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

Ladies and gentlemen, thank you for standing by, and welcome to Imerys' Q1 2023 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to the CEO of Imerys, Alessandro Dazza. Please go ahead.

Thank you, and good evening to all of you. Thanks for joining us today, this evening to review Imerys' Q1 results. With me on the call, as usual, Sebastien Rouge, our CFO. Let me start by giving you some highlights of the quarter. A tough quarter. We saw this challenging market conditions already developing in Q4 and certainly continued in Q1. But even in this volatile market, Imerys delivered robust results and succeeded to reach EUR 1 billion in sales basically in line with last year at historically high levels. Volumes were down, impacted by different reasons: paper market, first of all, a general weakness in industrial markets, and you will see in the market trends that triggered a continued destocking also in Q1; and the construction market, which suffered both in the U.S. and in Europe low activity on the back of rising interest rates and tightening credit. Nevertheless, we demonstrated the resilience of this business and posted a current EBITDA above 15%, higher than Q4. So the trend goes in the right direction, thanks especially to solid pricing and good cost management. I would say another proof of this resilience is the double-digit increase in current operating income, 15% increase at EUR 105 million compared to last year; and also in net current income from continuing operations, up 12% versus last year. As said, all of these was possible thanks to solid pricing actions that more than offset variable and fixed cost inflation, inflation that remains, as we all know, quite persistent. If we now move on to the next slide, we deep dive on different markets. Let's start with the most important for the group. As you recall, around 40% of our exposure construction market. You see here the numbers on the top part of the slide. Slowdown both in Europe and North America, a bit less in the remaining part of the world. What I find impressive is really the U.S., 2 consecutive quarters negative and 10% down this quarter alone. These are really impressive numbers in the negative way. As said, Asia was better and China seems to be restarting thanks to some, let's say, policies or public support to the construction industry. Good news from consumption and consumer goods. Private consumption remains sustained basically in all geographies, and we see a strong momentum in China after many quarters of COVID lockdowns. Going forward, we expect the U.S. to remain quite solid, whereas Europe could eventually suffer from a higher and more persistent inflation ahead of us. On the next page, I would say one of the strongest market in the quarter, automotive, a bright spot, picking up, strong rebound. As you can see from the numbers, very nice. We are still way below 2019 levels or 2018 levels. So I believe there is more positive news to come, but we enjoy still a good level of activity. Asia, especially -- Asia down or not much as up, dragged down certainly from China. The subsidies incentivizing electric vehicles expired in December '22, so there was a rush to purchase new cars at the end of the year with a consequent slowdown in Q1. And the same impact you see on the second part of the table, so on what we call energy and electronics. Clearly, mobile energy down in Q1 because of this Chinese effect. I remind you China is by far the largest EV market in the world. Also inflation has caused the slowdown of the electronic markets, entertaining market. On the next page, industrial production impacted differently according to the region. Certainly, soft activity in the U.S. and in Europe caused by rising interest rates, low corporate investments. Asia, well-oriented or better oriented. Strong in India. And China finally restarting and we do expect more to come after the end of the COVID lockdowns in the second part of the year. Last a word on -- in the bottom part, a word on paper. Terrible quarter Q1 with very low production and activity on the back of energy prices and mills shutdown, but also iron and steel. As expected, especially in Europe, I would say a general slowdown of activity, and again, high energy prices having a negative impact on activity. Sebastien, I hand over to you to give more details on the financial results.

Thank you, Alessandro. Good evening, everyone. We will walk through some of the key aspects of our financial performance and start with revenues. Sales reached EUR 997 million in the first quarter, a slight 1.6% decrease versus prior year, mostly driven by a flattish organic growth at minus 0.9%. As we have seen already in 2022, the contribution of price has been significant throughout the quarter, also decreasing in Q1 as compared to Q4 last year -- it was above 18% in Q4 -- and offsetting a big part of the volume shortfall. The perimeter and currency effects were limited, reflecting small divestiture in hydroscaling business last year and the strengthening of the USD versus euro as compared again to the first quarter of 2022. If we look now into more detail at our 2 business segments and their respective markets. We start with Performance Minerals. The segment generates 68% of the group's turnover with sales of EUR 677 million in the first quarter of '23. Geographies saw different trends with like-for-like revenues up 4.4% versus '22 overall. If we look at the market, on one end, the mobile energy market was weak due to the end of subsidies in China, and the construction industry was impacted by rising interest rates and that was true both in Europe and in the U.S. On the positive side, the consumer goods sector held well. We have noted as well a significant rebound of the automotive market, but we are still not reaching the levels of 2019. If we look now at our Refractory, Abrasive and Construction business, our second segment recorded sales of EUR 320 million in Q1, representing 32% of Imerys' consolidated revenue. The revenue was still impacted by a low level of industrial activity and customer destocking, particular in Europe. The business benefited from building an infrastructure-resilient performance, but activity in Asia remained supportive with a strong momentum in India. The rebound in China post-COVID restriction is just starting. Now, how does it look like for the group profitability as whole? Current EBITDA for Q1 reached EUR 151 million, down 3.4% year-on-year. So very close to last year's Q1 level. The evolution reflects decreasing volume contribution for EUR 57 million. We have a positive continued price contribution of EUR 111 million, which compensates for the EUR 50 million net increase of variable costs. That is the consequence of continued input cost still at a high level, especially when we compare to Q1 2022. And we have to note that our price contribution also more than offsets the increase of EUR 16 million of fixed costs and overhead, which is impacted by inflation. As a percentage of sales, the margin is very slightly down as compared to last year, but increased from 14.8% in Q4 '22 to 15.1% of sales in Q1 this year, proof of the group's resilience even with lower level of industrial activity. If we look now at the other elements of our income statement. In absolute terms, the current operating income variance is better than the one of EBITDA, thanks to positive development of non-cash items, depreciation, and contribution of joint venture and associates in particular. Current operating income thus reached EUR 105 million in Q1 this year. Net financial result was negative EUR 12 million impacted by some FX variations. Income tax of EUR 25 million corresponds to an effective tax rate of 27% in line with last year. Current net income from continuing operation thus increased by 12.2% to EUR 68 million in the quarter. We note a positive contribution of discontinued operation and the booking of the final disposal of our HTS transaction. All in all, net income was at EUR 101 million, above the figure posted last year of EUR 73 million. On this fast summary, I hand it back to Alessandro for the conclusion and outlook.

Thank you, Sebastien. So let me wrap up this short presentation of our Q1 results. So we see clearly volatile markets with different dynamics and trends depending on the geography and really on the end markets. On one side, construction and in general industrial applications were weak -- are weak mostly due to high interest rates and destocking, probably expected to remain soft in the nearby future, again, on the back of credit tightening. On the other side, we see more positive side. We see business in the second part of the year should gain momentum thanks to much lower energy prices, especially in Europe that should foster economic activity. Destocking will be over. The automotive market is rebounding. And we do expect the Chinese manufacturing world to accelerate as well as -- and of course drive also the mobile energy business. So we really believe this softness was a quarter and the mid long-term view remains very positive. In such a context, we need to remain cautious and prudent. We will continue to focus on costs and cash management, because we want to preserve, as we have shown in this quarter, our margins. But we will continue also to invest in growth opportunities along our path, because we are convinced that we will achieve our mid-term objectives. Thank you. And on this, I open the floor to questions.

[Operator Instructions] And the first question is from Sven Edelfelt from ODDO.

A couple from me. First of all, can you give us a sneak preview of what kind of deposits you have in Cornwall? I remember at the same period last year, you basically gave us some element about the deposit. That's the first question. Second question on volume. Can we assume that Q1 was probably the worst quarter, and therefore, the volume are improving in Q2 [Technical Difficulty] to, let's say, 0 in Q3? Finally, on the pricing. Can we assume that you will start to remove your energy surcharge in Q3 or a little bit later in the year?

On Cornwall, when we spoke last time, I think it was end of the year or maybe even the full year results. We said that before the summer, we should have a good view of what we have, and therefore, if we have a business case. And I confirmed that before we go on vacation and certainly before our results in July, we will have these answers. The drilling campaign is ongoing intensively. We have feelings, but it's too early to give you an answer on what we found in which quantities, in which quality. So bear with me another really couple of months and we will deliver all the answers as soon as possible. On volumes, I think we have touched the bottom. We do see markets -- we do see, first of all, the destocking coming to an end. Customers that have not ordered for quite a long time are reordering. Big quantities, no, very prudent, especially in certain industry, construction and industrial applications. But clearly, we see a trend in the right direction. Very volatile, and that's why making -- first of all, we normally don't make provisions so early in the year, but making really a commitment, it's quite difficult. Personally, I'm convinced the worst is behind. We should see Q2 improving compared to Q1. If you look at last year, Q2 last year was the best quarter in the history of the company. So we will have a very strong comparison basis. But fine. We know it perfectly as long as we see the markets rebound and go in the right direction, I think we will deliver good results. And I want to believe, and that's what institutions say, the second part of the year, Europe and America should come out of this slowdown and move back to solid growth. So that's the way I see it as of today. In terms of pricing, your assumptions are relatively correct. As you recall, about half of our pricing was energy surcharges. Basically now, so April, May, in most of countries -- or, let's say, largely in Europe and in the U.S., the main economies, energy is close to pre-crisis level, and therefore, these energy surcharges are coming to an end or very little. But it was half. So I'm convinced we will keep some pricing effect in 2023. And other costs have raised, salaries, fixed cost, meaning especially salaries. This year we do expect a higher impact compared to last year. And this, of course, we need and we will translate into fixed price increases for the year because they are needed. So we will see a price effect going forward, maybe not 11%, 12% that you have today, because the comparison basis is higher and because some surcharges will drop, but we will certainly continue to see a price effect also in Q2 and probably little but still there in Q3, Q4.

The next question from Mourad Lahmidi from Exane.

I have 3 questions, please. So the first one would be on the guidance that you -- I mean the indication that you pointed out for 2023. Is it you said that you will be able to deliver your medium-term guidance of 3% to 5% growth even in 2023? Then second question is on the variable cost inflation. Do you expect to see the drop in freight costs and energy costs in your P&L from now on? And finally, a question on the depreciation. It seems that your depreciation has dropped quite significantly. Is it due to the deconsolidation of HTS? Could you give us an indication of the depreciation as percentage of sales on the new pro forma?

I will let Sebastien answer the third question, which is more technical. In terms of guidance, we do not issue guidance this early in the year. So it will probably -- it will be more a topic for our half year results. The 3% to 5% growth that we have announced, it's an average growth over the next 3 years and I remain fully committed to deliver it and also convinced that we will. We knew -- when in November we presented this trajectory, we knew that Q4 and Q1 would be difficult because we saw the slowing down of construction and the interest rates growing. So we were fully aware. Probably it's coming a bit harsher than expected. But at the moment in the trajectory, I remain fully committed. We already posted this year. It depends a lot from the second half. We count a lot on the recovery of automotive, on China and especially mobile energy. Our Line 3 is coming online as we talk, it's producing. And this will be a big contributor in top line and profitability. So if we can fill it rapidly over the next 8 months, we will see it in our numbers. If the mobile energy, so basically electric vehicles, remain soft, it might take a bit longer. But mid-term -- that's why I remain fully convinced and committed. On the variable cost inflation, your assumption is right. Energy has been going down basically continuously, now probably stabilizing with the gas between EUR 40, EUR 50 per megawatt hour. We have restarted hedging because we believe this price is a reasonable price. Some customers are willing to commit on mid-term purchases if we commit mid-term pricing, which we are willing to do now that we have visibility. And we will see the effect of this lower gas price in our P&L. We've started to see it in Q1 and we will see it more going forward. A bit less on electricity. Electricity is today, I would say, something around EUR 120, EUR 150. It is still twice as much as before. Of course, less than half of what it was a few months ago. The issue with electricity, it's very difficult to hedge, because the spot price is much, much lower than long-term pricing. So if it stays at this level, we will remain non-hedged. We will profit from the spot price. We will see cost going down in our P&L. And that's why what you said is again correct. I hope this market as well stabilizes once for good, and then we can go back to a much more stable pricing, costing. And that's what our customers are looking for. In case of -- for freight, we are back to square 0. Freight prices today are exactly at pre-crisis. Advantages and disadvantages. Imports from Asia are competitive again, and our, let's say, high quality products can travel again especially to Asia, to the U.S., to South America. So with both sides of the middle, some positives and negatives. But for sure in terms of variable cost, we will see it's clearly in our P&L going forward. On depreciation, Sebastien, do you want to take -- do you want to comment?

Yes, one point to take into account. And you're right, Mourad, the impact of depreciation is both -- HTS is out of the perimeter. And also for technical reason, there are few millions of depreciation missing because of the application of IFRS 15 for the paper business. So that helps a little bit the current operating income as compared to EBITDA. The second point, which is probably de facto in your bridge, is actually the contribution of joint venture and participation, which we do not count in our EBITDA up until we receive dividends from them. And we have year-on-year an increase contribution of those.