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

Good day and thank you for standing by. Welcome to the Imerys First Quarter 2024 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first 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 Q1 2024 results. Next to me, as usual, Sebastien Rouge, our CFO. And as usual, let me start by giving you some highlights for the quarter we have just closed. I'd say first, very important topic, I believe we have turned the corner, and overall, business is growing again. Revenues close to EUR 930 million, higher than Q4, but also higher than Q3 of last year, on the back fundamentally of stronger, higher volumes. Some end markets still remain weak, and we will go in detail, typically or notably, I would say, industrial in Europe and residential construction, both in Europe and the U.S., but all geographies, all markets pointing in the right direction. Slightly declined versus last year, 3% last year, high comparable. March was the best month of the year. Also prices slightly down, about 1.9%, again against high comparables last year, Q1, we raised prices by 11% versus the previous year. So this is partly the effect of the end of surcharges compared to last year. On the profitability side, I would say excellent work, good commercial actions, strong saving measures, and I will come back on this. Strong performance of our JVs. All of these contributed to a good profitability and an increase compared to last year. We posted adjusted EBITDA of EUR 188 million, up 9% versus last year, representing solid margin of above 20%. We continue to execute on our strategic roadmap with 3 important actions in the quarter. We reorganized to create a new business area around Energy Transition, and I will come back on this one specifically on the next slide. Second, we entered into an agreement to potentially divest our assets serving the paper market, a deal with the American group Flacks. Third, we moved again on the M&A side. We entered exclusive negotiations with Chemviron, a subsidiary of Calgon Carbon, to buy their perlite and diatomite businesses in Europe, specifically in France and in Italy, representing approximately EUR 50 million in yearly revenue. Typical bolt-on acquisition for Imerys, it will deliver important synergies. It will broaden our portfolio in growing markets like natural solution for consumer goods. So all in all, I think we demonstrated to be agile in this economic environment, our resilience and fundamentally the validity of our business model. If we look at this new business area, we announced earlier on in April, it's called Solutions for Energy Transition. Why? Because these businesses, the critical minerals represents more and more an important pillar in our business, and they have -- they deliver a fast growing contribution to the group performance. It includes 2 businesses, Imerys Graphite & Carbon and our 50% share in the joint venture, The Quartz Corporation, producing high-purity silica for solar and semiconductor industries. Both these activities do represent a key driver of our future growth and they highlight the major role that Imerys will play or maybe is playing in the energy transition. On these slides, I wanted to point out again the rebound. Finally, that we see in markets, as I mentioned at the very beginning, growing again compared to Q4, 4%, but also Q3, 1%. As I said before, all geographies, all businesses are posting an increase and is really a volume growth. I remind you, prices are slightly down. FX or foreign exchange rates did not help, and there are slightly -- slight negative perimeter effects. So the growth is entirely volume based. If we look now, where it's coming from, or specifically on the end markets? Let's start with construction. I'd say, a mixed picture. Infrastructure, nonresidential remains solid on the back of different governmental investment plans. Residential remains largely subdued and Imerys is mostly exposed to this part or this sector of the industry. Europe, weak. Residential is down 2.5%. North America, flattish. And especially, we see finally a rebound. New housing permits have grown in Q1. So business, typically, you get a permit and then you build. So business should improve as we move on, and we count on this. China, Asia benefiting from infrastructure, and I would say, overall recovery. Consumption all in all, remains healthy, good in the U.S. on the back of robust job market, a bit more flattish in Europe, persistent inflation. Asia and China, in particular, coming back and solid. On the next slide, automotive. I would say, today, probably the most worrying sector. You see Europe, a 7% decline, difficult markets. U.S. more stable. Asia, China going well, maybe partly offset by a weak Japan, but China doing very well, fueled by exports, and that is partly the reason why Europe is suffering as we read every day in the newspapers. Energy, again, depending on the region, Europe down on the back of slow economic activity, better in the U.S., strong in Asia. Electronics coming back strongly after a poor '23 and if we do look specifically at electric vehicles, overall, the trend remains positive worldwide, 20% growth. It will continue although we do see different geographies with China really running fast on the back of exports, 40% growth. Europe, the U.S. slower in the adoption and in the production of electric vehicles. The last slide on the markets. Industrial, at the end, is a consequence of what just said, weaker in Europe. The U.S. more resilient more dynamic and probably coming out more rapidly from the recent slow quarters. And Asia, finally picking up, which -- China, especially ramping up in general. Paper, strong beginning of the year. I remind you last year on the back of very heavy destocking was a bad year for this industry, and it's good to see that everywhere is showing stabilization or even a good recovery. Iron and steel, again, depends largely on construction and equipment and therefore, weak in Austria, okay-ish in the U.S. and preparing for a rebound and remain strong or solid in the rest of Asia. And last slide, to show the work we have been doing, especially on costs when volumes were down. You might remember, last year, we announced a 3.3% cost savings program that delivered over EUR 120 million. Well, it is continuing to deliver, which shows that it is a structural improvement. We have 3.9% savings in Q1 on costs, really all area, it's overhead, it's fixed cost, it's discretionary spending, it's capacity adjustments, it's efficiencies, it's around energy. Yes, we have been helped by, let's say, improvement in freight, in logistics and in energy, but a lot of it is self-made and it does deliver. Sebastien, I hand over to you to go in more details on figures.

Thank you, Alessandro. Good afternoon, everyone. Let's go through some of the key aspects of our financial performance, and we'll start with revenue. Sales reached EUR 926 million in the first quarter of '24, with soft volumes that represents a 7% decrease year-on-year. It includes a negative currency effect of EUR 15 million, mainly due to the level of USD and Japanese yen versus the euro. Price's impact is negative 2%. You remember that in Q1 of '23, prices were still high -- at high levels and they were just recovering from the 2022 inflation spike. If volumes are lower than those of Q1 '21 (sic) [ '23 ], it was mentioned earlier, both sales and volume are above Q3 and Q4 of last year, which is a good sign of the beginning of our end market recovery. If we look now into more details at our 3 business segments. Performance Minerals generated 63% of the group's turnover with sales at EUR 579 million in Q1 of this year. Revenue generated by Performance Minerals was down 5.6% like-for-like in the first quarter of '24. Sales in the Americas were impacted by a slowdown in demand of the construction industry and of filtration markets. Revenue in EMEA and Asia Pacific decreased by 7.5% as compared to a still strong first quarter in 2023. Dynamic sales of plastics have partly compensated for weak ceramics demand. Compared to Q3 and Q4 of '23 both Performance Minerals segments have increased their activity. If we look now at our solutions for Refractory, Abrasives & Construction business. The segment recorded sales of EUR 300 million in the first quarter, representing 32% of Imerys consolidated revenue. The volumes in construction and industrial end markets in Europe were soft, but the refractory business, particularly in the U.S. showed some signs of volume recovery. The business as a whole posted growth as compared to Q3 and Q4 of 2023. Now let's talk about our new business area Solutions for Energy Transition. Please remember, it includes Graphite & Carbon activity and the contribution of our joint venture, The Quartz Corporation. We will deep dive on this one in July when H1 figures are disclosed. In Q1 of 2024, Graphite & Carbon recorded sales of EUR 49 million, representing 5% of Imerys consolidated revenue. This business posted a 10% decrease in revenue as compared to Q1 '23, reflecting persistent destocking in the entire electric vehicle value chain, while conductive polymer applications have started to rebound. If we look now at the group profitability, adjusted EBITDA for the first quarter of '24 reached EUR 188 million, up 9.2% versus last year, in spite of soft volume and a decrease of volume contribution of EUR 17 million, this evolution reflects a base business, which took advantage of positive price-cost balance fueled by a decrease in cost of EUR 31 million. This includes fixed cost and overhead well contained below 2023 levels. It also reflects an increased contribution from our joint ventures and associates. As a result, profitability levels increased versus last year. If we look now at the other elements of our income statement. Current operating income landed at EUR 123 million. That represents 13.3% of sales. Income tax expenses of EUR 24 million corresponds to an effective current tax rate of 22%, the bigger contribution of net profit from joint ventures not taxed at our level, supported this rate decrease. Net operating expenses represented EUR 14 million impacted by nonrecurring costs related to restructuring and asset disposal. As far as the paper asset disposal is concerned. I invite you to refer to the press release for the planned recycling of translation reserves that will occur at the closing of this transaction in the P&L. This entry will be noncash and will not impact shareholder equity, but as the amount is material, it's better to have this in mind. All in all, net income from continuing operation landed at EUR 69 million, up 10% versus last year, and that's in line with the adjusted EBITDA increase. We have this year no contribution from discontinued operation as they were linked to the divestiture of HTS that happened in January '23. Now back to Alessandro for the outlook.

Thank you, Sebastien. And to close, what do we see ahead of us? First, behind, we leave some serious destocking at the end of '23 and several months of low activity. As I said at the beginning, I think we have turned the corner, and we expect volumes to grow progressively in all sectors and in all geographies. The electric vehicles value chain is the last one that needs some stock adjustments. That's why we will see our Graphite & Carbon business pick up as we move on. But overall, very confident on the trajectory and therefore, on the positive impact on volumes going forward. The U.S. is more dynamic. So we expect a rapid rebound or good development. Europe is usually a bit behind, a bit lower, but will accelerate in the second half. To be observed is the residential construction market and automotive still partly impacted by high interest rates, but also in this case, moving in the right direction. What is important is for us to keep focus on our costs and cost disciplines. When volumes come back, we will see this leveraging significantly in our profitability. We have new capacities ready to fulfill demand and a number of products in the pipeline, new products that will also foster our growth. Thank you for your attention, and I open to questions.

[Operator Instructions] And now we're going to take our first question and it comes from the line of Sven Edelfelt from ODDO.

Thank you very much for this presentation. And congratulations for the nice improvement, especially at the Quartz Corp. I will have a couple of questions from my side. You mentioned an improvement in volume. And if I look at volume, they are still down in Q1. Can you perhaps share with us what was the volume in March and the -- if possible, April would be good? If I look at the Quartz Corp, the contribution -- the net income contribution should be around EUR 50 million in Q1, if I am not mistaken. Because there are other JVs that are contributing as well. Can you maybe clarify this element? And as well on this contribution, to what extent we can extrapolate and multiply this contribution by at least 4 on a full year basis? Third question will be a bit of a clarification. I think there has been some bad noise about Pacific Quartz, which -- revenue were down 67% in Q1. And can you basically tell us that -- maybe the read-across compared to Pacific Quartz is limited when compared to your Quartz Corp. And then the final question would be on paper. Can you give us an idea of what the amount that we could deconsolidate this year in case you're successful on the disposal. When I say amount, I mean revenue on EBITDA would be good.

Okay, Sven. Sebastien will then join me in answering some of your questions. First of all, on volumes, quarter-on-quarter, Q1-Q1, yes, volumes are down 3% and fundamentally it's a bit of construction and a bit of industrial activity in Europe. Volumes are up compared to Q4 and Q3. That's the message we were giving. March of last year was the best month of the year. So we start from a higher comparison. But what we see in Q1 is clearly a rebound compared to the last 6 months. If I look at April, as you know, we don't specifically mention numbers. And by the way, April is not even closed since it is the 30th, but the direction is absolutely confirmed. So we do expect a good April and that's why we are confident that progressively it's going up. What is also positive is it's not a single business or a single geography, every single business unit or business area in the group in every geography had a better Q1 than a better Q4 and even better than Q3, which is typically a strong quarter. Except Graphite & Carbon because Q3 was the beginning of the destocking. So you will still -- and you have the numbers in the appendix. It was still -- before the destocking. It's the only one that is late basically in the value chain. On TQC, I don't know if we -- Sebastien, we have the numbers specifically on each of the JVs? It's largely TQC by far, far, far the biggest.

Yes.

The others are really minor contributions. Can we multiply by 4? No, because every quarter is a fight. We have competition. We have markets. We have unpredicted events. What I said, if you recall, in February -- sorry, in April, when we when we presented this business, there are no special effects. There are no one-offs. It's a business that is solid on good markets with its own competition, with its own market drivers. Probably today, there is a bit of overproduction in China of solar, which is partly the reason you mentioned on -- a drop in activity at one of the competitors. But the underlying demand in semiconductor, in fibers and in solar is up and is up for many years to come. Then like every market, it will have up and downs, it will have slow down, overcapacity, a bit of competition. So to say it's -- multiplying by 4 is the right thing. I think it would be wrong. Every quarter, we will monitor. We will report. We remain confident that we have a great business. But every quarter is fight. Don't compare entirely to Pacific Quartz because this company is very minor in raw materials. For the industry, they are much stronger in the downstream business. So it's more on finished products and downstream. So it's not really entirely comparable to us, just for your information. They have a very small part of minerals for the industry. And last, in terms of paper, our business into the paper market, Sebastien, Q1?

Q1 around EUR 90 million of sales. And I would say when we normalize the margin, it's the traditional margin, 14%, 15%, 16% of EBITDA margin, depending on the period that you can use to normalize that. So we'll obviously know a little bit more precisely in the next week when the closing can take place, but I think that you can use that to do pro rata.

Okay. So if I sum up, April is up to some extent. On the Quartz, we cannot multiply by 4, but close to 4 because there is no one-off. So slightly below 4, right?

You take your assumption then -- it's a market like every market. We wish we could do simple math. It's a...

Okay. At least I would have tried.

Difficult to predict the future.

And the next question comes from line of Ebrahim Homani from CIC.

I have 3, if I may. The first one, if you can maybe give you -- more flavor on your cost structure. Are there more cost saving actions that will be led in the next quarters, or we can consider that the actual cost structure is -- will remain the same over the next month? My second question is about the M&A. Now you plan the consolidation of the paper assets in the current year. Should we consider H1 or H2? I have understood that we have to consider a 15% margin on these assets. And maybe my last question is about the hearing in the U.S., which was planned yesterday, if I'm not wrong, it has been reported. Is there any explanation on that?

Thank you, Ebrahim. I'll start with the last one and then let Sebastien comment on the costs. On talc, there is, of course, an explanation. The hearing has been delayed, as far as we know today, by one month to May 29. The main reason is simply, there are a lot of new cases that have been added and our -- the mediator as well as the talc committee, basically, the representative of the plaintiffs, just want to be sure that everybody has properly interpreted and understood the agreement and are willing to sustain it. They want to be sure that once we launch this voting, there is proper knowledge and support for this plan to avoid exactly what happened last time. So we remain very confident that these -- we are on the right track. I think a month of delay, if it helps, build support is well invested. So I -- we remain confident we have started the downhill process. But we will keep you updated, of course, as soon as the hearing is confirmed before the end of May.

On cost, what we can say -- on the variable cost, we have now a good visibility of the lower cost level of energy and freight, which, as you know, are our biggest input costs and that we'll be able to hedge or to contract for most of 2024. And I would say that comforts the cost reduction that we have seen and will carry on. On fixed cost and overhead, we continue our homework as well. We continue to do a small footprint adaptation here and there and in particular, in our European footprint. It will not be tens of millions of euros that we take out of the cost base, but we continue to make sure we put that under pressure. So there is no very big movements that we can expect, but at least not upwards. That's for sure.

And the last question maybe on the schedule of the divestment of the paper assets?

We hope we could give a date but...

Yes. Difficult to give a date, but in terms of divestiture of the paper assets, I think, realistically, it should be by the summer. And I exposed myself in an optimistic way, but we are very well advanced in our -- in the finalization, documents are signed. We are waiting for a last approval from a competent authority. Normally, there is a deadline. So I remain optimistic that we'll be done by summer. And on the acquisition side, probably a bit longer because we just launched the consultation with the unions, that is compulsory. And after that, there will be some carve-outs of these companies from a larger asset base of the Calgon Carbon group in Europe. So it might be rather, I would say, towards probably rather a Q4 closing.

And the question comes line of Aron Ceccarelli from Berenberg.

I have one on price -- price mix. Was quite strong, price mix. Down only 1.9% against very tough comps. Just wondering if you can provide a little bit more color around what was price versus mix? And since comps are getting easier here for the remainder of the year, should we be thinking about possibility of positive pricing going into the second half? The second question is around cash flow. I understand you don't provide cash flow now, but it would be useful to have an idea of how cash flow performance was in terms of also working capital management? And the final one, if I exclude the contribution from the joint ventures, the EBITDA was down 12% year-over-year. It -- would it be possible to have a little bit of color around what was the key segments that drove this decline?

On the price, 1.9%, as you say, I think it's quite a good performance because last year, we were still going up or are still having some surcharges. So it is -- I think it is good news. Some businesses are even slightly positive. As you say, comparison will ease as we come towards, let's say, second half. So all in all, in the year, I do not exclude we might be positive. Too early to say. But let's say, all surcharges have been removed. There is nothing left in the group because of obvious cost comparisons or price comparison towards last year. And here and there, we have to compensate to offset some fixed cost increases, which we have passed through. So it could turn positive when we look forward and even for the full year. Cash flow, we don't publish 3 months. I think we publish a lot more information than many other companies on a quarterly basis so allow us not to talk further. If you remind what we said on a full year basis, not only we delivered a great cash at the end of '23, a lot of it was structural coming from a project we have launched internally to better plan our production, forecasting, inventory management. So fundamentally, the job is being done. We will see it in June, we will see it in December. Then if activity picks up as we believe strongly, as you always know, it needs cash flow, it needs working capital to grow. But structurally, I think we are doing what needs to be done. Your last comment, I'm not sure it's suitable, meaning it's our business if you want to remove some bits and pieces of the business then pick whatever you want. I think our joint venture belongs to us. Largely, we co-manage them. They are doing well, and we are very happy and proud. Some construction is slightly down and others are slightly up. So I don't see much to be discussed. If you start separating a single business, go ahead -- it's not -- I think it's not the way to see it. This is Imerys. And I think it's growing and is going in the right direction after a few economic-driven difficult quarters.

May I ask just a couple of follow-ups. One would be on the synthetic graphite and carbon black. It would be great if you can give us a little bit of color around the visibility you have in the destocking, what you guys are seeing at this moment? And the other one would be, you mentioned automotive, if I recall correctly, in your presentation to be -- being one of the weak end markets in Europe. Is that just related to EVs or also auto ex-EV?

Graphite & Carbon, I think it's a good point. It is the one with the biggest drop compared to last year, which is clearly destocking effect, the entire industry is going through a destocking. And I think you've seen it in -- you've read it when you [indiscernible], when you read automotive, when you read metals, nickel, lithium, manganese, cobalt, but every product relating to the EV value chain as seen from H2 last year, a significant decline. Overcapacity, overproduction, slower adoption of electric vehicles have led to this high stocks, high inventories, we slowly see the end. March was a reasonable month and Q1 was better than Q4. So even in Graphite & Carbon, I think we have turned the corner. It's the only business that Q1 is not better than Q3 but it's better than Q4, and I'm convinced Q2 will be better than Q1. It has turned the corner. It is very customer specific. You have some customers that are booming. We have customers up 20%. We have others down, which is partly -- is really -- which models are winning the EV race and which ones are losing or which company is losing. So -- but fundamentally, I think, again, it has turned and it's going up, especially carbon black. Synthetic graphite is a more specific product, it is a bit slower. You know -- you might remember, we have built a third line and commissioned last year, and we are building the fourth. We are running at [ 2.5, 2.75. ] So we are filling slowly the third line. And we are happy because the fourth one will be coming on stream this year. So we want this market to continue growing or restart growing and growing fast. No doubt. More generally, on automotive, EVs worldwide are growing. So that's not the issue. It is rather Europe and is rather, I would say, normal cars. If you look at European production of vehicles is the one that is down. EVs are still pointing up. So it's more an automotive issue, interest rates, uncertainties of loss. So it is more the traditional car market in Europe that is -- that needs help.

[Operator Instructions] And the question comes from the line of Matthias Kubli from Tiger Asset Management.

Congratulations on the great JV income result. I mean it's astonishing to see that you do more than EUR 50 million JV income now per quarter. Last year, TQC did EUR 80 million in 1 year. So my question would be on TQC following up from same question. When I look at the contribution from the JV income last year, it was pretty much stable around EUR 20 million per quarter for TQC. So why should this year be very different and where we have much more volatility in net income? And then I have a follow-up on some financials.

Not sure I completely understand the question, but I will try to answer as best as I can. When we presented this business, we said that the business is enjoying solid growth because of the underlying markets. Plus the company has been investing in the last 2 years and is continuing -- and is completing its investments. So a growing business last year. Good performance this year is partly -- is volume and price. It's both factors. What I was saying is it is difficult to promise that nothing is going to change for the next 3 quarters. That was more my message. At the moment, we believe the underlying markets are solid. But if you had posed the same question a year ago on Graphite & Carbon, I would have told you that there is only one direction, which is up. And then suddenly, we realized there was a bit too much optimism, a slowdown and a couple of quarters of less demand. On a curve that in the long term, I think nobody challenges. That's simply why we prefer not to commit on the remaining quarters of a single activity.

Okay. On the net financial expenses, they were at EUR 16 million in the quarter. Do we have to think about this that they could be meaningfully higher for the full year? Or was there -- yes, could this also come down again in the next few quarters?

No, there was a bit of the exchange expenses during the quarter. So fully, we'll not have 4x what we have. On the other hand, you know that structurally we will consume a little bit of cash down the road with dividends that will come with a little bit of CapEx that will come as well. So we'll -- all in all, that will balance it out a little bit because it is difficult to predict the ForEx evolution, obviously. But on the base interest, I think we are structurally have a little bit more gross debt than we had last year, but nothing particular.

Dear speakers, there are no further questions. I would now like to hand the conference over to the management team for any closing remarks.

Okay. Then thank you very much for listening to us. And with a positive message that finally, the business is going in the right direction. And with the expected announcement on interest rates, should give a further boost, especially to the construction sector. Therefore, we do look much more positively to 2024 than we did 3 months ago. Thank you very much, and good evening.

Good evening. Bye-bye.

That does conclude the conference for today. Thank you for participating. You may now all disconnect. Have a nice day.