Titan S.A. (TITC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Titan Cement Group Conference Call to present and discuss the 9 months 2020 financial results. [Operator Instructions] The conference is being recorded. Please note, this call and presentation is intended for analysts and investors only. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michael Colakides, Group CFO. Mr. Colakides, you may now proceed.

Thank you. Ladies and gentlemen, thank you for being with us today, and we hope that you and your families are keeping well and safe. We are presenting today our 9-month results. And together with me, is Afroditi Sylla, our IR Director. We had the last-minute change. Dimitrios Papalexopoulos just received a call for a family emergency and had to leave a few minutes ago, so I will take all the presentation myself. I will start with the 9-month highlights. Looking at the highlights, we see that first, group revenue remained stable, just over EUR 1.2 billion. Group EBITDA rose by EUR 21 million to EUR 229 million, a 10% increase versus last year, benefiting from lower energy prices, cost control and selective price increases. Group net profit was up by EUR 13 million and reached EUR 58 million. Net debt dropped by EUR 74 million year-to-date, reaching EUR 766 million, which is EUR 125 million lower than at the end of September 2019. Operating cash flow was up by EUR 41 million versus last year, reaching EUR 128 million, driven by the rise in EBITDA and tightening of CapEx. Revenue in the U.S. remained solid, reaching EUR 715 million, 1% decline versus the same period last year, while EBITDA grew by 3.2% to EUR 141 million, with the performance aided by the residential sector, resilient pricing and cost control. Greece, Western Europe benefited from increased domestic demand while 9-months 2020 revenue declined by 3.9% to EUR 178 million due to the reduction of exports. EBITDA improved by 5.9%, reaching EUR 16 million. Southeast Europe had a strong Q3 with revenue growing by 1% to EUR 197 million and a solid EBITDA performance of EUR 73 million, a 23.4% increase compared to the same period of last year. In the Eastern Mediterranean, revenue increased by 5.8% versus last year, to EUR 113 million, mainly due to our Turkish operations performance. The market environment and performance in Egypt was rather disappointing but improved over the last 2 months, while in Turkey, we had a surge in both domestic and export sales. EBITDA was a negative EUR 1 million for the region. It was negative EUR 3 million in the same period last year. Turning to Slide 3. We see the evolution in turnover and profitability on a quarterly 9-month basis. An EUR 18 million negative FX translation impact on Q3 revenues due to the weakening of the U.S. dollar, resulting in 9-month group revenue coming EUR 60 million shorter than 2019. EBITDA increased by EUR 6.4 million in the quarter, reaching EUR 92.6 million, aided by volume recovery in key markets, lower energy prices, cost control and resilience of pricing. Now turning to our P&L. Despite having a flat revenue line, lower fuel costs as well as successful cost containment efforts led to a 10% increase of group EBITDA. Finance costs were also lower year-on-year, thanks to decreasing debt levels and consistent reduction of the average cost of debt. FX losses of EUR 6.6 million in 2020, a shrink compared to a small gain in 2019 are for the larger part, attributed to intragroup euro loans to the U.S. and East Med and were caused by the strengthening of the euro versus the local currencies. Now looking at our balance sheet on September 30. FX movements, such as the strengthening of the euro against the dollar and the depreciation of the Turkish lira in 2020, were the main reasons for the reduction in our noncurrent assets. Given the COVID-19 uncertainty, the group continued holding higher cash balances, EUR 218 million at the end of September. The increase in short-term borrowings just reflects the transfer from long-term to short-term of the notes maturing in June 2021. Now let's take a look at the evolution of sales volumes. After a strong start to the year in Q1, following by a COVID-impacted Q2 and subsequent slowdown of markets, Q3 marked a rebound of construction activity, which helped offset the Q2 decline. Overall, volume performance in the 9 months was above last year levels in aggregates and ready-mix and essentially flat in cement. Our cash flow. Group operating free cash flow in the 9 months reached EUR 128 million, an increase of EUR 41 million compared to last year, benefiting from the higher EBITDA levels, tighter CapEx and contained working capital spending. As the impact of the pandemic was not as severe as initially feared, the group has somewhat relaxed its capital expenditure plan, spending EUR 60 million in the first 9 months of the year. Looking at our debt. The robust cash flow generation allowed the group to reduce net debt to EUR 766 million, lower by EUR 125 million compared to 12 months ago. Net debt-to-EBITDA ratio improved further, dropping to 2.6x. Now looking at our debt profile. On the left, you can see the group's maturities. As a reminder, in July 2020, Titan Global Finance issued EUR 250 million notes due in 2027, with a 2.75% coupon, which was used for the repayment of older existing and more expensive debt. As you can now see, significant maturities have been extended to 2024 and 2027. On the right, you see that the group maintains total facilities just over EUR 1.5 billion, of which a total of EUR 552 million are unutilized lines. The group's liquidity measured in available cash and committed undrawn facilities is EUR 518 million. I would like now to update you on Titan's decarbonization efforts underway. Our long-term goal is to reduce specific net direct CO2 emissions by about 30% below the 1990 levels by 2030. Meanwhile, we are rapidly progressing towards meeting the 20% reduction target by 2021 until 2023, by increasing the use of alternative fuels, accelerating efforts in energy efficiency and reducing clinker content in cement. In July, we responded for the first time to the Carbon Disclosure Project Climate Change and Water Security questionnaires. We have also successfully measured Scope 3 indirect emissions in 2 of our plants in Greece and Southeast Europe, recognizing critical areas of carbon emissions in the supply chain. We intend to expand monitoring Scope 3 emissions to all our cement plants in the next year. Furthermore, we continue to invest in research and innovation. Titan has been recently recognized as a key innovator in the European Commission's Innovation Radar, for its contribution at the research project, RECODE. The project involves the capture of CO2 and its conversion into value-added chemicals and is in pilot phase at our Kamari plant in Greece. Finally, it is worth mentioning that the group's balance of EUA allowances for carbon emissions covers our needs long beyond 2025, assuming, of course, that there will be no significant change in the rules of the EU Emissions Trading System, the ETS. Now let's turn for a review of our performance by region. Starting with the U.S. The U.S. continued to exhibit dynamic underlying fundamentals. Revenue in the 9 months was stable at EUR 715 million, while EBITDA increased to EUR 141 million, growing by 3.2% or 3.7% in dollar terms compared to last year. Construction activity in our regions was affected but not severely by the pandemic. Overall, the residential segment as well as infrastructure projects continued to drive the market. Record low mortgage rates and the low stock of unsold houses drove strong demand for the residential segment, while infrastructure spending continued. On the other hand, the commercial sector has slowed down due to the macroeconomic conditions. The resilient financial performance delivered by the U.S. in the first 9 months of the year was a result of healthy price levels and careful cost management, amplified by Titan America's ability to flexibly adapt to market conditions. At the same time, a strong performance was recorded in the aggregates business with the group capitalizing on its vertical integration. Turning to Greece. In Greece, the market staged a strong rebound following the easing of the lockdown restrictions back in May. Revenue in the 9 months declined due to lower exports by 3.9% to EUR 178 million. EBITDA rose by 5.9% to EUR 16 million. A pickup in activity continued in Q3, underpinned by a healthy pipeline of smaller projects, spanning both infrastructure segments and rising private consumption. Large infrastructure projects have commenced, albeit are still in their early stages. Export for the period were lower, reflecting a conscious decision to decrease the least profitable exports, taking a long-term view of CO2 requirements and strengthening our inventory of EUAs, the CO2 rights. Profitability continued to benefit from lower pet coke prices, the group also made continuing process -- progress in the utilization of alternative fuels in both the Kamari and Thessaloniki plants in this way, contributing in the reduction of costs and their carbon footprint. Next, Southeast Europe, where revenue increased by 0.9% over the 9 months to EUR 197 million, while EBITDA grew by 23% to EUR 73 million. Demand in the region rebounded in Q3 after the strict lockdown measures in Q2. Activity continued to be driven by a mix of residential and commercial works, as well as select infrastructure projects, mostly regarding roadworks, depending on the specific market. Profitability was supported by selective price increases as well as lower fuel costs and lower electricity charges. Turning now to East Med, where revenue increased by 5.8% to EUR 113 million, mainly due to our Turkish plant's performance while EBITDA came in negative at EUR 1 million compared to negative EUR 3 million last year. In Egypt, the cement sector is ailing. There was a significant decline in sales volume in Q3, primarily due to the 6-month suspension of building license for private consumption, which, however, were partially lifted in October; and over the last 2 months, we saw increase in cement sales. Prices remained under pressure owing to the low capacity utilization rates across the industry. In Turkey, despite severe macroeconomic challenges, domestic sales volumes growth accelerated to double digits accelerated in Q3. Demand is fueled by private construction, supported by the government incentives and housing program. Adocim, the group subsidiary in Turkey, benefited from buoyant local demand, which, supplemented by exports, led to strong revenue gains and a profitable operating performance. However, this is not fully reflected in euro due to the weakness of the Turkish lira. Taking a look at Brazil, where we have our joint venture. The Brazilian market enjoyed growth for the second year in a row. Cement demand in the 9 months reached 44.5 million tons, 9% higher year-on-year with the North and Northeast regions where the group is present, growing by 13.7%. Q3 was strong as well. Selling prices also recorded a considerable increase. Revenue in local currency was up 18.2%, and EBITDA improved by 86%, while both revenue and EBITDA were affected in euro terms by the weakness of the Brazilian real. I will now move to the last part of the presentation, which is the outlook. That is a part, which usually Dimitri used to cover. I will cover it myself today. So while market fundamentals remain solid, and the drivers of demand are in place to support growth, the second wave of COVID-19 limits predictive ability regarding the evolution of performance. Despite the uncertain context, we remain confident in the solidity of our business model based on the nature of construction activity, our track record in facing the pandemic and the resilience and dedication of our people. In the U.S., solid backlogs point to continuing robust activity in the short term, underpinned by the low mortgage rates, low housing inventories and the pipeline of funded construction projects. In the medium term, growth should be further aided by expenditure for addressing the country's urgent infrastructure needs. In Greece, the positive trends witnessed so far, are expected to extend through the end of the year and beyond. Housing-related construction seems on track to further increase from current low levels. A number of big construction projects, both public and private, are set to pick up further momentum in 2021. The country starts to capitalize on the disbursement of recovery funds from the EU in '21 and beyond. In Southeast Europe, while like in the rest of Europe, a second wave of COVID-19 has set in. The region is expected to continue performing solidly with construction continuing as an essential activity. In Turkey, with the construction -- with the situation remaining fluid on account of both macroeconomic and political challenges, visibility into 2021 is quite low. In Egypt, the gradual lift of the suspension imposed on licenses for private construction is leading to the stabilization of cement consumption as recently witnessed with a recovery of volumes. Looking to the longer term, the country maintains favorable and promising fundamentals for a recovery as Egypt records positive GDP growth and enjoys one of the highest birth rates in the region, generating needs for future housing and infrastructure construction. Last, in Brazil, the market continues at the same positive trend witnessed thus far with indications for the healthy positive close to the year. Within this context, we remain flexible and we adapt to changing conditions addressing several challenges. We prioritize health and safety, taking care of our people and those around us. We keep focus on effectively serving our clients, and we maintain our cost discipline and our tight cash flow management, but we also keep our long-term projects on track, the 3 Ds. We aim to deliver improved operating results and to accelerate the progress against sustainability, decarbonization -- decarbonization ambitions and also the progress of our digitization projects. This completes my presentation, and now we are ready to take questions. Thank you very much.

[Operator Instructions] The first question is from the line of Speak George with Exane BNP Paribas.

This is George. Hopefully, you can hear me okay. A couple of questions, if I may. Firstly, do you mind giving us a sense of how meaningful the big new infrastructure projects would be to Titan's top line in Greece. If possible, could you quantify those, and give an indication of how that margin compares to residential projects? Okay?

Well, there -- I will not give you numbers, but I will give you the nature of the projects. The first one is the new airport at Heraklion in Greece, and this is the second largest and second busiest airport in Greece, brand new, including runways, terminals, peripheral buildings and so on. And this is about to complete all the initial -- the groundworks, the earthmoving. So do -- we expect segment to be utilized meaningfully next year. The second is the Hellinikon project, the old Athens airport, which is going to be massive, it's an EUR 8 billion real estate development project over 10 years, and it will be done in stages. It includes a new casino in Athens, residential, commercial, hotel, marina and so on. Again, that is a sizable project, and it has taken off. The third, which will be the Athens Metro, the fourth line, it has just been awarded. We don't expect any volumes next year. The good news there is that the contract -- sorry, the tender has been awarded. There are no -- it's not contested. So that project is also going ahead. And then there is what is expected to come out of the European next-gen funding, the EUR 750 billion, for which Greece has quite a big stake over EUR 30 billion, and that has not yet been submitted, but there is a commitment that the bulk of the spending has to take place by 2023. And my understanding is that most European countries are now at the stage where they will be submitting their plans.

Brilliant. And a second question, if I may. Could I just ask what the group's outlook is on cost inflation next year? And whether you have any expectation that the tailwind might reverse?

Well, cost containment has come from 2 main sources. The one is solid fuels, where we had very low pet coke prices, particularly during the first 6 months of the year. And there will be a reversal, and we will have higher prices next year. But it will not reverse all the benefit we had in 2020. It may be order of magnitude to EUR 5 million to EUR 10 million max and also has to do with timing of purchases. And the second has to do with reduction of operating costs. We had a setup geared for faster growth. So there are -- were resources on the ground that had been hired for expected growth. Since the growth did not happen, those resources were made redundant. And we do not expect to hire back unless we actually see the higher growth materializing. So there is still more flexibility on the cost side, depending how actual volumes will develop.

The next question is from the line of [indiscernible] with On Field Investment Research.

Can you hear me?

Yes.

Perfect. Great. Well done for the results. I have 3 questions. So I just ask them all in one? Or should I just ask them separately?

I'll just take them one by one.

Okay. So the first one is what differences do you see in the budget allocated by Florida and Virginia Department of Transportation for highways and roads between the fiscal years ending in September 2020 and in the fiscal year ending in September 2021?

I'm afraid I don't have an answer to that other than from the direct contact we have with our colleagues in the U.S. We know that all the projects are going ahead. And in fact, we have won additional tenders. Florida, in particular, is a very -- is a financially very strong state with surpluses and a high spending capacity. So we wouldn't worry about Florida, but also Virginia being close to the capital and military bases and infrastructure, we haven't seen any slowdown in infrastructure spending.

Okay. So my second one is, do you have an update on the European carbon border adjustment mechanism?

There are no news yet. It's under discussion. The Commission is aware of the carbon leakage risk and of the fact that there may be -- production may move next door if we do not have an adequate system. We expect that a satisfactory system will adopt it, but neither the specifics, not even the timing is yet available.

Okay. Makes sense. My last one is, to what extent do you believe Turkish and North Africa cement imports could cap European cement prices in the next few years? Well, at least until there is a carbon border tax?

Well, let's take Turkey, in particular, because it is already a very large exporter. Turkey exports over 30 million tons and next year, it may go up to 35 million. The recent devaluation -- essential devaluation, the sliding of the Turkish lira has made Turkish production even more competitive. Turkish cement has infiltrated the U.S. It's in clinker form, it's abundant in West Africa as well. The local producers are already stretching their capacities, but we may see additional capacity, I will not exclude that. The question as to how they will compete against Europeans: a, for European markets; and b, for export markets. For European markets, that will depend on the carbon adjusted mechanism for imports. And for exports, the court is still out. The European industry is lobbying for exports to be exempted from the CO2 regulations so that Europeans can compete on a level playing field. But again, that there has been no final direction on that matter.

[Operator Instructions] The next question is from the line of Memisoglu, Osman with Ambrosia Capital.

Just wanted to get some color from you, if possible, on where you expect your CapEx to be for the full year this year? And given current conditions, what kind of CapEx figure would you guide very -- I'm guessing it's still early a bit, but for next year?

Well, we started the year with a plan for over EUR 100 million of CapEx, just over EUR 100 million. Back in April, we slashed it by 40% for the full year. But gradually, since June, we started giving frozen projects a green light to restart. We were EUR 60 million by the end of September. For the rest of the year, we expect another EUR 10 million to EUR 15 million, so to close at about EUR 75 million. And for next year, the total should be about EUR 100 million. We don't yet have our budgets finalized. But as an indication, I would say, EUR 100 million would be for next year.

Okay. And regarding, I guess, related to this, working-capital-wise, nothing major -- no major changes, right?

No. Working capital, we're managing tightly. There is always a cost benefit. If you -- if we find pet coke cheaply in 2020 at the beginning of the year, we start it with heavy working capital because we purchased early, the cheap pet coke. So working capital is not a single dimension. But in terms of credit terms, receivables, we have no issues with receivables coming out of the COVID crisis. In fact, in the most -- in the largest locations in the U.S. and Greece, we had a reduction of days receivables.

The next question is from the line of Boulougouris Alexandros with Wood & Co.

Just a quick question on the Greek market, if I may, on Q4. We saw a strong rebound in the third quarter. Do you see this continuing in the fourth quarter? And I'm not sure if you're impacted by the new lockdowns.

Alexandros, we see the market continuing with the same level of deliveries. I mentioned a 9% year-to-date growth, and it has continued over the last 5, 6 weeks. Talking with Greek banks as well in order to get their feeling how they see the market. They are telling us that real estate projects are continuing strong even in the tourism sector, which was a bit of a surprise to us. So for the time being, and if the lockdown is going to last until the end of November, we should have no material impact. If it stretches to many months, then it will be a different picture.

[Operator Instructions] The next question is from the line of Kourtesis Iakovos with Piraeus Securities.

Yes. My question has to do with the trend during the fourth quarter in the Balkans. After the new lockdown measures that were imposed, do you see the market perform the same way it did throughout 2020? And the second question has to do with Egypt, if you could identify some potential catalysts that you could see in the market and could alter the picture for 2021, reverse what's going on in the markets there?

Okay. Now turning first to Southeast Europe. We have not seen a slowdown yet, and we are already getting close to the middle of November. So -- and usually December, the change in demand in December will depend on the weather. It will not be a COVID-driven slowdown if it happens in Q4. Now Egypt is a very strange market. And what we have experienced in the last 3, 4 years, is quite unusual with the government itself essentially causing damage to the industry by now famous gigantic military-owned plant, the 12 million ton in -- near our Beni-Suef plant. Utilization rates remained low. We have seen the last 6, 7 weeks, a growth of something like a 10% growth compared to September as of the relaxation of -- the partial relaxation of the building permits. We will need some assistance rather than further taxation from the government. There are many charges imposed by the government on cement producers. There is a clay tax, a raw materials tax, taxes on fuels and so on. So states' support would be needed in order to give some breath, some fresh air to the sector. The government has acknowledged its responsibility, and they have called more than once for meetings with the main representatives of the industry. They have indicated intention to take some action but we have not seen anything materializing yet.

The next question is from the line of Woerner Tobias with Stifel Europe.

Just with regard to your trading in the U.S., can you give us a bit of flavor of what's happened in October and November? I'm sorry, if it's a question that's been asked since -- earlier as I came in a bit late. And secondly, also, you talked just about pricing in Egypt and that it is a difficult market. Are we starting to see a floor? Or is the trend still downwards in terms of the price here, also driven by what the prices are in the Eastern Med?

Let me start off by the U.S. The October, November have been -- haven't been unusual months, they have been normal months. October -- and also it had to do with wet periods. We had more rain in Florida in October and more in Mid-Atlantic in September. But overall, the performance over the last 2 months has been similar we've experienced throughout during the year, a minus 1% or 2% order of magnitude compared to last year. Now turning to Egypt. Even within this year, we've seen all trends were observed. Beginning of the year, we had volume growth until May. And then we had the -- the COVID appeared in Egypt in May and also the building restriction. And we had a slowdown until late September and then a rebound again. So it's a bit hot and cold. And in terms of prices, again, some blips, but no stability at higher levels. They are at low levels again. And no increased trend yet in sight.

As I'm on the call, can I ask one more question, please?

Sure.

In terms of your capacity utilization in Southern Eastern Europe, what are you seeing there? Are we now at levels where you could start to see prices coming under some upward pressure for a change?

Well, prices in Southeast Europe have increased over the past, both in 2019 and 2020 at the beginning, we had price increases, which have remained. They have not been reversed. And as you can see, the profitability increase has been much higher as a percentage compared to the revenue increase. And that was partially because of the energy cost savings, but also because of the average -- higher average prices.

And where is your average capacity utilization now in Southeast Europe?

It's still below 70%. It varies by country. We have plants, which are operating at full capacity, the Kosovo plant is small, for example, and they offer import from next door from [indiscernible]. But overall, we are above 70%. There is still a lot of operating leverage if there is consumption we can satisfy from the local plants.

The next question is from the line of Kumar Deepak with Citigroup.

I just have 2. First is around CapEx. I mean as you kind of like accelerate your program for the decarbonization, do you expect CapEx to increase? Or you think you can cover it by the EUR 100 million sort of run rate that has been going on for the last couple of years?

Yes. CapEx spending for decarbonization and sustainability, in general, is not new. It's been part of our annual budget. And last year, if I recall, it was something like 25%. We do not expect a step-up for decarbonization. On average, a rule of thumb, something like EUR 15 million a year over the next 10 years may be needed to be allocated. But we are not talking about any monstrous amount required.

Okay. And my second question is regarding your balance sheet and net debt situation. I mean obviously -- I mean, net debt has decreased quite nicely over the last 12 months. Do you see debt going down further? Or how do you feel about the leverage situation and do you have any target in mind where you would like it to be? And how do you see then the cash utilization if you are already at sort of the level where you would like it to be?

Yes. We hope that by the end of the year, we will stay at the 2.6, 2.5 level, which is a level that we feel comfortable with. Obviously, when we see things turning uglier in the market, we tighten the belts, and we will try to deleverage even more. But given the current situation, we expect net debt to be at the 2.5x EBITDA level. And the existing cash, we will use to pay down other forms of debt. Within Q4, we will repay something like [ EUR 50 billion to EUR 60 billion ] of the '22 -- the 2022 maturity of a bond issue that had been raised in the Greek market. We will repay that early this quarter. And also part of the cash would also be used to pay down the June maturity of the 5-year bond that expires in June 2021. Ideally, in periods where we are not worried about the market being volatile, we feel very comfortable to operate with less than EUR 100 million of cash on the books.

And just to finish, I mean then going forward, if your balance -- if you're comfortable with 2.5x net debt-to-EBITDA, how do you see then the cash being utilized next year? Do you expect the shareholder payout to increase or you would pursue some other growth opportunities?

Next year -- I talked about the CapEx. We also have EUR 40 million payment to IFC for the purchase of the last installment coming from the purchase of their minority stakes. Distribution to shareholders will be -- should be higher than what was experienced this year, when we took a rather cautious approach in Q2, which was under -- still under COVID concerns, more worried concerns at the time. So next year, there should be a more generous pay out to shareholders, but nothing dramatic. We are not talking about -- EUR 30 million, EUR 30 million-plus order of magnitude is more or less in line with long-term dividend payments.

[Operator Instructions] The next question is from our webcast participant, Mattias Karu with Trigon Asset Management. And I quote, "Are you willing to sell your Egypt assets?"

Well, the question is only half because no price was quoted. We have not actively looking. And our strategy is to remain in Egypt. We have weathered the storm and we hope the worst is behind us. As I mentioned during the presentation, the country and the market have strong long-term fundamentals. I mean Egypt, even during this coming year, will come out with something like 3% GDP growth. There is better performance expected at macro level next year. And they do keep growing by 2 million people a year with all the resulting needs for housing and infrastructure. So the answer is unless someone makes us an offer we can't refuse, Egypt should remain on our portfolio.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Colakides for any closing comments. Thank you.

Okay. Thank you all for participating. We are glad that you joined us, and you shared with us the experience of our Q3 and 9-month results. The full annual results will be out in March. But if we continue to have this level of uncertainty in the market, then we may well consider to issue some kind of an interim report right after the end of the year so that we keep the market informed. Again, thank you all for joining.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling and have a pleasant evening.