Séché Environnement SA (SCHP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for taking part in this meeting presenting our consolidated results as of June 30, 2021, Séché Environnement. This is wholly done via webcast. Of course, I feel it's unfortunate I can't see you personally at this time as well. At my side, we have Maxime Séché, our CEO; and on the other side, Baptiste Janiaud, our CFO. [Operator Instructions] H1 2021, we saw excellent commercial, operational and financial performance. I have 3 main points having to do with these interim results. Baptiste will be running you through the results in detail. My first message, though, is that in H1 '21, we can say we went well above our targets in commercial terms, financial terms and operational terms first half -- not just versus the first half of 2020, which was hit by the health crisis, but also versus the first half of 2019. We can see the overall figures are well above they were during that benchmark period. This performance is very much about our overall growth momentum and ongoing improvement of operating margins. This has been the case for Séché Environnement for many years now. To talk about activity specifically, it's buoyant in our main scope, particularly in France. But we've also seen this, a confirmed recovery, in most geographies internationally. We see a resumption in volumes in H2 2020. This continued, which shows structural momentum in the waste market. Contributed revenue, EUR 355 million, up 18% compared to the same period in 2020 also up 13% versus the first half of 2019. Now let's talk about operating income. Our operating performance shows strong growth in all of our figures. And we can see in both EBITDA and COI increases in value and margin versus equivalent periods in 2019 and in 2020. EBITDA reaching almost 23% of contributed revenue. COI improving substantially, over 9% of contributed revenue. This is a level of profitability, which we hadn't seen for several years. This growth is thanks to commercial operations to address industrial lockings and our cost-cutting plans that were enacted. Now the financial situation also demonstrates significant improvement in the soundness, the strength of our balance sheet. The first half is further confirmation of strong cash -- available cash flow generation above our target of 35% of EBITDA. The financial leverage is 2.7x EBITDA and it's strongly up, a strong improvement compared to leverage 30 June 2020, which is 3.3x EBE. We can compare this very favorably to leverage on 30 June 2019, which was 3.2x EBITDA, which shows great flexibility in our balance sheet. A second message I would like to say to you this morning, this very good performance yet again confirms the strength of our momentum in profitable growth, enabling Séché to reap the benefits of the economic recovery after 2020, where the group nevertheless showed the resilience of its activities and its margins as well. This dynamic of profitable growth has been underway for several years based on 3 pillars: the positioning of our focus on value-added business lines, our industrial efficiency and growth through acquisition. Maxime will go through these 3 pillars in detail, talking to you about the basics of our model for growth and achievements in the first half of 2021. I'd point out that during the first half of 2021, our group completely smoothed out the effects of the health crisis in 2020 without swaying from its path of growth and profitability. Firstly, because our service offerings with very high added value enable us to tap into growth in our markets, volume and value growth both in France and internationally. Next, because thanks to improved industrial efficiency, our entire organization increased its operating profitability working on our waste mix, improving productivity of our facilities and also optimizing flow management. Lastly, during this half year period, Séché continued to adapt and add to its services offering through targeted acquisitions. With the acquisition of Spill Tech in South Africa, we added to our offering of recovery and treatment with high-value services and tackling urgent environmental matters. We have also announced our intention to acquire Osis Ile-de-France. They're specialized in sanitation services, which is a recurring business developed in territories where we don't have a footprint and with the renewed customer portfolio. After this first half, I observed that we are ahead of our road map. We will be reaching, in all likelihood, our targets as of 2021. One year ahead of schedule, we're reaching targets of most of our operational and financial targets we set our sights on for 2022. This is why 2021 targets have been revised upward. New medium-term targets will be disclosed to you towards the end of the year during our Investors Day meeting. A third message for you. Performance we're seeing after this first half of 2021 are sustainable, lasting. They'll continue to improve further. So we revised upward our targets for 2021 in terms of overall activity, operating income and financial flexibility. Therefore, on a like-for-like basis in scope for this year, we expect contributed revenue close to the initial target, the minimum that we had set for 2022, which is EUR 750 million. This is to say, with the integration of Spill Tech, as of this year, 2021, we're going beyond this minimum target we'd set for 2022. I'd make the same point in terms of operating profitability. Here, we'll see a significant increase versus last year. So EBITDA should be between 21% and 22% of contributed revenue. Strong generation of cash flow will be maintained. Now we're targeting financial leverage improved at 2.7x EBITDA for the 2021 period, which is 3.1x for the end of 2020. Last March, I'd remind you, we've already improved our targeted financial leverage for 2021, reducing it by 2.9x versus 3.2x previously. As I said, these are sustainable lasting trends. New medium-term targets for growth in business and growth in operating profitability will be disclosed toward the end of the year during an Investors Day. These new targets will display our ability to continue sustainably e growth in profitability of our operations with our new scope of activity within a new economic environment. We'll give you further details on medium-term targets, financial targets, but also nonfinancial targets. These are also a focus of our growth model. Now I'd like to give the floor to Maxime Séché who will talk you through the main factors, which were driving our growth as well as profitability during this half yearly period. Maxime has the floor.

Good morning to you one and all. This good performance in the first half shows the relevance, the appropriateness of our strategy for growth based on 3 pillars: first of all, our positioning; secondly, our policy of industrial efficiency; and then external growth, which is selective and profitable. As you know, we're a global player in waste management with expertise in recovery of energy and materials as well as hazardous materials. Thanks to the flexibility of our organization, our ambitious R&D policy and also thanks to our ability to roll out internationally, we can support our clients in industry and municipalities and meet their needs, which are at the core of our challenges in this century, i.e., decarbonized economy, circular economy and biodiversity. Historically, we've been well positioned in waste management, both hazardous and non-hazardous. We've been able to, therefore, tap into growth in those markets, positive commercial effects there in the first half, specifically, trending upward tick in prices, positive waste mix, initial effects of our industrial efficiency policy. Hazardous waste markets. Here, we observe a good level of production in strategic industry, our core industry, saturation of facilities in France and in Europe that lends itself to price increases and arbitrage strategy, the mix effects -- waste mix effect. Also, we're seeing great interest in the circular economy with recovery of materials to cut pressure on resources and improve product life cycle. Non-hazardous waste markets. Here, we see trends that are favorable structurally. The regulatory environment is favorable, boosting the economic viability of solutions on offer. We continue rolling out and using our expertise for energy recovery, as you know. We developed, for instance, Laval, the first CSR boiler in France, solid fuels used for the urban waste system in the wintertime -- urban heating systems, sorry, in the wintertime and it's also used in the summertime at farming facilities. We'll develop this for our clients, both industry and municipalities, with more sorting upstream of the treatment facilities to further recover materials as well as energy. Second pillar of our policy of growth is industrial efficiency, thanks to which our positive commercial effects pan out and can be seen operationally. We've focused effort on some essential points here. First of all, better coordination of the commercial efforts through operational management to optimize the waste mix. We set up an industrial and commercial plan with a short-term time line schedule to predict volumes and flows and monthly discussions between commerce, logistics and operations, the target being to maximize our scheduling ergo customer satisfaction. We're also working to improve on the supply chain to improve customer service and reduce transportation costs. We are optimizing flows of waste using rail and so forth and also upstream preparations that we can maximize tons per hour and capacities used by our incineration facilities. We've also achieved -- made investments for revamping our facilities to maximize availability and throughput. For instance, Salaise 2 investments in revamping enabled us to gain 10% in additional capacity, optimize smoke processing and we're still expecting new regulatory requirements in this area. We've also developed a preventive maintenance plan, which, in addition to technical elements, will enable us to increase installed capacity for our facilities. Furthermore, we've undertaken actions on productivity levers such as professionalization of our purchasing departments inter alia, standardization of nomenclature to optimize group procurement. We don't forget one of the most important points here, which is safety. We developed safety trainings. We've formalized safety points for each team, each shift and we're also getting systematic feedback on issues. This is a way of enhancing performance and it's also certainly a way of respecting our employees by focusing on safety. A third pillar in our strategy, external growth, which is selective and profitable. The target here is to add to complete our offer of services and our territorial coverage, supporting our clients and being proactive in terms of what their needs will be. In France, we're mainly targeting territories where we're not established yet or business lines that are in line with our strategy to add to our offering. Internationally, here, we're talking about gaining market share in countries with high potential for development and where environmental regulations are favorable. That's our framework for the acquisition strategy. We've added to our scope, particularly internationally and been doing so since 2018. This year, we continued rolling out the strategy to acquisitions in the beginning of 2021, we finalized the acquisition of Spill Tech in South Africa. We selected that company firstly for its intrinsic qualities -- inherent qualities. Spill Tech is growing very well and its profitable growth -- strong profitable growth. Furthermore, they are a good fit, it's complementary. They have synergy with Interwaste. We're already present in South Africa, had been since 2019 with Interwaste. With pollution remediation activities and environmental services by Spill Tech, the group becomes the #1 waste operator in South Africa and the first operator, which is integrated throughout the value chain. Now we're offering all waste management facilities: collection, recovery, treatment with quality standards, which we continue to grow. To go back to Spill Tech, this is a company whose revenue is around EUR 30 million in a full year. We're confident in their outlook for growth. Business is up by 40% since 2018. Furthermore, this acquisition is accretive as from the first half with EBITDA, which is 30% of revenue. In France, we just announced our intention to acquire 8 agencies of Osis Ile-de-France representing around EUR 27 million of revenue. This is in line with our rationale of extending our footprint toward -- throughout Ile-de-France surrounding Paris, focusing on waste management services and sanitation services and extending our customer base. This should be finalized beginning of 2022, subject to approval by the antitrust authority. Thank you very much. I'll give the floor now to Baptiste.

Thank you, Maxime. Good morning to you all. I'll present the consolidated financial statements at June 30, 2021, starting with the chart of the key economic and financial indicators. The figures speak for themselves at June 30, 2021. Even if we took up the 2019 numbers restated from contributed revenue given the restatement of the tax on pollution activities, all the indicators are trending favorably in terms of activity: EUR 324 million at June 30 (sic) [ EUR 354.7 million ], up 18.4%; a strong increase in operating income be it EBITDA up 50.1% and COI, 39.1% (sic) [ EUR 32.9 million ], up 152%. Strong changes versus '20, but also strong increases versus '19 through net income EUR 13.5 million, sharply up versus previous years. De facto, we see a very favorable increase in margins, be it the EBITDA margin, 22.9% or the operating margin at 9.3% or net income related to revenue coming in at 3.8%. There's a change in cash flow that is favorable with a cash flow preservation policy, cash flow up and net debt at EUR 465.5 million that de facto reflects the increase in CapEx, resumption of industrial growth CapEx as well as financial through an acquisition policy via Spill Tech, as Maxime indicated. So we have a favorable change in net debt IFRS post acquisition. From a cash standpoint, we're coming in with net debt that is flat and it's noncash items that changed by EUR 15 million versus December 31, 2020. Net financial debt strong, very strong balance sheet. Improved leverage, as we said, 2.7x the EBITDA, which is favorable and maintained strong liquidity at June 30 this year. When we look at the main aggregates, of course, starting with the activity. As was said, EUR 382.5 million in revenue versus EUR 313 million at June 30 last year, EUR 27.8 million in noncontributed revenue, primarily EUR 4.9 million are linked to IFRIC 12 revenue to the Montauban operation and EUR 29.2 million of tax on polluting activity sharply up versus EUR 13.3 million in H1 '20. Remind you, this tax is collected by the waste producer on behalf of the state and restated as noncontributed revenue, so it's to present operating margins that are real. Contributed revenue comes in at EUR 354.7 million. You see that in the blue section of the chart, up 18.4%, with a scope effect impact, 11.1%, linked to the acquisition of Spill Tech consolidated as of March 1 this year. Shown here is a H1 impact that is in full to be taken into account in anticipations. Like-for-like contributed revenue comes in at EUR 343.6 million, plus -- up 14.6%; slight ForEx impact like-for-like taking us to plus 15%, reflecting a positive and strong contribution of all activities in France and internationally. The green line, EUR 43.9 million, that represent the organic growth as such made up of Hazardous Waste and Non-hazardous Waste business lines, 50-50 for both value chains. Quarter-by-quarter, we see, as I indicated, for Non-Hazardous Waste by value chain, plus EUR 22 million in organic; Hazardous Waste, plus EUR 22 million. By focusing firstly on Non-Hazardous Waste, we see a strong increase, plus 20.6%. Two strong quarters in '21 driven by a sharp increase in volumes and prices in France, up EUR 15 million. International increased primarily in South Africa with a strong contribution of Interwaste, plus EUR 6 million versus the first half 2020. For Hazardous Waste now, plus EUR 22 million organic. Two strong quarters in '21, broadly flat with sustained growth in France versus H1 '20 stemming primarily from processing and recovery and stability internationally with a clear disparity according to geographies. Turning briefly to the France-international split. As I indicated, strong momentum in France, plus 16.9%, thanks to all activities, positive price and volume mix on the back of a good trend in industrial markets. Plus 9.4% international with a return to growth across our main markets. Europe, EUR 34 million in revenue, up 4%. South Africa, very dynamic, EUR 34 million, up 21%. The rest of the world primarily service to industry via Solarca up EUR 29 million, plus 3%. Only in Latin America, revenue coming in at EUR 6.5 million remains clearly impacted by the pandemic and weakness in industrial activity in its main geographies. Moving swiftly over this slide, the key point is by activity. Contributed revenue driven by all activities, including without the scope effect on the service segment, we see the processing activities. Highly contributive recovery and a very positive strong rebound in services, both for Hazardous Waste like-for-like and Non-Hazardous Waste as regards the actual scope. Turning to the operating income, starting with EBITDA. As I indicated, we're posting EBITDA at June 30 coming in at EUR 81.1 million, 22.9% of contributed revenue with a scope effect you can find on the international part of EUR 3.4 million. The acquisition of Spill Tech, increased activity led to an increase in EBITDA. Excluding scope, we have an operating margin that would have come in at 22.6%, as Maxime indicated. We see that, as of now, the position of Spill Tech is both accretive on our EBITDA and operating margins that clearly reflects our strategy and that's very positive EBITDA increases the result, both in increased margins in France and internationally with overall a good trend of industrial and municipal markets and a significant increase in the utilization rate of our facilities. On the right, international, the rebound of EBITDA into Waste in South Africa, which contributes to the significant increase in group EBITDA. When we use the different price and volume effect, we see the importance of volume effects linked to the rebound of H1 '21, plus -- up EUR 29 million. When we look at that volume effect, we see half of that is made up of an increase in France of the treatment volumes versus Q2 last year, which was weak; also an increase in the utilization of our facilities, up 10%. That's for France, EUR 14 million links to treatment, EUR 7 million to the rebound in services in France through the momentum of works and the global offering and EUR 7 million internationally, primarily in South Africa for half and the rest in Europe and the rest of the world. The price effect, that's positive, just under EUR 15 million. And the key point is, of course, the improved margins through an increase in activities. Both volume and prices faced with good containment of operating margins, which was a key factor in H1 performance. Turning to the current operating income. As you see, COI comes in at EUR 32.9 million. That's an operating margin of 9.3%, sharply up. When we separate France from international, France current operating income of EUR 26.8 million, that's EUR 10.3 million of contributed revenue with primarily the cause of the increased EBITDA with the effects indicated, an increase in provisions to amortization linked to a treatment activity that was dynamic and increased amortization on the back of the investment policy conducted on thermal treatment facilities. International, EUR 6 million in COI with an increase in margins versus EUR 2 million last year, which is the result of organic growth of EBITDA for EUR 2 million and the increase of current operating income internationally, EUR 2.9 million with the acquisition of Spill Tech. Moving down the income statement to net income. We see, first of all, improved in our financial expense income at EUR 9.4 million in spite of an increase in net debt 78% of our financial cost in the first half of the tax expense, EUR 7.2 million. That's linked to the increased earnings with an effective tax rate contained 34.1% versus 35.1% last year. Slight negative income on equivalent costs linked to a shutdown of the waste treatment. EUR 13.5 million net income group share, as I indicated, sharply up. Just a word now on the balance sheet items. We see a return of industrial investments at a more normative level. Last year, we protected the cash during H1 '20 during the lockdown. So de facto there's resumed resumption in CapEx, above all nonrecurring one-off CapEx that are growth CapEx; recurring 6% of contributed revenue, maintaining our production facilities; and EUR 17.5 million one-offs in growth projects, increased capacity, investing in recovery facilities, non-hazardous and hazardous waste treatment facilities, to increase the range of services offered to clients and improved standards, notably in South Africa, which led to this good contribution that we saw. And like last year, investment of EUR 3.2 million to put in place our group ERP. Turning to cash flow. We have recurring cash flow sharply up, EUR 21 million, thanks to the improved EBITDA and operating cash flow available after mandatory expenses, up EUR 6 million this half versus last year in spite of all the CapEx rolled out. That strong cash generation that has allowed the resumption of an active CapEx policy, both industry and financially to fund our expansion and de facto increases debt, but in limited manner, up EUR 15 million, no cash effect. These are noncash impacts linked primarily to the recovery of lock fees and the Spill Tech that impacts debt directly. Turning to liquidity. The group maintains a strong liquidity position, EUR 3.3 million, (sic) [ EUR 304.3 million ], EUR 134 million in active treasury, a leverage 2.7 EBITDA. So that's a very significant improvement over the end of 2020, 3.1x, and 3.3x end of June last year. Looking at the outlook for '21, we've reviewed the outlook for '21 upwards with a target revenue that will come close to EUR 750 million, excluding the integration of Spill Tech. In terms of activities with de facto expecting continued positive momentum. In France in H2, continue of a good level of activity. In Europe and South Africa, we're hoping for the ramp-up of activities that are suffering today, the health situation in Lat Am and international work projects, international that are still suffering to travel restrictions in certain areas. This brings us to anticipating a level of activity in H2 '21 in line with H1. From -- in terms of operating income, as you've seen, we have H1 that's very dynamic. Even if 2 swallows don't make a summer, our target for EBITDA is 21%. Given the H1 and the outlook for H2, we expect to be above that target with an EBITDA target between 21% and 22% of revenue -- contributed revenue, including polluting tax. As regards COI, that current operating income should follow the same trend as EBITDA. Financial structure is key. We continue to protect the cash flow situation. We're still expecting industrial CapEx of the order of EUR 90 million with resumption in growth investments. Liquidity -- abundant liquidity with available free cash flow, 35% of EBITDA. It's the case we maintain it. Flexibility, where we improved the leverage target, we were expecting 2.9x EBITDA. Given the situation, we expect to maintain the leverage target improved to 2.7x EBITDA at constant scope. That's the presentation of results and the main targets. Let's now move to the Q&A session.

Thank you for talking us through the results as of 30 June. It's time for a question-and-answer session. We'll field those questions. Do we have the questions now? Yes? Okay. Question one from Jean-Francois Granjon. Margins inter alia you've reached in France, are they sustainable for the medium term? Second question. Guidance for revenue, EUR 750 million, is this before Spill Tech and Osis? Next, what are the trends in Latin America? Are we seeing signs of recovery and improvement. Fourthly, Spill Tech margins, are they sustainable? What about these levels? Next, what about your CapEx policy medium term after EUR 90 million in '21.

Question one, margins reached inter alia in France, are they sustainable medium-term. Several points here. Firstly, these are half yearly results. Outlook for the medium term will be submitted to you during the Investors Day towards the end of the year. As Maxime pointed out, If you look at half yearly results as an improvement in margins of EBITDA and operating margins, which relate to cyclical elements as well as structural elements, cyclical elements, first of all, we can say that today there's good growth in industrial production. The macroeconomy is buoyant in the main geographies of this group, then structural elements having to do with the cost-cutting plan, the industrial efficiency plan, enhanced productivity, which we see in our facilities and improvement in waste mix. We'll be presenting to you the medium-term outlook, driven both by cyclical elements as well as structural elements, realizing, of course, that our task will be to set up action plans, structural elements, so that we can boost margin levels, which -- and underpin margin levels we've announced to you. Next question, guidance on revenue, EUR 750 million. Is this before Spill Tech and Osis. Let me mention we're going close to EUR 750 million. According to our expectations, we'll get close to EUR 750 million in revenue. Now of course, this excludes Spill Tech. Together with Spill Tech, we would have gone above EUR 750 million. Remember, Spill Tech is consolidated starting on 1 March 2021. So the revenue for Spill Tech, EUR 30 million, is on an annual basis, not over 10 months. Osis. No impact in 2021 of Osis. So of course, guidance for EUR 750 million near -- close to EUR 750 million excludes Osis. Question, trends for Latin America. Well, as I mentioned to you, as of 30 June we're not seeing any improvement for Latin America. Clearly, there's been an impact by the health crisis, also an impact in terms of the overall economy in Latin America. We hope we've reached a low point, a trough. The health situation will improve and there'll be a recovery in these areas. We are maintaining our strategy of managing our business locally and adjusting operating costs to any deterioration in overall activity. So far, no improvement in our financials there as of end of June. Now our CapEx policy medium term was the next question. And of course, we will outline this for you during the Investors Day. That's a very important point. The important thing here is to realize that now we've come back to a normative recurring CapEx. We're going to maintain the normative level. However, having to do with growth investments, here, we will continue to be highly selective in industrial and financial terms. It will all depend on opportunity and financial flexibility that we have within the group.

Next question was -- yes, to build on this. Question from Mr. Pierre [indiscernible]. The government has announced a support plan for R&D and recycling. Are you going to apply for the government assistance support. Another question. Would you talk about the stock of waste to be managed in France as China has announced it won't be importing waste?

Well, let me say that it's very important for us to have a true sector for recovery and recycling within France. It's very important to be able to recycle, reinsert secondary and primary materials and have energy recovery facilities in France. This way, we'll be able to develop jobs that couldn't be offshored from France and help contribute to reindustrialization in France. Would you like to add something on this?

No. Thank you.

We have a question now also from Pierre [indiscernible]. Could you explain changes in the TGAP tax in upcoming years? This increase in TGAP, could it be passed on to the customers?

The government does indeed have a plan to increase the tax on polluting materials, TGAP. It's a publicly disclosed government plan, you can look it up. This is what we've included under in noncontributed revenue. Because de facto, we pass along this increase in TGAP to the clients. We say that these are governmental measures and we tell the clients invoicing of these are straight pass-along. So there won't be any issue in terms of any changes in our operating key figures.

Question -- important question here from [ Nicola ] [indiscernible] asking could you talk to us about Italy? Is the situation still as good in terms of prices and volumes growth in that country? Is this due to investments to increase capacity? And will all of this only start bearing fruit as of 2022?

It's a positive situation in Italy would be my answer. There's no capacity impact. It's only an increase -- increasing capacity will just start in 2022. We're in a positive situation. No increases in capacity or prices, but nonetheless, continues to be a positive situation, therefore, contributing to our group's operation of aggregates in the first half of 2021. What are the further questions?

Next one. Indicate -- [ Nicola ] [indiscernible]. H2 revenue indication -- your indication seems cautious. Is this due to the catch-up effect that you saw in H2 2020?

Yes. If you look at quarterly changes, we had second quarter 2020, which was very low due to lockdowns. Then there was a rebound because of opening back up of waste recovery centers and opening up of services in Q3 2020. Therefore, we're expecting in the second half revenue will be similar to our revenue figures in the second half of 2020.

Let me just add another question for [ Nicola ] [indiscernible]. What are growth opportunities -- acquisition opportunities after SUEZ-Veolia Merger?

We'll, as I've said, analyze opportunities if there are any in the horizon. We're highly selective. And as Baptiste said, thanks to our cash on hand and our financial flexibility, leverage of 2.7x, we are in a position to react quickly if any opportunity were to come up. Would you like to add something?

Are there no further questions? Well, then I would like to thank you. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]