NV Bekaert SA (BEKB) Earnings Call Transcript & Summary

Good morning, everyone. Hope you're doing well. So thank you for joining this call. So you would have noticed that we have decided to organize the call to comment on our Q1 trading update. So we will be initiating this new process going forward. So before going into the figures, I just wanted to share some headlines about the Q1 2023. And as far as we see 2023 has started well. So we see a good trading performance despite some anticipated mixed market conditions that we have already discussed some time ago. Again, the figures that we will be presenting are compared to Q1 2022. And you might remember that Q1 last year was a very strong quarter. So it's important to bear this in mind. So we continue to demonstrate our commercial excellence in challenging markets, challenges in some specific geographies. The pricing continues to be quite strong. So we are maintaining our discipline in terms of pricing and margin preservation. More fundamentally, we continue to focus on the cost conversion, the working capital and the cash generation. China, which was also a topic of discussion over the last few months. So we see that the volumes in China have picked up. They have picked up earlier than what we anticipated. We did see this pickup coming back a bit later on during the year, but Q1 seems to initiate the trend as far as demand in China is concerned. But we are still a bit cautious with the overall uncertainty around some of the market fundamentals in China. More broadly, we continue to execute our strategy, and we remain confident that the long-term expectations that we have set, in particular, the 9% to 11% margin target will be met. Therefore, we believe that we have good reasons to remain comfortable with the 2023 expectations. Now looking at some of the top line metrics. So you will see that our consolidated sales has reached EUR 1.2 billion. So this is obviously excluding Chile and Peru, which are subject to disposal. So it's slightly down by 2% versus Q1 of 2022, roughly EUR 23 million, and again, against a very strong Q1 2022. The volumes have dropped by approximately 4.7% of the total company, but we have been able to mitigate a significant part of the impact, thanks to the focus on the pricing and the mix. And again, as I stated it earlier, we continue to demonstrate a commercial excellence in very challenging markets. From a segment perspective, so our sales are consistent with Q1 of last year with the main particularity being the returning demand in China, somehow ahead of expectations. And this is also compounded by a strong growth that we see in India, which are offsetting lower volumes that we did see in Europe and North America. China and India together are reporting 14% sales expansion compared to last year, which is a quite strong performance. More specifically about these 2 countries. So China, as I said, has rebounded well in Q1. So this rebound is driven by mainly restocking. So it's a quite positive trend, but we want to still take another quarter to watch more carefully how the market fundamentals will be evolving, and that's the reason we are taking a cautious stance for the time being as far as China is concerned. India continues to please with another strong period. Their outlook is very positive, and we're confident about it. Europe and North America, lower volumes are connected with the softer economic conditions, but we are maintaining a good pricing discipline in those markets. The pricing evolution overall for RR has been impacted by the wire rod price evolutions. So while we saw an increase of the pass on wire rod changes in 2022; in 2023, we're facing a slight decrease. Moving to SWS. The top line has contracted by roughly 9.6% on the back of a 15% decrease of volumes. The overall price and mix improvement that we're reporting of 5.3% is the result of the decrease for the past on wire rod changes. But it's also characterized by a standout price/mix improvement of nearly 13% compared to last year. So despite the volume decreases that we have seen in SWS across most of the regions, the BU continues to benefit from a very buoyant energy and utility markets in North America with a very good level of pricing. An update on the disposal of Chile and Peru. So it remains on track, and we're still expecting it to happen in H2 of this year. Moving to Specialty business. So we see -- we are reporting a 9.1% decrease in the consolidated sales, primarily due to lower volumes in construction applications and some reduced demand in combustion technology. However, the price and the mix performance remains strong and it's overall contributing to 8% to the top line. So in building products, we saw a decrease in Dramix volume, mainly because of some phasing and job delays and slower overground activity primarily in EMEA compared to Q1 of last year. However, we have higher pricing and a better mix towards more high-end fibers, 4G and 5G, in particular, which are representing now 40% of the volume, which are more than offsetting the volume shortages. We have also booked some very notable new contracts in India, Israel, U.S. and the U.K. In BFG, we are facing a price erosion in China to wire market, mainly related to an increased competition and some additional production capacity. Semiconductor growth was kind of subdued and has also led to a lower filtration business. Last but not least, moving to the BBRG. So there as well a standout performance with a 23% increase in sales, primarily driven by a combination of price/mix improvement, but also a quite strong increase of volume of roughly 8%. So the performance has been very strong in our key applications in oil and gas and mining, which grew, respectively, 15% and 21% versus Q1 of last year. The order book remains quite solid, and our outlook are positive as far as BBRG is concerned for 2023. A couple of words about the advanced export volumes. So there as well, the volumes have picked up by roughly 11% with a good performance in terms of pricing and mix performance, which has been further consolidated by the increased demand for Armofor applications for oil and gas but also for hydrogen and transmission. So that's -- as far as the sales are concerned. Moving to the outlook and what we see for the balance of the year. So the internal motto in the company for 2023 is -- this year is the year of execution, and we have a lot to do in 2023. I do believe that, again, we have another stress test environment. It will allow us to confirm that we are doing the right things to transform the company. We have the ambition to deliver another year of strong performance in an adverse environment. And I do think that this will be a mother proof point to demonstrate that we are much less impacted by the cyclicality and that our fundamentals still enable us to deliver strong performance despite the mixed environment. So our key areas of focus, it will not be a revolution compared to what we have done in previous quarters. So we will keep focusing on pricing and margin discipline. We will continue improving our business application. We will need to move faster in terms of being able to adjust our cost base and be able to be in an efficient, leaner and cost-efficient organization. So cash conversion will be key with the swinging volumes that we have, we will need to be able to demonstrate the agility and the flexibility to adjust the cost base along the changes in terms of portfolio. So we also have many opportunities mainly related to some of the new markets where we are entering some of the new applications that we have developed. So we will need to capture profitable growth opportunities in a very opportunistic way when it comes to some of these specific applications, and we need to scale up some of these promising products that we see. I'm referring here to the Dramix and Armofor. We will be accelerating our activities in terms of investment and focus on technology and innovation. This is how we will be securing our winning positions for tomorrow. We are pleased to have our new Chief Technology and Innovation Officer joining us. So the organization now is fully staffed, and we are ready to go with our plans. So in summary, Q1 2023 is another proof point of the improvement that we have made to the business in the recent years. The business has demonstrated resilience in Q1, and ability to perform in difficult markets. And we are also positioning ourselves in interesting growth markets. So the combination of resilience and growth is confirming our strategy and underpins our targets for 2023 and beyond. So with that, I will open it up for questions.

Right. And we see that some of you have raised your hands. I think you were the first, if you can unmute and then start stating your questions.

Yes. And I have a couple of questions, please. First is on the guidance on the outlook. The slides mentioned unchanged expectations for 2023. Can you offer a bit of clarity on what that exactly means? And how you compare, yes, your view to the consensus, for example, which is, if I'm not mistaken, EUR 378 million underlying EBIT. So the first question is there on the guidance. The second one is on rubber reinforcement and specifically on China. Can you maybe elaborate a bit on where inventory levels are at the moment? And also how pricing dynamics have evolved in that market. You explained last year that there was for a number of months, heavy pricing fight between a few players and then that settled a bit. But can you maybe update us on the pricing conditions and inventory levels in the Chinese market. So those are my questions.

Okay. So as far as the guidance is concerned, so we want to stick to the statement that we did when we published the full year. So as you know, Q1 is a trading update. So we are not disclosing results. So what we can say is that, I mean, as I stated, we have made a good start in 2023, we do see the benefits from the mix improvement despite the volume reduction in some areas of the business. It's showing that the structural improvements that we have made in recent years are building results. So our midterm targets, which we gave, which are 9% to 11% remains unchanged. So I think that we will need to see how things are evolving in the next quarter before potentially guiding more precisely when we will publish H1. But for the moment, we want to stick to our previous statement. As far as China is concerned, so the reopening and the lifting of the COVID measures has created a new level of activity. This is what's driving a significant pickup in the volumes. There was indeed a kind of fight between 2 main types of suppliers in China around prices. You might remember that we decided not to go into this logic during 2022. The dust has somehow settled. We do see a normalization progressively go in. We want to stress test a new approach where we want to rebalance a bit more the plant occupation, the volumes versus the prices. So last year, we were primarily focusing on high-margin contribution applications at the expense of the plant occupation. And anyway, the market was under tension. So it was not really relevant to start looking at how we can fill up our plants. I think that now with the new dynamics in China, I think it would be a good opportunity to rebalance a bit more the type of construction and portfolio of applications in China. It will help and contribute in offsetting some of the deviations that we have in the cash conversion cost. So far, this approach is yielding some good results. Our plans are going back to a more normalized level of occupation compared to 2022. So I think it's -- for the moment, it's the right approach. So we will go through a cycle which will potentially last 3 to 6 months where inventories in the supply chain will be rebuilt and normalized, then we do believe that towards Q3, end of Q3, will have a more normalized trading environment in China. So we're looking forward to that. For the moment, we're benefiting from these volume pickups, which are happening mainly related to some of the restocking, because I mean again, supply chain was significantly emptied during 2022 and the COVID lockdown period in China.

Okay. Then we have Frank. Can you unmute and raise your questions.

Yes. Coming back on the question on the outlook. If I recall well, you said with the full year results that you felt comfortable with the consensus. Do you still feel comfortable with consensus expectations? My first question. And then secondly, on the wire rod prices, they've been coming down. What is your working assumptions for now? Do you anticipate FIFO adjustment, inventory adjustments maybe in the first half? And also, is it possible that pricing could go negative because of lower wire rod prices? So could you elaborate on that, please?

Yes. So as far as the consensus is concerned, I mean, we are comfortable with it as it stands now. Again, we would have loved to give you a more affirmative stand on that, but...

Sorry, I don't hear anything. I don't -- not sure you're the only one.

Do you hear us, Hello?

Okay. Can you hear us? Frank?

We lost Frank, it seems. Okay. I will, however, answer the question on the consensus. I think it's relevant for the wider group. We are comfortable with the consensus as it stands. We will give it a more affirmative tone in our next result publication. Again, it's mainly due to the fact that the environment currently is still very fluid. We do see some positives mainly related to [indiscernible] and the fact that our plant occupation are progressively going back to a more normalized level. But we want to see how things will be evolving in the next coming months, primarily in terms of pricing, competition and so on. But for the moment, we do see positive indicators. As far as the wire rod cost is concerned. So in March, what we stated was that the price were coming down, and we expect the prices to plateau in the coming months. The picture hasn't changed much. Demand, as we saw, it is a bit sluggish in some specific geographies. And the prices are plateauing or slightly decreasing. For the moment, we don't see a material rebound from the China pickup. There are some regional dynamics, for instance, in India, where prices are expected to increase somehow. In Europe, there could be some impact later on following more steel demand after the earthquake in Turkey. But this will not trigger a big impact on the global level. This also means that we are not expecting major inventory revaluation amount for 2023. In the delta versus 2022, there was an impact for sure in H1, but this is mainly related to last year, it's not related to the dynamics of 2023 in particular.

Then Martijn, you're next, if you can also unmute and raise your questions.

I have one question left actually. Could you elaborate a little bit on the competitive pressure in RR and SWS. In the past, you've benefited from the Asian competitors not always being able to compete effectively because of higher freight rates or port logistics that were helping their operations. How is that evolving from 2022 into the first quarter and now moving into the second quarter. A bit color on that aspect, please.

Yes. So I will start with the dynamics in RR and looking at one of the markets. So I will start with China. So China is in the middle of a demand pickup and increased level of top line sales. A couple of things are triggering this dynamic, the fact that the economy is reopening. But there is also a certain level of new capacity which has been put in the market. So this capacity coming from some competitors is mainly focusing on some low-end applications. So there might be some tensions when it comes to pricing for the low-end applications. As far as the high-end applications where we have built a strong position during the last few quarters, we don't see it yet, and our level of pricing remains very comparable to what we have seen last year. So there will be some tensions in terms of pricing, but we look at it as something which will also allow us to offset some of the negatives that we had to deal with in 2022, resulting from the under-absorption. So we did various analysis on how we should balance the impact. So leveraging price versus occupation for some specific type of application does seem to be the right strategy as far as China is concerned. If we move to Europe and the U.S. still in RR, the demand is very much triggered by the overall confidence in the economy and the overall market conditions. So that's the primary impact that we see. That's also explaining the reason why we are seeing a drop in our -- in some of the volumes. However, the pricing does remain quite strong in these 2 markets. The other dynamic that we will see long-term is that in the context where many time makers are looking at how they can de-risk their supply chain, some of -- we are expecting that some of the exports or rather imports that we did see in the past from China, although, if they are coming potentially at a slightly lower price may phase out over time, because of the derisking strategy that most of the companies are having towards China. So that's for some of the key highlights that we see in RR. As far as SWS is concerned, so the issue that we're facing, these were something driven by the overall market sentiment, the economy and so on. So some of the key big markets that we have typically Latin America and Europe are seeing a slowdown of the demand. But as I stated during my introduction, we do see a very strong pricing level. So pricing overall for SWS has improved by 13% compared to Q1 last year, which does gives us a high level of confidence that we are managing the situation with the competition. Is it because we are positioned differently, is it because we are still leveraging our local supply chains and our local production capabilities? It's hard to say, all what we can rely on is the strong metric that we are currently seeing in terms of pricing, which is helping to offset the volume dynamics that we are currently seeing.

Okay. And then the next one up is Stijn.

Yes. Two, if I may. The first one, can you provide volume growth numbers for the different regions in rubber, also for China, India and EMEA and the U.S.?

Yes. So India volumes for RR plus 13%. The rest of Asia, so that's China and Indonesia, plus 21%. Europe, minus 9.8%, and UAS -- U.S. minus 4.7%.