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

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Titan Cement Group conference call and live webcast to present and discuss the first quarter 2021 results. Please note, this call and presentation is intended for analysts and investors only. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michael Colakides, Group CFO; and Mr. Dimitrios Papalexopoulos, Chairman of the Group Executive Committee. Mr. Colakides, you may now proceed.

Thank you very much. Good afternoon, everybody, and welcome to our conference call for the Q1 results. This morning, we had the Annual General Assembly of the group, and we're happy that all matters were approved. And we go now to the presentation of the results. The first quarter marked a positive start to the year with resilient underlying demand and pricing progress across key markets. In the U.S., demand continued at a robust pace. And in Southeastern Europe, market trends were solid. In Greece, healthy market development continued, while the East Med marked also some improvement of performance. Group revenue reached EUR 371 million, down 3.6% compared to the first quarter of 2020, impacted by the weaker U.S. dollar and U.S. dollar-linked currencies. In local currency terms, revenue increased by 3.2%. EBITDA reached EUR 56 million, driven by sales volume growth and was aided by deferred maintenance shutdowns. Adjusting for this shutdown deferrals at an estimated $10 million cost, EBITDA still grew by some 18%. Net profit after tax for the quarter marked a EUR 31 million improvement at EUR 15 million positive. While last year, in the first quarter, it was EUR 16 million loss. The benefit came from higher EBITDA, lower finance costs and FX gains. There was a seasonal increase in net debt at $759 million, that -- which was inflated by the prepayment of the last EUR 41 million installment to the IFC for the acquisition of the minority stake that was signed a couple of years ago. Turning to the next slide, highlights of the quarter by region. Revenue in the U.S. was solid at EUR 226 million, down in euro terms, but up 3.8% in dollar terms, while EBITDA rose to EUR 38 million, due to the deferral of maintenance shutdown of the Pennsuco plant. Revenue was stable in region Greece and Western Europe, closing at EUR 58 million, with increased domestic sales, but weaker dollar-denominated exports. The improved sales mix and cost control resulted in a EUR 5 million EBITDA increase to EUR 7 million. A strong performance in most of our Southeast Europe operations resulted in the region as a whole posting a revenue growth of 2.2% and reaching EUR 49 million. EBITDA dropped by $0.7 million. In the Eastern Mediterranean, revenue declined by 9.3% to EUR 38 million, although by -- up by 3.9% in local currency terms. While volumes grew strongly in Turkey, prices were weaker in euro terms due to the sharp devaluation of the Turkish lira. In Egypt, the market witnessed an uptick in volumes and prices in March, which allowed some improvement of profitability in the quarter. Overall, EBITDA for the region turned a positive EUR 0.2 million compared to EUR 0.4 million loss in the first quarter of last year. Moving on to the slide with our P&L. The group posted a significant rise in EBITDA and net profit in the first quarter, which is traditionally the low-performing quarter of the year. A weaker U.S. dollar and linked currencies compared to the euro between the first quarter of 2021 and the first quarter of 2020 partially eroded the results of growth in local currencies. At the same time, the benefit from price increases, good cost management and deferred maintenance costs resulted in the EBITDA growth to EUR 56.1 million. Below the EBITDA line, lower interest expense, thanks to lower debt levels and the lower effective interest cost of the group, contributed to a rise of net results, besides not having the EUR 9 million mark-to-market loss, one-off, in the first quarter of last year. There was also an improvement of EUR 8.7 million in the FX line. The result of the above was a EUR 31.1 million improvement in net profit after tax to bottom line result of EUR 15.3 million. Moving on to our balance sheet. There was no notable -- there were no notable movements on the balance sheet other than the effects of the EUR 41 million payment to IFC. As a reminder, on the equity side, the process of cancellation of 4.1 million own shares, representing 5% of Titan Cement international shares, is currently underway and due to be completed in the second quarter of the year. On volume growth, the first quarter marked a positive start to the year with good underlying demand. As such, sales volume trends were positive across all product lines. Group cement and clinker sales increased by 3%, supported by higher demand across most markets, while aggregate and ready-mix sales volumes also increased by 3% and 1%, respectively. Moving to our operating cash flow, which in Q1 was affected by the increased working capital requirements, which is common to the first quarter of the year. Thanks to higher EBITDA, operating free cash flow improved and resulted in a smaller outflow than the first quarter of last year. Combined with the early payment to the IFC, this led to a EUR 74 million net debt increase compared to the December 2020 financial net debt. Now moving to take a look at our debt levels. At the end of March, net debt amounted to EUR 759 million. Despite this seasonal increase, net debt on a year-on-year basis was EUR 119 million lower compared to the first quarter of 2020. Looking at the debt profile, in June, we will pay back a maturing EUR 170 million notes of the 2016 issue, which will lead to a lower cost of debt for the group. Titan retains upward headroom in its total available facilities, but the maturing notes will be repaid out of existing liquidity. The next important maturities are significantly spaced out and are scheduled from 2024 onwards. Now let's move on to take a look at the regional performance, starting with Slide 10, on the U.S., the next slide. The year got off to a good start in the U.S., especially in the Mid-Atlantic region. Solid price trends testify to the pent-up demand and the more confident restarting of economic activity. As a result, revenue in the quarter grew by 3.8% in dollar terms, but due to the weaker dollar was 4.9% lower in euro terms at a reported EUR 226 million. EBITDA increased by 36.4% to EUR 37.7 million and half by an estimated $10 million due to the develop of the maintenance shutdown of Pennsuco. But adjusted for this effect, EBITDA growth would still be about 6%. The market in the U.S. is building momentum, with demand being strong in the residential and commercial segments, supported by the low interest rate environment, the low housing inventory and underpinned by positive market sentiment. The announcement of Infrastructure Bill and the outflow of stimulus packages have all given rise to expectations of coming increase in infrastructure spending, further supporting demand mostly from 2022 onwards. Looking ahead, cost headwinds in terms of energy, commodity prices and logistics amidst an environment of healthy market trends provide good ground for a second round of price increases in the second half of the year, following the increases announced in the first half. Now moving on to Greece. Where the encouraging trends recorded in 2020 have continued into 2021, with the market continuing to grow and sales up year-on-year. Revenue in the region as a whole, region Western Europe, was roughly stable at EUR 58 million, just under 1% increase, with growth in domestic sales but a decline in third-party exports. Export for the year as a whole, however, are expected to be up. On the operating level, EBITDA reached EUR 6.8 million compared to EUR 1.4 million last year, mainly due to improved sales mix. The domestic market is being driven by many peripheral construction projects and private investments and an uptick in residential construction. Large-scale infrastructure projects, which have commenced and where Titan is participating as a supplier, will be reflected in demand from the tail end of the year onwards. On Southeast Europe, on Slide 12. Southeast Europe continued delivering well with solid margins and volumes against the backdrop of construction confidence in the region. Revenue for the region as a whole increased by 2.2% to EUR 49 million, while EBITDA declined by EUR 0.7 million compared to the first quarter of the previous year, largely due to increased maintenance costs. Demand in the region relies in the residential sector, regional pickup of real estate development and stable infrastructure activity. Moving to the East Mediterranean. In Egypt, our first quarter sales were flat at Q4 of 2020 levels, starting with relatively low sales in January and February. By much, however, demand witnessed an uptick, and there was growth in both volumes and prices continued into April. Recent developments are encouraging for an improvement in market conditions in Egypt. Turkey once again recorded growth in domestic sales and prices, with increased volumes out of our plant in Tokat as well as export supporting utilization rates. Total revenue in the East Med reached EUR 37.7 million, a decline of 9.3% year-on-year, the result of both weaker Egyptian pound and a sharper decline of the Turkish lira, which was down 32% year-on-year. In local currency terms, revenue posted growth of 3.9%. EBITDA, however, turned positive closing at EUR 0.2 million in the quarter compared to negative EUR 0.4 million loss last year. Now taking a look at Brazil. The market in the northeast of Brazil grew by 18% in the quarter, confirming the momentum weakness in 2020. It should be noted, however, that Q1 2020 was affected by heavy rain at the beginning of the COVID pandemic. Sales of our joint venture, Apodi, increased based on stronger demand coming from the residential and commercial sectors. Profitability was supported by higher prices, which succeeded in offsetting rising energy costs. In the first quarter, Apodi posted an increase in revenue to up to EUR 18.3 million compared to EUR 16.3 million last year as well as in EBITDA at EUR 4.9 million compared to EUR 2.5 million last year, despite the weakening of the local currency. Now moving on the next slides, refer to progress towards achieving some of our strategic goals. On Slide 16, a few weeks ago, the group published our ESG targets for 2025 and beyond, focusing on 4 pillars of decarbonization and digitalization -- if you can move to the next slide, please, thank you, growth enabling environment, positive local impact and responsible sourcing. Most noteworthy is our revised more ambitious CO2 reduction goal for 2030, which is aligned with the COP21 Paris Agreement. Moving to the next slide, please. In line with our strategic priority to benefit from the introduction of digital technology in our group, and especially on the manufacturing side, we are proud to present the end-to-end digitization of the production line at our Pennsuco plant in Florida, bringing us closer to the smart factory of the future. We have completed the successful commissioning of 1 autonomous artificial intelligence-based real-time optimizer for the entire production line, starting from the raw mill, the kiln and the 3 cement mills. This enables best possible energy consumption, achieving 5% to 10% productivity improvements as well as failure prediction solutions, preventing production interruptions, overall improvement of plant reliability as well as more cost-efficient issue resolution. Next, we would like to present a Titan Group innovative solution in the next slide for the reduction of carbon and energy footprint through fly ash recycling from landfills. Separation Technologies, a Titan subsidiary in the U.S., has created the world's first industrial-scale fly ash drying electrostatic separation. Through this process and up to now unusable waste product is reclaimed from landfills and is transformed into usable green products that can be used in the manufacturing of cement and cement [indiscernible] products. This ends my part of the presentation, and I will now turn you to Dimitrios to talk about prospects for the year.

Thank you, Michael, and good morning, good afternoon to everyone. The outlook slide on your screen is the same one we shared during our annual results call a few weeks ago. It remains relevant today. In short, the fundamentals for 2021 are supportive and improving with positive trends in volumes and prices, but also short-term headwinds on the cost side. If anything, the development for the last 2 months have made us more optimistic, not only for the short-term outlook, but also beyond the current year. Let me mention a few. First, but not trivially, there has been good progress on the vaccination front. We're turning to something more closely resembling normality fields much closer, almost visible, perhaps not in all countries, but certainly in some of the most important ones for Titan. Second, the short-term macro outlook has been upgraded, more or less across the board. Pent-up demand and increased savings from the past year are already fueling a surge in activity. Government spending and policies, especially in the U.S. and Europe, are providing more impetus. We are already seeing the effects on our business as order books grow and projects get started. This has allowed us to push through price increases in several countries. And as Michael [ ordered ] also the first time in many, many years where we have announced a second price increase during the year in the U.S. and several other competitors have already made similar announcements for a second price increase in the second half of the year. More importantly, there is a growing level of conviction that this will not only be a short-term rebound with the beginning of the growth cycle over the next several years. We are well positioned to benefit from such a development. In the U.S., we are gearing up to serve our customers' growing needs, both in the short term and over time. We are working to address minor bottlenecks in logistics and downstream operations. In terms of cement, we have plenty of spare capacity in import capability. With our existing footprint, we can increase our imports by more than 2.5 million tons without substantial investments, if that becomes necessary. Keep in mind, to put things in context, where we are in the cycle, U.S. demand in the whole of the U.S this past -- this year is around 105 million tons, which still puts it 25% below the previous peak in 2005, which was almost 130 million tons. In Greece, where we also expect healthy growth over the next several years, capacity is readily available by shifting some export volumes to the domestic market. Demand growth will be broadly based. Private consumption is recovering gradually from the prolonged depression level housing demand over the past decade. Demand from farmers is visibly increasing, driven by support of government policies and incentives. Many major cement-intensive projects are getting started or will do so shortly. The RRF Recovery Fund, in addition to regional EU funds that are available to Greece, will provide a much advertised and discussed huge boost to investments over the next 5 years. The funds available to Greece over the next 5 years are by 1 estimate, over 3x more per annum as we've ever had in the past. And the way the European funded and directed and Greece implemented project works is that a lot of that money will go towards green, digital and infrastructure. So a fair amount will support infrastructure work Keep in mind that demand in Greece today is still close to the bottom reached in the past decade and about 75% below the peak reached after the Olympic Games in 2004. Similarly, in Southeastern Europe, we have the spare capacity to meet anticipated demand growth. Same is abundantly true in Turkey, Egypt and Brazil. And to add to what Michael said, for -- again, for the first time in a while, there are signs of an improved outlook -- short-term outlook for Egypt, as volumes and prices have improved recently. On the negative side, we should mention that the input cost increases in energy costs, in carbon, in maritime freight and commodities, these increases look likely to persist for a while and will increasingly filter through to our results as we don't have longer-term cover. Of course, as mentioned earlier, it seems that market conditions allow us to pass those on to the market. So all in all, a stronger outlook than we've had for a while. The question now, the issue now is to implement efficiently and well this year and prepare for the years to come. So that concludes my comments in addition to what Michael said, and let's now open it up for questions. Thank you.

[Operator Instructions] The first question is from the line of Edelfelt Sven with ODDO BHF.

Sven Edelfelt from ODDO speaking. The first question, is it possible to quantify the tailwind in energy cost in Q1 on the potential headwind in the second half, if you assume that energy spot price stay where they are today? That's the first question. And my second question would be on import or export in general. To what extent there is a cement shortage in the U.S. caused by lower [ Turkey ] and China export? Do you believe the situation would normalize this year or next year? These are my 2 questions.

The first question on the energy front, my friend, I cannot give you any specific numbers on a quarter basis, especially since -- I mean, we are operating on a rolling 12-month average cost. So prices are very gradually filtered in. So there has been no be -- there would be no significant change between Q1 and Q2 in our fuel cost. Let me address the second question. See if I have understood it correctly. First of all, to put things in context, china was never a one of the leading importer or the leading importers in the U.S. And if it did have some imports, it was almost exclusively on the West Coast of the U.S. where we don't -- we are not present. On the East Coast, most of the volume comes from either North or South America or the Mediterranean region or Europe. Keep in mind also that in the past peak, which I mentioned around mid-2004, '05, '06, '07 in the U.S., imports back then peaked at 35 million tons, and they are roughly half of that at this point in time. And the import terminals that are available, I mentioned we have 3 major ocean import terminals that are -- can import a lot more. There are other terminals. And it doesn't -- on the import capability side, the ability to ramp up imports to meet demand seems to be there. On the export availability side, again, there are surpluses of clinker available in several parts of the world, which can be tough to satisfy demand. So I don't see why an increase in cement consumption in the U.S. cannot be effectively addressed going forward a much higher numbers than we are today. Does that answer that question?

Yes, that's perfect.

[Operator Instructions] The next question is from one of webcast participants, [ Andrew Spruiell ] with On Field Research LLP. Considering price increase, how much has the price increase stuck in Florida? How much is the USD [indiscernible] price increase sticking in other U.S. states? Could you comment on the utilization rates in the U.S.?

Okay. Well, price increases take some time to be implemented. But overall, there has been something like a $3 to $4 acceptance or success in the price increases in Florida. Not everyone, depends -- there is sort of a touch work of surplus and shortfall regions. So it's been obviously easier to pass the price increases where there is an increase in demand and consumption. But overall, it has gone well so far, and we're also optimistic that Mid-Atlantic, which was effective as of the 1st of April, the first signals are also good, and it seems there will be a similar acceptance rate.

[Operator Instructions] The next question is from the line of Boulougouris Alexandros with Wood & Co.

Two quick questions on my end. The first is regarding the EBITDA margins in the domestic market, which have been over the past few quarters, many quarters very volatile with various one-offs and because of the low volumes in Greece, and we have seen a good improvement in the first quarter. So despite the negative headwinds on the energy cost, do you expect these margins around 12%? I think it's in the first quarter to see an expansion going forward, I mean, given the improvement in volumes or this is a base is 12%, and we should see an improvement going on? That's my first question. And the second, maybe if you can reiterate what is your CapEx target for the year in 2021 and maybe 2022?

Let me perhaps say a few words about the first question before giving the floor to Michael for the second question. You -- Alex, you almost answered the question yourself the way you phrased it, but just a couple of points on Greek results. First of all, the standard disclaimer that first quarter results can be volatile, there's a period of winter weather. Remember, we also had storms. This year, it's a period of high maintenance, shutdowns. So it's not necessarily a predictor -- a good reference point for margins for the whole year. Second point, as you -- as we implied, both Michael and I, the effect of higher energy prices and higher maritime freight rates is -- filters into results gradually. So we had some cover. We were still using shipments acquired much cheaper or using contracted affreightment closed earlier. And we have some partial cover, so you should expect those to filter through gradually. A third point is that, increasingly, in many areas, even energy prices are not fixed. Electricity prices vary a lot. And -- as those markets have become more market base as opposed to contractual. But fundamentally, I think the main point is that as one would expect with an inexpensive heavy commodity, domestic sales have much less transportation cost and, therefore, much better margins than exports. And therefore, a shift from the very, very low levels of the last almost 10 years now to something of even approaching mid-cycle levels will provide a big boost to profitability. Now how quickly that filters through, and -- it's unclear. And yes, there will continue to be volatility by quarter going forward.

Yes. As we discussed in one of the presentations we had, Alexandros, Greece, if you look at the long-term back history back from 1970 onwards of the consumption in cement, every single year well over 5 million tons until 2019. And it dropped within very sharply down to just over 2. We are not in what one would say is the norm for the country. And we are still below 3, so there is plenty of room to recover to come back to more normal levels of consumption for Greece. And as Dimitrios commented every time that converts from exports to domestic is a boost to the margin. Now coming to your question on CapEx, I would say that we are happy that CapEx is rising in the sense that the increase comes mostly from new growth opportunities. Our U.S. colleagues are busy in coming up with new ideas every month. So while we had a budget of just over EUR 100 million, we may exit, but it will be a pleasant surprise if it materializes EBITDA so soon. And for 2022, it's still open. I wouldn't expect it to be any lower. It will very much depend on U.S. opportunities, I would say.

The next question is from the line of Kourtesis Iakovos with Piraeus Securities.

First question has to do with Greece. Taking into account the growth ahead, if you quantify for us any pricing initiatives you plan to take for this year? Where do you stand at this front? Second question has to do with the U.S. You referred about CapEx, especially for 2022. Would you think or consider add further capacity in the U.S. plants? Fourth question has to do -- third question has to do with Southeastern, we've seen very good performance in the past years. Could you confirm that your capacity utilization in Southeastern Europe still stands in the area of 70% or is rising? And finally, about your dividend policy, if you could further comment for 2021? That would be from my side.

Let me try the 2 middle questions before giving it back to Michael. On the capacity of the U.S. plants, a couple of points. First, as pointed out in the slide presented by Michael, digital technology actually lets us increase capacity of current assets beyond traditional debottlenecking. So as we get plants run by artificial intelligence, we can expect sort of higher throughput per day as well as better reliability factors, and that should provide us some -- with some additional capacity. But most of the growth going forward will come from additional imports. And our whole integrated set of operations in the U.S., including ready-mix concrete, aggregates, fly ash, block bag, will all benefit -- will benefit throughout the chain from that increased activity. In -- on your question, Southeastern Europe capacity, the 70% rate is a bit maybe outdated. I don't have a figure handy. But you should keep in mind that there we benefit from a clustering effect where not only the Southeastern European plants but also Greek plants can contribute to the demand, as necessary. So again, here, you can assume for all purposes that we have the capacity to meet demand as it materializes. I think the summary for both Southeastern Europe and the U.S. is that there is substantial operating leverage and therefore, margin leverage in our current setup, if demand does indeed materialize.

There were 2 more questions. The one was on the prices in Greece, we have announced a price increase as of the beginning of April, it's a small increase to cover the incremental costs. We're just talking about something like 2% to 3%, but that will be enough to cover and maintain the margins. What was the last question? Dividend policy, that's right. Well, things look promising. And if the year turns out to be as good as we hope, then dividend for next year is likely -- the return to shareholders is likely to go up as well, but it's still early days. Let's not count or chicken too early.

[Operator Instructions] Our next question is from our webcast participant, Betts Mike with Database Analysis. Please, could you provide further information on the recent improvement in Egypt? Has the Army plan changed its behavior in Egypt?

After many months or years of waiting, we have seen some light in Egypt with both the government and local producers responding. Last year, through Q4, we had seen a gradual further erosion of pricing. But over the last 2 or 3 months, we've seen a reversal of this trend, and we were glad to see that everybody has been following, including the Army, and this has been a significant development that the Army has kept up with the rest of the market, introducing price increases along the same lines. Now there is also still in the making a government sort of quotas system that has been announced to the industry, but its details are not yet available. So we can't say too much about that. But still, it's good to know that the government has taken it seriously and has taken some action. Let's hope that by the time they give out the details, it will be measures that will actually help the market restore -- come back to a normality.

The next question is from our webcast participant, Gkonis Argyrios with Axia Ventures. What is the magnitude of price increases in the U.S. for first half '21? How you see pricing trends in SEE region?

Could you repeat that, please? It wasn't very clear.

Yes, of course. What is the magnitude of price increases in U.S. for 2H '21? How you see pricing trends in the SEE region?

The second round of price increases is expected to be similar to the first round. We still expect -- I mean, the announcements have just gone out with different effective dates. Florida is on July, New York from August and Mid-Atlantic from September. And we are...

Between $4 and $6 per ton.

Please go ahead, I apologize.

Yes, we see that there's a second part of the question about pricing trend in Southeast region. Prices have gone up over the last couple of years. They are holding. We are not pushing for further price increases. But it is an environment with growing demand where we expect small price increases as well.

[Operator Instructions] The next question is from our webcast participant, Woerner Tobias from Stifel. Dear Mike and Dimitrios, 3 questions, if I may. What is your capacity utilization in Greece at the moment? And what is the split between domestic and exports? Question number two, where are export prices at now? What is the increase since last year? Question number three, almost 2 years into your new listing, what are your experiences so far? And would you consider making any changes?

Let me -- shall I start from the end?

Sure.

On our new listing gave us, let's say, mixed results, which -- on the equity side, we've seen split of volumes, which hasn't been so good for liquidity purposes. What has been handful for our share was the delisting from the MSCI last May. And it's been a year since then. Our stock took a dip over the first quarter or so. And it took almost a year to recover back to where it was a year ago. It's still early days to determine how much that it's been good or bad on the equity side. It has definitely helped us a lot on the debt side, being recognized as a firm domicile in an investment-grade country with very limited sovereign risk that has helped us not only on capital markets but only -- also in the international banking community. And I would say, financially, this has been the -- most of the benefit.

Let me say few words about capacity in Greece and exports. Capacity is in -- as in most European countries, is no longer limited by in the industrial sense, but is limited by the way the ETS, the Emissions Trading System, is -- has been designed in Brussels. And we are producing in all our plants in Greece, combined domestic and exports, at significantly below capacity at a level that optimizes CO2 costs and keeps us competitive. So what drives -- if you like, production decisions in Europe these days has more to do with CO2 than it has to do with industrial capacity. Export prices, a couple of thoughts. In dollar terms, they have improved a bit. In euro terms, they have declined because the euro-dollar parity has changed. If I -- from memory, if I remember right, I it was 10% down versus last year, and that obviously translates the same number of dollars or slightly improved number of dollars into fewer euros. And also, the freight rate, the higher maritime freight rates eat into margins wherever we are supplying CIF instead of FOB. So generally speaking, this is not a particularly good year for export margins for those reasons.

[Operator Instructions] 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.

Okay. Thank you all for participating. We expect to see you at the end of July with our first half results. And as, of course, you may have noticed, we are quite optimistic for the rest of the year and definitely for the rest of the first semester, considering that the last year, it was a COVID second quarter. Thank you very much.

Bye-bye.

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