we've seen today will support us. In this context, we expect current EBITDA to reach EUR 810 million-EUR 840 million, in this range, assuming, of course, that there is no significant market disruptions in the second part of the year and excluding the contemplated HTS divestiture which has not been taken into account yet. And I close by saying that this divestiture, this potential transaction is a very important milestone in the refocusing of the group towards our core high-growth specialty mineral business, but we will speak about this and the future of Imerys in the fourth quarter of this year at our Capital Market Day. Thank you for your attention and I open the floor to questions.

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

Congratulations on the Calderys potential disposal. This is a very positive move on news. Coming back on Calderys, can you share with us the margin for EBITDA. If I'm not mistaken, it should be close to 14% EBITDA margin this business, which means that disposal would imply 8% of something time EBITDA, that's the first question And then I had another question on lithium on the [ Bovamine ]. We know from the BRGM that there is at least 320,000 ton of lithium in this mine, no conversation with investor suggest the CapEx to operate this mine that could range from EUR 600 million to EUR 800 million. And given the CapEx is linked to the volume to be sold annually, I estimate, in fact, that the reserve could be between 700,000 and 900,000 ton, so this is very significant as it implies potentially a stellar valuation for this reserve. And it seems it might be a game changer for Imerys as a whole. So first question, what's your take on my calculation? And considering lot of information and there is a lot of information on talk on the market, why are you not more vocal about the potential of this mine? These are my 2 questions.

Thank you, Sven. As always, you are a very detailed analyst as we know. Then we have never communicated on the segment's EBITDA. Therefore, we'll stick to this with the next publication of results, of course, we will restate all the figures and so on, so it will become transparent. And you will have your answers in due time and we are really working on preparing this information for -- after the summer. I can confirm to you that this divestiture will be in the region of 8 to 10x EBITDA of last year. So your range is not wrong, probably on the lower side. More clarity on figures impact on guidance and so on will be done. It's really fresh of today, so it will be done with the next quarterly presentations and of course, during the Capital Market Day. On lithium, we are almost there. I still do not have all the answers, I don't think that the CapEx will determine the reserves. The reserves are there or not. And therefore, the CapEx needed will be approved or not depending on what we find, the quality and the capacity to extract it. We still remain very excited and that's why we still continue full speed with the maximum of resources possible. And we are close to having all the answers. Imerys is a prudent company, so we will be vocal and very vocal the moment we have concluded everything. We are, I would say, really couple of months away. And I count on the fact that during the Capital Market Day, we will have all the answers to your questions.

Okay. That's very clear. So just a follow-up. You said fourth quarter for the Capital Market Day, I thought it was the third quarter?

Yes, but the current events of today pushes us to -- September will be tight, has been honestly and we don't believe October is a good month to do a Capital Market Day because of the different releases that will come. So will probably be in the early days of November.

Okay. Okay, but it's about the same. Okay. That's fine.

Yes. Yes, exactly [indiscernible]. Okay, that's why...

Vocal on lithium in October?

Yes, around that, we should be able -- as I said, we will have now around the summer, our results on mining and our drilling campaigns on the technology around Q4. So it's one of the reasons why we would like to be clear when we speak about the future of this company. If lithium is, as you say, a pillar of the future or is just not viable. And then we will have all the answers.

[Operator Instructions] And your next question comes from the line of Adrien Tamagno from Berenberg.

Can you hear me well?

Yes, Adrien, we hear you well.

Okay. Good. Yes. One follow-up on the HTS disposal. So yes, that will be quite significant proceed for the company. So would you like to keep the leverage around 1x net debt to EBITDA going forward or perhaps give your shareholders a special dividend or we should think about these proceeds to be used to grow the business, yes, as well many option in the table now.

Adrien, it will be much easier to give you an answer on when we will have the cash on our bank accounts, which is not the case today. But as you can read in the -- in our release, we do count to use these additional resources to grow our business in Performance Minerals with clear focus on some very promising markets. Then the details of how to use the proceeding is, of course, under review. We do have many ideas and it will be really the focus in the core of our Capital Market Day after the summer.

Okay. That's understood. And yes, a follow-up on the HCS. I suspect this relies heavily on the RAC division volumes for refractory and foundries. So those that did involve also an agreement to offtake this RAC upstream volumes and hence, perhaps the nice price tag.

I would put it a bit in relative terms. Our RAC business, Refractory, Abrasives & Construction as you know is a business that with revenues of, I would say, between EUR 1.2 billion and EUR 1.4 billion. The part that goes to the HTS side is double digit. So it's definitely less than EUR 100 million, therefore, less than 10%. So there is no heavy dependence on one business to the other and reciprocal. This being said, of course, with very much value the contribution of HTS to our business, as well as for HTS of our unique raw materials. So yes, we have an agreement with future owner to continue to supply in the mid, long term to this business.

[Operator Instructions] There are currently no further phone questions, I will hand the call back to you. Sorry, sir, just to advise, there were no more questions on the phone lines, I will hand the call back to you for any further comments.

Okay. I guess everybody is ready to go on vacation. So...

Lots of publication today, Alessandro.

As well. No, I -- then I wrap it up. I would like to thank you for dedicating us the time to go through this, I believe, very good results for the 6 months and to listen to this milestone really in the repositioning of the group towards minerals, specialty minerals and high growth with high growth potential. I do look forward to telling you more around the Capital Market Day and really around lithium as well and I remain confident that we will have a good project there, but too early to be affirmative. Thank you and I wish all of you some rest during the summer. Thank you.

Good evening.

Good evening.

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