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

Good day, and thank you for standing by. Welcome to the Imerys Third Quarter 9 Months 2023 Results Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alessandro Dazza, Chief Executive Officer. Please go ahead.

Thank you, and good evening to all of you. Thank you for joining us today to review Imerys 2023 third quarter results. With me, as usual, next to me Sébastien Rouge, our CFO. As always, let me start first as you a few key messages, few key highlights of the last quarter. Let's start by sales, Imerys posted revenue in Q3 of EUR 918 million, down compared to last year, 14%, reflecting a high comparison basis, but also, as we will see later on, soft end markets, especially around construction and residential construction and some increased competition from Asian players benefiting from lower energy and logistics costs. Current EBITDA, strong performance, resilience, 16.5% margin in line with the performance of the first half of the year, thanks to a very good contribution margin. We could benefit from lower input costs, variable costs, and I will entering more details on this, but also from an excellent work done by the teams to deliver cost savings, especially around fixed costs and overheads. As you see on the chart, bottom right, is the -- on the slide, not only variable costs were lower than last year in this quarter, but also our fixed cost and overheads were lower than last year despite persistent inflation everywhere. Consequently, our Q3 price cost balance remained largely positive, even with the price effect now is leveling off at 0 as we announced in the past. As a reminder, Q1 price effect, 11%, Q2 price effect, 4%. Q3 price effect, basically 0 in average on the year-to-date 9 months, 5%. Once again, I believe Imerys demonstrated its agility in an uncertain and challenging environment. Last, for the quarter, on the M&A front, we closed the acquisition of the ground calcium carbonate assets of our business of Carmeuse in the U.S., in Georgia, North Georgia in September, we should add approximately $50 million in annual sales. Good bolt-on acquisition in an area where we have a strong presence. And for sure, we will be able to achieve a good level of synergies. The intended sale of our assets serving the paper markets, as we commented at the beginning of the months, highly unlikely to materialize, though negotiations are ongoing. And should this be the case, we will explore alternative options for the divestment of this business, which clearly remains our strategic priority. If we now look a bit more in detail at the different underlying markets for the group, let's start by construction. Overall, on this slide, Q3 shows a positive number, low but positive. The market overall is holding, but mostly thanks to a strong infrastructure sector, up more than 5% versus last year as well as in nonresidential, where Imerys is significantly less present. Our exposure, as you know, is largely to the residential market, which is severely impacted by the rise in interest rates and tougher access to bank credits. Residential construction in Europe was sluggish and in the U.S. posted a 6% decline. I'm talking about housing starts in Q3, and the forecast for the full year is around minus 10%. Consumption will be well in the U.S. on the back of what is still a robust job market. Europe is slowing, but still positive, although inflation starts to hit consumer confidence and, therefore, spending. If we move on to automotive, positive numbers on the table, lower than the previous quarter. But again, we're comparing to last year, which was a very low level. Order backlog, what we read in the newspaper seems to be caught up and delivered. So question on the future [indiscernible] considering weakening consumer confidence and credit tightening around the world. We are still far away from pre-COVID levels. So the potential for improvement is still ahead of us. The word on Energy & Electronics, still good momentum remains. You can see numbers less positive than in the past. Most of it is relating to EV. So electro-vehicle sales slowed down significantly in China, and this caused a bit of destocking throughout the entire value chain. The next slide, industry and equipment for general economic activity, I would say, industrial production, both in the U.S. and Europe. After a flattish first semester now clearly turning into negative territory. This, together with what I just mentioned on construction have an impact not only on industry, but also in iron and steel, bottom right of this slide, steel production, which is clearly negative in our main markets, normal consequence of the slowdown in the economy. As far as paper is concerned, another bad quarter with very negative growth. Here, on the contrary, I see rather a positive trend, inventories of paper around the world have decreased significantly in the last quarters. So probably the worst is behind us in this market should stabilize and recover some of these losses. I now hand over to Sébastien to give you more details on our financials.

Thank you, Alessandro. Good evening, everyone. Let's walk through some of the key aspects of our financial performance, and we start with revenue. Sales reached EUR 2.9 billion in the first 9 months of 2023, an 11% decrease versus prior year, mostly driven by a drop in volumes of 13%. It was partially compensated by the price effect of plus 5%, a consequence of the carryover of the price increase that we implemented last year. As planned, there was no more price increase in Q3. Perimeter effect was limited, reflecting the 2022 divestiture and the currency negative effect is increasing this quarter. Main impact is USD versus euro exchange rate. And we remember that the U.S. dollar was very strong in Q3 and Q4 last year. If we look now into more detail at our 2 business segments and their respective markets. Starting with Performance Minerals. This segment generated 68% of the group's turnover with sales close to EUR 2 billion in the first 9 months of 2023. All geographies were impacted by continued destocking with like-for-like revenue down 6.4% versus 2022 overall. On one hand, the mobile energy markets was weaker due to softer demand in lithium ion batteries. Construction industry continues to suffer for rising interest rates and the paper and board activity was very low across the board. On the positive side, the filtration sector hold well, we can also underline that we kept a sustainable price effect, especially in Europe and in the U.S. On a quarterly basis, Q3 of last year was still very good for Performance Minerals in volume, price and even in FX, we suffer from high comparables that will ease going forward. Looking now at our refractory abrasive and construction business. Our second segment recorded sales of EUR 945 million in the first 9 months of the year, representing 32% of Imerys' consolidated revenue. Revenue like-for-like in the first 9 months was down 12.7%, reflected continued destocking and low iron and steel end markets in particular in Europe. We faced increased competition from Asian players as compared to European Abrasives and refractory products. China in particular, with lower energy cost and soft domestic demand is pushing its export activity. The Building & Infrastructure business continued to perform better than the rest, thanks to increased market penetration of specialty products, helping to decarbonize the industry. As we can see from the comparison, quarterly [ variation ] is well in line with the year-to-date figure, and we do not anticipate a further deterioration of the growth rate of this segment. If we look now at the group profitability as a whole, current EBITDA for 9 months reached EUR 481 million, down 15% year-on-year. This evolution reflects a decrease in volume contribution for EUR 206 million. A continuing positive contribution of the price of EUR 151 million, which compensated for the EUR 41 million net increase in variable costs. The decrease of EUR 10 million of fixed costs and overhead in spite of labor inflation is reflecting the cost reduction efforts made by the group, also supported in H1 by the contribution of dividends from joint venture, the group achieved a 16.6% EBITDA margin, a proof of the group's resilience at this level of industrial activity. When we look at the quarter alone, it's important to see the neutral price effect and the inflation of variable costs, 28% lower than last year, so contributing positively as well as the positive effect of fixed cost and overhead. If we look now at the other elements of our income statement, starting with the decrease of current EBITDA in absolute value by EUR 87 million as compared to last year, thanks to the growing contribution of share in net income from JV, the decrease of -- in absolute value of current operating income is limited to EUR 46 million. Important to remind that even with low volumes, Imerys current operating income at EUR 300 million represents 10% of our sales. The amount booked in other expense line corresponds to costs related to disposal and industrial reorganization, in particular, adaptation of our refractory [ and abrasive ] industrial footprint. Other expenses are lower than last year, which enables net income from continuing operations to increase by 12.4% to EUR 140 million. We still have a positive contribution of discontinued operation of EUR 44 million in '23 related to our HTS disposed business that we booked in H1. All in all, net income was at EUR 184 million, just short by 5% as compared to last year, EUR 193 million. Back of this note of resilience, I give the word to Alessandro for the conclusion.

Thank you Sébastien. Let me wrap up this short presentation with a few takeaways. Clearly, we're leaving through uncertain times, both macroeconomic and geopolitical level. But I believe Imerys has shown if it was needed, that we can weather through such challenging times in a strong way, it can adapt to the context and it can deliver solid margins. We will protect our profitability and cash generation. We have shown it in Q2, even more in Q3, we have deployed a number of cost savings initiatives they are delivering, as you have seen in the [ bridge ] presented by Sébastien. [ They fully ] deployed throughout the group, a more effect to come. Fourth, we are confident and we confirm [indiscernible] although, at the low end of the range, and we will continue to progress on the more long-term strategic road map. Thank you for your attention, and I suggest to open the door to questions.

[Operator Instructions] And your first question comes from the line of Ebrahim Homani from CIC.

I have 3 questions, if I may. The first one is about the prices. As they are not including anymore? Do you plan any decrease in 2024 stabilization? My second question maybe is about the destocking, is destocking effect on the H1 and Q3, what you expect in Q4? And my last question about the volume dynamics in the U.S. in paper, abrasive businesses. And maybe if you could remind us your exposure to the construction industry market in the U.S. please.

On prices, if I may start with your question on prices, the effect is 0 in Q3 on Q3. I would like to remind that last year, Q3 -- last year, we increased -- we had to increase our prices to compensate for inflation every quarter, Q1, Q2, Q3. Q3 was the strongest and Q4, it started to level off. So the comparison is when we say 0 is compared to last year, which means that a very high level compared to past practices. We have transformed -- we have canceled over the year, '23, all the surcharges. Some of them have been transformed into permanent price increases, and that's why you still have the 0. Although last year, there was a significant impact of surcharges. So we believe Q4 to come to your answer, to answer your question, I believe Q4, we should be in the same region, around 0 or slightly negative, meaning prices remaining flat. And last year being the last push on increase on the back of still being high as we entered Q4 last year. That's the way I see the end of the year. For 2024, we have not started negotiations. I don't think we will see any significant decrease in prices. Inflation remains an issue. I do expect labor costs to continue to increase next year to compensate for inflation, and therefore, it will be our duty to still adjust our pricing through the effective cost development. So rather stable potential even with a light increase. But the second one, destocking is very difficult. As you know, we have many industries, many customers in different geographic areas. It was very strong, I would say, until the summer. We do see the end. What we don't see yet is a restocking. So I believe customers are uncertain about demand patterns and therefore, they buy what they really need. And today, logistics has become easier, is available. The lead times have become shorter because of softer activity. So you can get hold of products fast, which avoids talking to a normal level of demand. As always, when it comes, and I remember very well 2021, when it comes and Hispanic because lead times immediately become longer and then the pipeline is empty. I've seen there are statistics published on paper, and it was one of your questions on volume. Piper inventories in the U.S. have come down every month quite significantly. So I'm pretty sure where the inventory is over. So I want to believe that this destocking is gradually behind. Restocking is still ahead of us. So today, we see volumes quite stable. We see in October, which is rather positive. And therefore, we are confident that probably the worst is behind us. And to finish our exposure of construction for the group represents today around 40% of our overall turnover is quite heavily distributed throughout the group. Therefore, in the U.S., I would say, is the same as for the rest of the group around 40%, 41%, [indiscernible]. And of course, plastic, there is a lot of activities due to [indiscernible] within the construction industry.

And your next question comes from the line of Sven Edelfelt from ODDO BHF.

I have 2 questions. The first one is on the paper business. Sorry if I misunderstood, but would you say the deal is off 100%? Or there's still a probability to come through? And if there is still a chance to do it, I mean, why not renegotiating the price rather than wait and over 2 years to get rid of this business? That's the first question. And the second one is about the [indiscernible] related in the U.S., I think there was a very positive hearing on the 28th of September. Maybe you could -- on the back of what has been said to this hearing. I think the judge has 3 months to put the new plan to revote and therefore, we should see some positive maybe first quarter of -- or second quarter of next year. Could you maybe elaborate a little bit on this, please?

And of course, we will elaborate on it. First of all, on the divestiture of the paper assets, the deal is not 100% debt. Otherwise, we would have indicated that it is 100% debt. When we say it's highly unlikely is because today, we are -- we believe that the probability of a positive conclusion is low, but it's still alive. And as we mentioned in our press release, we do reserve the rights to act towards the buyer because we believe we are very close to a conclusion. The nation are ongoing. So I believe there is no for confidentiality reason or need or not the possibility now to discuss if and what then what is important is we put these assets on sales because it has a strategic value for the group. The strategic reasoning is still valid entirely. And therefore, we will do our best to complete the deal. And if not, if it is not possible, we will for sure investigate alternatives. And for me, alternatives is not a 2-year time frame. It is through the strategic means long term. We want to act rapidly and therefore; we will do our best to keep a very reasonable time frame no matter which actually will follow. And we will, of course, keep the market updated as there are any significant news or decisions in this regard. In terms of our Chapter 11 case in the U.S., you're right, there was a first after a long time, the first event, almost the filing of a draft new plan of reorganization. The reorganization is the plan that basically regulates all the elements around the Chapter 11. So after a long mediation ordered by the court, the plaintiffs found largely agreements among them. I remind you again that we are not part of this negotiation. The agreement with Imerys for the time being, stands as it is in all its terms and conditions, and then remediation was around other topics among the plaintiffs. It seems they have found an agreement and this agreement was filed as a draft. I'm not aware that there is a deadline of 3 months. To be honest, charge is invited to complete and finalize this draft. And for this one, there is really no deadline. There are still a couple of ancillary documents missing, which should be filed as soon as possible. Once this file is complete, we can last year if the hearing is positive, which the moment we go to the judge, I assume it will be, the judge will start the voting process. So at the moment, there is no more to say when will we file a final new reorganization plan. Early to say. I think it is in the coming weeks, if not year-end, it might be in January. But we have tried to give deadlines before. And as you know, very well, then there were delays, there were factors. So impossible to say important is it is a draft, and it is a step ahead in the mediation. And now we will need to complete and transform this draft into a final plan of reorganization. And again, we will keep everybody informed if we file for a new hearing and therefore, starting a new voting process.

And your next question comes from the line of Aron Ceccarelli from Berenberg.

I have 3 questions, please. So the first one is on the paper business. Maybe remind us what is the maintenance CapEx of these assets? And how we should think about your CapEx for '24 and '25 in case the paper business to remain within the group. The second one is on the EBITDA guidance, which you now have lowered toward the lower end. If my numbers are correct, this would imply an EBITDA for Q4 down only 2%. After that was down 22% in Q2 -- sorry, in Q3 and it was down 50% on a 9-month basis. So I would be interested to understand how you think about this difference? And the third one, I noticed is the second time you mentioned increased competition in from Asian players. It would be great if you can elaborate a little bit on this topic.

Again, there, our paper activities or activities around the paper market typically require between EUR 20 million and EUR 30 million of CapEx, which is maintenance is -- of a burden is new mining, also some projects, we say, EUR 20 million to EUR 30 million is a number on the run rate, typical year. This year, we will be investing around EUR 330 million, excluding strategic CapEx. Strategically means our Emily project and our expansion in the carbon black lithium-ion field. We have a budget last year, but I believe, given the current level of activity and the good level of maintenance of our assets, I believe we can further reduce our run rate. and then plus or minus the paper business, if it will be part of Imerys or not. You have seen that we have signed also a potential divestiture of our activities in Greece, bauxite activity, which is minor for the group because it serves captive internal customers, if you wish. It was used internally and had one external customer only, the one that is purchasing and we should be able to save around EUR 10 million of CapEx because it was an intensive CapEx business being an underground mining activity. So that should also help us reduce our CapEx spending for next year, I would say, were EUR 300 million, if I may say. In terms of EBITDA, Sebastian, do you want to comment, and then I will have...

Yes. I mean if we look -- I think the easiest way to look at the EBITDA sequentially, you're perfectly right in -- when you look year-on-year, we have to remember actually the profile of last year. Q4 last year was the first one where we started to suffer low volumes. And since we are usually with EUR 150 million of EBITDA by quarter. And that's how we built our forecast for Q4, with volumes still soft, still with the FX of cost reduction of input costs and efforts on the cost base and that's why I would say a little bit easier on the comparison basis. As we said, we -- H1 was extremely good last year. Q3, in particular, for [indiscernible] was still a very good quarter. From Q4 onwards, we have comparables that are a little bit easier to compare with. And if we maintain the current run rate, then we are in the same ballpark as Q4 last year. I think your math is correct and also the wage build reflects actually on these assumptions.

And if I may add, interpretation is, we believe that the drop in volumes is stabilizing. We are -- as I said before, probably behind us the worst. And therefore, Q4 should be, although December is typically a very weak month. Everybody tries to optimize even at the end of the year. We do believe that volume should hold stable. Prices should not suffer. And if we do our but on the cost side, which we are doing, we should be able to deliver EUR 150 million lease of EBITDA, in line with Q3 and therefore allowing us to meet out the guidance to the but be within our guidance. When we announced in July, we -- if you remember, we expected volumes to recover, start recovering around the end of the year. We don't see that yet. We see rather a flattish environment. But still, we are able to deliver even especially on the cost side, and therefore, on the contribution of our business, we can deliver our guidance even when volumes are not picking up, which I think is one of the stool. And the last thing on competition and on volumes. We mentioned it because we are transparent. I think in Europe, in some high energy for energy-intensive businesses today in Europe, so specifically Europe and is very specific to some businesses. We do see Asian competitors, especially Chinese competitor coming back, and we gained significant market share in [indiscernible]. Today, the picture has reversed partly. They enjoy low energy, very low logistic costs, and we are still penalized by some high energy. Decreasing, but still higher than in the past. And here, competition is tougher. We are fighting, but it is tougher than it used to be in '22, '21 or even '20. That's what -- so very specific to single businesses and very specific to Europe.