SigmaRoc plc (SRC) Earnings Call Transcript & Summary

Thank you for joining SigmaRoc's Q3 trading update presentation. Today, we have our CEO, Max Vermorken; and CFO Garth Palmer. They will present the Q3 results today. Max will present the results overview. Garth will present the financial, and Max will then present the conclusion. [Operator Instructions]. I now hand over to Max to present the results highlights.

Good morning, everyone. Thank you very much for taking the time for this Q3 update. We present -- we've got about 10 slides to go through very quickly. So Q3 and the year as a whole, year-to-date, the 9 months so far have been, by any standard, quite a challenge. As everybody knows everything that we had to deal with from inflation, from energy uncertainties around. But generally speaking, we came out with a very strong and positive message here today. GBP 394 million in turnover, GBP 77 million in underlying EBITDA, which represents a like-for-like increase of 19% on the revenue and 5% on EBITDA for the same period in 2021. And volumes across the board are up by 2%. If you look at what's -- the various drivers were for the performance year-to-date. First and foremost, the platforms, we've got 6 platforms in total, have all performed exactly like we hoped, both in terms of volume, in terms of pricing, in terms of dealing with the cost inflations and other uncertainties. And that shows the resilience of this group. And secondly, volumes are ahead year-on-year on like-for-like basis, which we're very pleased with. A lot of work has been done in terms of addressing new markets, testing new products and all that has been successful and is coming through. And thirdly, that's quite an important point, but sometimes is missed. Our group is not a one-geography, one-product group. It has a very diversified end market. It does both high-grade limestone, low-grade limestone, products that we make out of the various types of stones that we produce and sell. That allows us to be resilient, flexible and probably be more resilient against adversity than most other groups of our size. As a result, we've been able to effectively manage inflation and cost pressures. And obviously, there's quite a few questions on leverage. We're actively managing the leverage down, both in terms of the cash generation, disciplined M&A and on CapEx. And all that through the standard way of operating that we've always had as to drive profitability and margins. And if you look at what that really means and what we've achieved over the last 5 or so years with this group, I thought it'd be good to present this slide to you. We did a calculation comparing the [indiscernible] with VAS announced various RNSs and then the broker consensus forecast for 2022. If you take all the businesses pre-Nordkalk or just isolate the Nordkalk Group, given its large and recent, we were able to improve the EBITDA generated by this business by about 40% from acquisition, and that's from everything [ Ronez ] to the PPG Group to the Belgian businesses, which we're very, very pleased with. Look at Nordkalk only so far, we're already 8% ahead of the acquired EBITDA numbers last year, again, on a like-for-like basis. That's good progress for such a large business in such a short time. Group it all together, obviously, that the 2 combines -- the 2 graphs combined [ growth ] nearly 20% like-for-like and obviously trending also equal [indiscernible] the higher numbers with the programs that we've got in place. So very pleased with this. I'm very pleased that in the 9 months to date, we've been able to continue exactly this trend. To give you a bit more context of what the year has looked like and also what the quarter has looked like, we present you here a fairly detailed slide on the demand outlook. On the left, a bar chart, which combines up to 100% of our sales. And then on the right, a table with a breakdown or by end segment and also the platforms to give you a geography feel of where these sales have mostly gone. The first 3 brackets, chemical, environmental and agricultural applications all have evolved with the same underlying trends and that is effectively 2 aspects. On the one hand, we've got the conflict in the Ukraine, which has meant that Russian imports [indiscernible] imports into the various eastern markets, Finland, have now completely ceased. That's an opportunity for us, and that will be a long-term trend as far as we can see at this point in time. What it means is that we can sell more products into the chemical industry, into the agricultural industry, where fertilizer is short and limestone products are an alternative. We're also burning a lot more coal these days, and that means flue gas treatment is important, and that is the environmental application of our products. So all these 3 segments really present an opportunity for us, in particular, in the Baltic markets where we have really not had much of a presence to date and which presents an opportunity for us to grow. The metals segment, 10% of our turnover at a group level is a mixed bag when you look at the entirety of Europe. It's fairly all right in the northern markets, obviously, as long as you can read in the press, various large steelmakers announce or indicate that they might shut down some blast furnaces on the various sites. We see a fairly stable outlook for in terms of volumes. We haven't had any significant changes in demand outlook or significant changes in volume outlook for the metals producers. That is usually typically the case for Northern European metals producers because of the higher end applications of the steel they make and the markets they service. And so from that perspective, a neutral outlook from a demand perspective for us. Paper pulp and board, 13%. You may remember that we had a strike at the beginning of the year, which basically shutdown our main source of supply into that industry in Finland for 4 months. But that industry is very, very bullish at the moment with good demand, order books building as they should and even indications of running over Christmas, which is not usual for that industry at all. The demand obviously comes primarily from the pulp and the board side of things and also the high-end paper, which we supply into as well. Now that represents a bit over 40% of our turnover in as you can see, primarily in the [ Nordkalk ] markets and the England and Wales. If you look at construction, 57% of turnover for this calendar year, this year so far, 35% is infrastructure. And the demand there is robust. Everywhere, we have good infrastructure pipelines. There's more coming in, in terms of infrastructure supply, but we're looking at wind farms, we're looking at LNG terminals, but we're looking and solar panels that are being put in for the infrastructure for energy generation. The rest of that 57% is the various types of housing we supply. Most of that housing is really spread across all of the jurisdictions we have. Largest single market is the U.K. with 7.5%, and Belgium follows with about 5.5% and low single-digit elsewhere. Look at the U.K. exposure that we have, half of that -- more than half of that is effectively high-end housing. These are homes high value, where we supply dimension stone in the [indiscernible]. And so from a resilience perspective of that type of housing, again, when you have question marks around mortgages, interest rates and so on. We feel a lot more secure and occupy the demand outlook there. So from a general perspective, our construction outlook seems still positive with perhaps a question mark on housing, but again, the indication of our low exposure to any single housing market. So we see a lot of points on the cost, and I'll hand you over to Garth to go through [ through the others ].

Thanks, Max. So there are 2 things we just want to focus on the financial aspect. So first being cost control also how we deal with inflation. [ Big ] thing to know, overall, is 65% of our cost base is variable. So that scales of production. We don't extract underground, that -- we don't pay that portion. That's further supported by the fact that we have a statutory furlough scheme in Belgium, where we have [ furloughed ] staff across the group. In terms of how we do with inflation, we've got effective energy and CO2 hedging in place. In the energy front, we're pretty comfortable where we're hedged out for the remainder of the year. And then into '23, we're at the upper limit of our electricity hedging mandate. Now that's obviously on an average higher price overall than '22, but we're comfortable that can be managed by a fairly modest price adjustments next year. So we're going to [indiscernible] stay there. Further on inflation, we also benefit from dynamic pricing and contractual pass-through arrangements with some of our larger more energy-intensive customers, particularly in the Nordic region. That's sort of supported by the results to date in that top line revenue growth and then the relative EBITDA. So we managed to pass through those extra costs. And slightly more granular level, we're running night and weekend shifts across the group to take advantage of lower electricity prices. And the noise we're even monitoring daily for the next day price and engaging production accordingly. And we have ongoing operational efficiency improvement programs and cost reduction initiatives across the group. And as we pointed out in the RNS, that's expected to net us about GBP 5 million in EBITDA savings this year, and we expect that to be recurring through. And lastly, we have a very flat management structure, close proximity to our customers, and that makes us nimble and quick-to-react and ability to pull these various levers, which then sort of ties into some historic statistics across the group. For Nordkalk, its lowest EBITDA margin on an annual basis since 2005 is 14%. That's obviously coming out of the global financial crisis. And at SigmaRoc on a monthly basis, seasonally adjusted, our lowest EBITDA margin was in April of 2020 at 13%. Obviously, we all know what happened there. So the group has -- group is able to deal with sort of adverse market dynamics. Moving on to net debt and leverage. So we have a 4 years remaining in our facility at GBP 405 million, of which about GBP 173 million is still available, GBP 73 million of that's a revolving credit facility. [indiscernible] covenants on that 3.25 leverage and 4x interest cover. We've had good cash generation through the period and focus remaining years on de-gearing, building up cash. And just as a point to note on our ability to delever, we've spent GBP 56 million year-to-date on growth-related investment. That's acquisitions, so like Johnston, RighCast and also organic expansion, various investments to improve our resource base. And so if we haven't spent that money, we would -- our leverage ratio currently at 2x, excluding IFRS 16, would have been worked down to 1.5x. And just lastly to close out, but particularly for the Q4, we're really focused on reviewing -- we're always doing this, but particularly in Q4, we're doing a fixed asset base, looking for anything non-core and building up cash. So I'll hand back to Max to close out.

Thanks, Garth. So looking forward and in terms of building the group and continuing to be sort of assertive and aggressive where we can obviously noting what Garth what just said on de-gearing and caution, there's still a lot that we're actually doing in the background. And they don't necessarily require any specific investments. These are programs that we run constantly. We made a list here quickly so that you have a brief idea. In the Channel Islands, most recently, and this is a major step forward for us, we received planning approval for the new Korean currency. This was something that when we acquired the Channel Islands business back in 2017, that was a key point in the various presentations and to have now that step is fantastic news. So that gives us the next 20 years of reserves, which we'll start to produce from -- in the next 5 or so years when the existing operations run out. PPG, the Precast business in the U.K., constantly working on the various improvements there. The Poundfield site continually growing. We're now about 14 acres. We started the business with 7 acres, double the capacity and the size. We've made it a really stunning outfit, very good for the supply of infrastructure related and large technical precast elements. So that journey keeps going and keeps being successful. And from a Greenbloc perspective, there are again good progress. We're starting to now supply really major infrastructure projects, major large-scale precast elements, which is great because it's exactly where we want it to go from a starting point, a very modestly with concrete [ bridge ] blocks in a green mix and now large-scale structural elements. It's exactly where we wanted this to go. Look at England and Wales, Harries and in Johnston. We secured the SWTRA at South Wales Truck Road Agent contracts. That means that we are now supplying all the trunk roads in South Wales, in our sector. again, something that the group wasn't able to do in the last 5 years. So well before we bought the Harries' business. That's a major win and a testament of the restructuring effort that we've done there to get the contracting business up and running and properly delivering. And then from a Johnston perspective, obviously just recently acquired at the beginning of the year, but we're optimizing quite aggressively the Bath Stone business and the various other aspects of that group to deliver more. Belgium, CDH. The next phase of the extraction is starting to be open. We've moved the road. That's being finalized now. Gives us access to new reserves, large volumes of Belgian Bluestone, we're working actively on that. And then from a Nordkalk perspective, the most recent -- one of the most recent large deals, we've created effectively 4 divisions where there were only 2 before. That's an important change for 2 reasons: one, we have a quicklime line division with lots of kilns. That needs focus. It's a particular business, it's technical. It is -- it spreads, it's sales volumes are wide across North Europe, and it needs focus, and that's what we have created with both commercial and technical skill for that business. There's a Baltic division that's now been created, which didn't exist before. Again, for [indiscernible] the demand outlook and various changes that we've had there. So we now can take advantage of the Baltic markets. And there's a big railroad project coming through the 3 Baltic states. We want to participate in that, too. And the other business is [ Poland ] and the carbonates in the north are fantastic as they already were, having specific management focus on that to continue to drive improvement. The cost savings is now more possible than before. And so as a result, the Nordics businesses to the Nordkalk business will be more agile, more dynamic than it was to date. And so if we really sort of summarize this presentation with a few key takeaways and the sort of tailwinds and headwinds slide, give you a few bullet points to take away. At this moment in time, the tailwinds outweigh the headwinds. And the headwinds are strong and the headwinds are from a lot of the places. The tailwinds are [indiscernible] generated internally. And we keep being -- we're able to find new ideas to both streamline the business and make it more agile to flex. Demand outlook is still encouraging. We remain vigilant to see where that changes or if it changes. And currently, as you saw on the other slide, it looks encouraging. As Garth highlighted, there's multiple cost levers that we can pull. The CapEx reductions that we put in place and that we can do on short notice. We continue, as we have been in short- and the medium-term, with all the various initiatives to be agile, quick and then improve where we can. Obviously, the macro outlook is uncertain, and it remains uncertain. Energy, everybody is looking at, especially for the November -- sort of February month. And there, we need to obviously flag and highlight dynamic pricing works, but there's always a lag effect on dynamic pricing. And so on the -- that as much as we can, depending on how energy evolves, with hedging in place, with a very active management of that as well. And then the interest rates and mortgages, something that in the U.K. is in particular, our cause of concern in recent weeks. Again, our exposure to housing in any single market is fairly limited, our exposure to housing as compared to the entire group is effectively also modest. And so as a result of that, we think that even these swings and changes we are able to manage either directly in the housing sector or by changing and shifting products away from housing to other end users. And so again, to come back to the first point of this slide, currently, tailwinds outweigh headwinds, and we continue to drive this group as fast -- as hard as we can. So that concludes a few slides. Happy to hand back over to Elisa for the management of the Q&A and any questions you might have.

We don't have any questions at the moment. [Operator Instructions] Harry.

Can you hear me?

Yes.

Brilliant. I've got a couple of questions. Maybe I'll do them one by one if that's okay. But already great results, I think, on my side. First one, just kind of around the volume picture. I think the 2%, if I'm right, refer to the 9 months sort of up-to for the 9 months. I think I've got in my notes somewhere that maybe the first half was sort of up 4%, 5%, 6%, but maybe I'm wrong on that. Maybe you can correct me there. And obviously, if that was the case and up 2% in the 9, maybe imply sort of flat to slightly down in the 3Q. I don't know if that's correct. And maybe if that is correct, then the pricing was up quite a lot sort of in the area -- sort of 20%-ish. So I guess, first of all, maybe just a bit of color around where H1 fits with 3Q and sort of the movement sequentially as you've gone through, if that's okay.

Okay. I'm happy to take you through that. So the statements we made in the past on volumes as they've evolved have always be low single digits. We have actually been very specific on the number to date. But -- so it's always been low single digits. And so the 2% number is relatively in line with the rest of the year. You need to also remember then that the breakdowns and various other effects in the first half. So that swings and then we -- so we always correct for the impact of those. So that's one. Secondly, the pricing point that you've [indiscernible] is actually a very good one. We are very active on pricing and therefore, pricing and increase in price have been good to be able to take a deal with the inflation that we see from energy, from wages, from other things. So from a balance perspective, we think we've managed that point well. Now to come back to the actual volumes of 2% there, that's obviously an average across all products we make across all markets we service, and you'll have positives and you have minuses as you would have at any point in time. The positives and minuses also need to be corrected for summer months. Obviously, if you look at the Belgian platforms, they would have very slow summer months, but that's because of statutory shutdowns of the construction industry in the Benelux and in Holland, across July across August. So you have these swings. So to answer your question, corrected for shutdowns, corrected for those sorts of things, the first half would have been a bit up stronger than. The second -- than the last quarter, correcting again for shutdowns in the various places.

Okay. Brilliant, very clear. And on that pricing point, you kind of mentioned across various products. I don't know if not numbers, but sort of just in an order, what would be sort of the products that have carrying the highest pricing? I'm assuming it's probably things like lime that have some of the highest energy content, but I don't know if you -- just a general color around what is carrying the most pricing and what sort of at the other end?

Yes, it's the higher value products that receive a higher portion of increases and lime is obviously one of those.

Okay. And then on the sort of EBITDA, again, I think pretty strong performance of 5%. Obviously, for Q3, I think that implies a margin of just over 20% versus what was it, 19.3%, I think it was for the first half. Do you see the sort of margin sequentially improving through Q4 as well? And then maybe just what that sort of makes us feel for what's going to happen sort of for the full year and where we land around sort of margin and EBITDA?

No, we're trailing into some slower months of particularly in December, right? So that will trend down a little bit, and we'll have the knock-on of further dynamic pricing rolling through from Q3. So don't expect that to trend up, steady or slightly down.

Okay. And then just a final one. Just on financing costs, I think last time I looked sort of in the annual report from last year, a lot of that facility you mentioned earlier, I think, is on a floating rate above SONIA I think it was about 2.3% above SONIA. And obviously SONIA was basically 0 for this year and the last time I checked, it's sort of more around 2%, 2.2% now. I guess, should we be expecting a higher finance charge sort of going into next year sort of more in the 4%, 4.5% interest cost range?

Yes, it depends on your view of the world, obviously, but readjustments on the modeling. And we're actively looking at that and that's something I want to pick up to -- but yes, it's a tricky one to call, but we're going to obviously going to trend up a little bit this year, and that's probably going to continue into next year. I think just one thing to point out there, though, is about GBP 50 million of our debt is pound. The rest is euro. So it's about -- touch over EUR 200 million. So there are, again, slightly different base rates to [indiscernible]

Okay. Good. And then just actually very quickly just a follow up on that. There is -- I think they didn't say an annual report, but there's no sort of swaps or anything that convert any of that floating to fix at the moment. So it's a yes. Okay.

I think Charlie Campbell has a question as well now.

I had a couple of questions, actually. So you talked about hedging and you've explained that you're at the upper end of your mandate. But I just wonder what that looks like in terms of months, if that's the right way of looking at it or as a sort of percentage of energy requirements?

It's not a month-specific, Charlie. It's across -- it's an average price for the year. That's with this -- with the new group we've engaged to manage our portfolio, certainly across the [indiscernible] I should -- to be clear.

And -- but you...

[indiscernible] we all work to for the full year.

Okay. And so effective, that's all of the energy you require for next year's brought to the forward price. Is that right?

Yes.

Okay. That's bigger than I thought. Okay. Very good. And then secondly, just the list of projects you've given very kindly on Page 9 of the presentation. Should we think of those as kind of incremental to normal CapEx? Or are you just sort of helping us to see the sorts of things you could do within the normal run rate for CapEx? Just to kind of get an idea of that. And also just to sort of looking at that list, I guess you've talked about 1 or 2 things on the list and actually the payback can be really pretty short. So I just wondered if you had an idea in your mind about what the payback is across those Page 9 projects, really, just to give us an idea about kind of what you get to the investment you put in?

Yes. Okay. So the list on Page 9 is primarily focused on things which are effectively just coming through our standard maintenance CapEx or CapEx which is a -- it's also guided that sort of proportionate depreciation and amortization. So you can see that within the standard bracket of money that we would spend to maintain the business in its current form, also that is included. It's a mix. It's a mix of reserve extensions, which means that the direction in the life of the business in these locations is now secured. Thank you to currency, currency is an important one. Another one is Belgium. And it's a mix of -- this adds land into production capacity so that we could generate more turnover and more revenue. PPG one is a clear example of that. When we're talking about reserve extensions, they -- those are just maintaining the business life and going forward. When you talk about extension of production capacity, whether that's CCP or PPG, whether that's Bath Stone and so on, because it's organic, because it's self-funded, because it's extension of production, it is always very low multiples if that's a comparator here. 1, 2, 3x EBITDA versus what you would typically pay for an acquired business, 6, 7 -- 5, 6, 7, 8. And so that's why we put the focus on those currently and also the focus on those if we are trying to de-gear but we can still increase our EBITDA on our profit generation regardless of any M&A work.

Ties back into that historic improvement in the business we bought.

Correct. So that ties back to the second slide that showed you with the 40% increase in EBITDA from what we've acquired to date, that's [indiscernible] those sorts of activities.

All right. Samcon has a question as well.

Can you hear me?

Yes.

Great. Just one actually. Just I think you both mentioned the strength of the order book. Just could you add a bit more color in terms of a, the length that they typically are; and b, whether they're kind of lengthening or contracting? Would be helpful.

Yes. Okay. So we've had the table in the slides there with the pluses and the neutral or the question marks or the minuses that may give you an indication of how they evolved. You need to really sort of break that down into 3 types. There's the long multiyear contracts, which are not always, but most of the time, not guaranteed forward buys. But they are strong in volume indications or take or pay on the proportion of the contract. And how you then look at those contracts is whether or not the forecast that we get from these bigger customers, the paper mills, steel makers for the next 6, 3, 6, 9 months volume are in line with what they asked in the beginning of the year. And so when we say a plus on those sorts of customers, it means that they are indeed just sticking to the volumes that they indicated 12 months ago in most cases. And so you'll consider yearly rolling a fair. And so currently, where we sit maintain the volumes throughout the year and into next year. When you look at businesses that have just forward purchasing and forward orders, for instance, dimension stone business, the infrastructure supplies, there is very much on what the volume of orders in the books are in terms of [indiscernible] or projects that we will be able to supply. In Belgium, the CDH business, we're still running at sort of EUR 10 million, EUR 11 million which is on a EUR 50 million turnover business is you can sort of calculate what that means. And then when you look at the concrete business and the infrastructure suppliers, there we can mostly look at how many big projects we see having received planning approval and will come up for -- or have started construction and will come up for supply in the next 3 months. And again, there, we see the next 3 months at least looking very solid and into next year as well. Precast, for instance, especially structural elements, we stopped taking orders today, we would still be busy supplying what we've already got on the books well into Q1 2023. And that is obviously a portion of the business, which is absolutely no order book possible because it's just -- you roll up to the quarry and you pick up a load. But there, we see that we still are not on stock. We have the volume -- daily volumes coming out. We have indications of people calling in for weeks ahead, months ahead in terms of volumes and asking pricing. And so there it can be gauged on that basis. So overall, the picture is effectively the same as it has been the whole year. The one thing that has probably changed into the upside is agriculture, flue gas treatments in the chemical industry. And the effect there is the agricultural side of things, the farmers would have and -- big agricultural production companies would have taken fertilizer to fertilize the land, that's obviously not available or very expensive. With the high energy prices and everything else, they would have -- they slowed a little bit what they would have normally taken over the year, but that's now coming back in with demand -- demanding seasons. And you see that they are more confident in buying more volume than they would have -- than they were before. So that's very good. And that has to do with fuel prices that has to with confidence in the outlook there as well.

Any other questions? I think that's it. Thank you, everyone for joining. A recording of the call will be made available on the website shortly.