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

Ladies and gentlemen, thank you for standing by. I'm Myrdal, your Chorus Call operator. Welcome, and thank you for joining the Titan Cement Group Conference Call and Live Webcast to present and discuss the 9 Months 2021 Results. At this time, I would like to turn the conference over to Mr. Michael Colakides, Group CFO; and Mr. Yanni Paniaras, Group Executive Director of Europe and Sustainability. Mr. Colakides, you may now proceed.

Good afternoon, ladies and gentlemen, and welcome to Titan's conference call covering our 9 months results. Joining me today is our Executive Director, Yanni Paniaras, Head of Europe and Sustainability; and Afroditi Sylla, our IR Director. Let us start with the highlights of the 9-month period for 2021. In the 9 months, the group maintained a growth momentum with volumes and revenue growth across all our regions. Group revenue grew by 5% to EUR 1.263 billion despite the negative impact of the weaker U.S. dollar. In local currency terms, revenue growth was 10%. Performance reflects continued strength of the U.S., a rebound in the Greek market, solid robust performance in Southeastern Europe and improving market in Egypt. Group EBITDA reached EUR 220 million, penalized by the spike in input costs, particularly in the third quarter and the adverse impact of foreign exchange from the U.S. dollar. Still, EBITDA margin was up compared to the same period of 2019. While energy and freight costs remain high, current market prices are signaling a decline, although not yet a return to 2020 levels. Net profit for the period advanced by EUR 24 million or 41% compared to 2020 or EUR 22 million benefiting up to EUR 82 billion, benefiting from significantly lower finance costs and FX gains. It should be noted that net profit was over 8% higher compared to the same period of 2019. Following increased CapEx, higher capital needs, working capital needs and final EUR 41 million payment to IFC. Group net debt at the end of the period was EUR 735 million, lower by EUR 31 million compared to a year earlier. Now looking at the next slide, at the 9-month results by geography, it is evident that all of TITAN Group regions recorded solid volume growth, which translated into increased group revenue, with all regions coming with revenue growth in the range of 8% to 10%. We will address each region's performance in more detail a bit later on. The next slide, which is our summary P&L. In Q3, group revenue growth was 6.2% compared to last year, reaching EUR 441.7 million. EBITDA declined by 16.8% compared to strong post lockdowns Q3 in 2020 to EUR 77 million, but reflecting also the sharp price in energy, electricity and distribution logistics costs. Year-to-date EBITDA at EUR 219.6 million was 4.3% lower than 2020. Below the EBITDA line, lower interest expense, thanks to lower leverage and the successful refinancing strategy contributed to a higher net profit of FX. There was also an improvement of EUR 10 million in the FX line. The result of the above was a EUR 24 million improvement in NPAT to EUR 82 million. On the next slide, we would like to take a look at the cost factors that skewed our performance in the last few months. We feel that energy and freight costs reached a peak in Q3. This reversal trend started in October and current forward prices in the physical markets as well as the futures in financial markets, clearly indicate that we should expect a more favorable cost environment going forward. Financial futures of natural gas show gradual top of the elevated prices for the third quarter and the stabilization after the winter period. Similar trend is also observed in the coal index, which has increased fourfold in October and future contacts point to a return to Q2 levels of this year, roughly around the second quarter of next year. Electricity in the bottom right chart hit a peak in September and October, but has started declining since the OPEC futures, which is the most relevant index for electricity for our South European operations indicates a return to June levels before the first and the second quarter of 2022 -- between the first and second quarter. With regards to freight costs, which skyrocketed in Q3 due to bottlenecks in the ports and pent-up demand, causing supply chain hiccups. The situation is already returning to normal levels, with freight rates showing significant decline in November, down by 40% within the last 20 days. All-in-all, we do expect that this unprecedented spike of input costs to alleviate significantly at the first quarter or after the first quarter of 2022. Turning to our sales volumes. Sales volume evolution confirmed the underlying dynamic of demand across group regions, especially in cement, where a growth of 9% year-to-date was recorded. As can be seen in the chart on this slide, volumes increased year-on-year across all product lines. Our operating cash flow on the next slide, in the first 9 months of the year reached EUR 68 million compared to $128 million last year. Cash flow generation decline was primarily due to higher capital expenditure by EUR 30 million compared to the COVID-restrained CapEx program of 2020 and the seasonal increase of working capital. But as we can see on the next slide, group net debt at the end of the 9 months of 2021 was EUR 735 million, which is EUR 31 million lower compared to a year earlier, but seasonally higher by EUR 51 million compared to the end of 2020. As of September 30, the group's leverage ratio stood at 2.58x EBITDA. Now moving to Slide 10 to review the regional performances, starting with U.S. The macroeconomic environment continues to provide a solid backdrop for building materials demand in the U.S. At the same time, input costs have risen undercutting profitability. Revenue in the 9-month period was up 2% in euro terms to EUR 731 million, but an increase of 9% in dollar terms. EBITDA softened EUR 227 million, a decline of 10%, 5% in dollar terms, reflecting the surge in all input costs. The residential segment continues to drive consumption in our markets, which enjoy robust employment and increase consumer spending against a tight housing inventory at attractive mortgage rates. In response to the surge in cost, a second round of price increases was implemented midyear. Considering contracts already in place and the magnitude of the spike in cost, increases were not sufficient to mitigate the impact that margins came under pressure. The effect of those price increases will manifest itself with a time lag, and in combination with a new significant price increases already announced for January 2022. In the U.S. sector, all indicators remained buoyant and the approval just last week of the long-awaited infrastructure bill paves the way for a sustained higher cement demand for several years ahead. The group is investing in growth, focusing on expanding production capacity with the use of artificial intelligence and extending its reach in terms of logistics infrastructure so as to better serve cash flow needs. Titan America announced yesterday the construction of 70,000 tonne done at its ported Tampa Bay terminal, making it one of the largest of its kind in the United States and supporting its effort to meet growing customer demand for our products in Florida. At the same time, the group is actively promoting cement with a reduced carbon footprint in the U.S., thus addressing pressing environmental priorities but also effectively augmenting the available product offering to customers. Before completing the U.S. review, it is worth looking at the evolution of some leading indicators on the next slide. Key indicators depict a solid background for building materials demand and enhance our confidence for growth of the residential construction. On the one hand, you can see that building permits are at historical high levels throughout 2021. House availability remains tight for both multifamily and single-family residences. We are witnessing the highest levels of housing surge during the last 10 years, and we are experiencing historically low mortgage interest rates. Now turning to Greece and Western Europe. The market continued its encouraging performance in Greece, lending further support to believe that it is now in a steady long-term growth path. Revenue increased by 10%, reaching EUR 195 million, owing to strong domestic sales and exports continue at pace in response to the upsurge in global demand. Coupled with the increase in volumes and increase in domestic prices resulted in EBITDA growth to EUR 20 million. Still, however, price increases have not been sufficient to cover the surge in electricity and fuel costs, particularly in the third quarter of the year and further price increases were announced in Q4. Our construction segments are providing and introduce to demand. Building activity is driven by upgraded expansion works across a multitude of private infrastructure and small industrial unit projects in logistics and warehousing throughout the country. Residential activity was also strong, especially in the main metropolitan urban centers. Emphasis on our priorities of industrial efficiency and environmental excellence continue as we invest in our production base in Greece in terms of both alternative fuel usage, attendance, CO2 emissions reduction and efficient waste management. As communicated earlier this year, the installation of the pre-calciner in our plant in Kamari is on track. Once operational, the pre-calciner will lead to further increase in alternative fuels utilization and to higher production levels of lower carbon cement products. In Southeastern Europe, the group's markets continue to delivering a strong performance following a strong first half of 2021. Revenue increased by 9% to EUR 215 million. During the same time, EBITDA declined by 5% to EUR 69 million, penalized by the spike in energy cost, electricity, in particular. While volumes and prices developed well across the region, reflecting both solid infrastructure and the residential housing trends, rising energy costs outpaced price increases to mitigate the inflationary effect. Alternate fuel utilization continues to increase, with our plant in Bulgaria now reaching a 50% substitution rate. Turning to East Med. Developments in the Eastern Med were mixed with positive signs coming out of Egypt after a long time and evidence of a slowdown in Turkey. Revenue in the region grew by 8% to EUR 122 million, while EBITDA was EUR 3.5 million compared to a loss of EUR 1.1 million in the first 9 months of last year. Our plants in Egypt have been producing at the levels of the production cap as applied across the market, while prices have consistently maintained their upward trend. As a result, operational profitability in the country is improving after a long period of negative performance. The market is driven largely by public and private housing investment and more recently, rehabilitation of the country's port infrastructure. In Turkey, deteriorating macroeconomic fundamentals have started to manifest themselves in a slowdown in economic activity. Investment in real estate, which has historically provided a safe haven for investors is in turn compromised by high interest rates, while public investments slowed down further. At the same time, high freight rates also reduced the attractiveness of export out of the country. Last, turning to Brazil on Slide 15. The market in Brazil has continued to grow in 2021, continuing the upswing already recorded in the second half of 2020, supported both by the residential and commercial sectors. Cement demand in Brazil reached 48.8 million tonnes in the first 9 months of the year, higher by 9% compared to the same period of last year. As a result of the healthy market development, Apodi's revenue, Apodi's joint venture grew by 20% to EUR 60 million, while EBITDA reached EUR 14.4 million, an increase of 23% year-on-year. Now this concludes the regional overview. And Yanni Paniaras will give us an update on Titan's ESG performance. Yanni?

Thank you, Michael. I'm happy to start with the news that in October, we joined the global campaign, led by the science-based target initiative known as SBTI. And we cosigned their business ambition for 1.5 degrees Celsius. This pledge reinforces our commitments to have a leading role in de-carbonizing and reaching the net zero emissions by 2050. With regards to 2030, we are now one of the first cement companies worldwide with a reduction target validated by SBTI. This covers Scope 1 and Scope 2 emissions, so practically the emissions inside the perimeter of our plants and the emissions related to energy. In this year, we expanded the monitoring of CO2 emissions beyond the perimeter to include also emissions from the supply chain across all cement operations. These are the Scope 3 emissions. Moving to disclosure, on climate-related information. We have already started implementing the recommendation of TCFD, the task force on climate-related financial disclosures, assessing climate-related risks. And we will be adding them to our reporting from this year's annual report. This extends and complements the disclosures we are already doing regarding our risk management. Looking at our current carbon footprint. We have made good progress by shifting to lower carbon cement in the U.S., in Egypt, in Greece and in other terminals. In fact, Titan America reached a new milestone in low-carbon cement manufacturer with half of its output being now a lower carbon Portland Limestone Cement. And actually, our plant in Pennsuco in Florida is today the largest U.S. producer of this type of cement. We have also made good progress in alternative fuels utilization, mainly in Bulgaria, in Greece and in Egypt and have added further plants in our energy management systems, so that we now cover more than 85% of our clinker production. On research and innovation, we are participating in collaborative efforts and evaluating several de-carbonization and carbon capture and utilization technologies, mainly in Greece and in the U.S. We are also exploring the further optimization of our cement kiln efficiency through hydrogen enrichment and are currently running 2 industrial scale pilot tests. We have also staying on hydrogen. We have also submitted a green hydrogen project called H2CEM for EU funding, where we have now passed the first stage of the approval process as to be one of the, so called, important projects of common European interest. And as a final note on our de-carbonization efforts, we recently announced our engagement in the tender for 3 public-private partnerships for the investment in waste treatment plants in Attica and Central Macedonia and Greece, in partnership with a leading company in the field, TERNA ENERGY. This investment aims to address the waste management needs in Greece and to secure additional high-quality alternative fuels. This is linked to what Michael mentioned earlier that we are investing and actually installing Africa finer in our plant in Kamari, Greece, and that will enable the utilization of these extra qualities and quantities of alternative fuels. So overall, quite excited to be among the leading companies, committing to the 1.5-degree scenario. And we're making good progress on our de-carbonization plan. Back to you, Michael.

Thank you, Yanni. I will not cover the outlook part, which is usually done by the Dimitrios Papalexopoulos, the Chairman of our Executive Committee, who is now in Glasgow, getting the direct feedback of what's happening there on the development of the climate conference. Now, the outlook, driving demand across our markets, the fundamental driving demand across our markets, namely the strong recovery of economic activity, a surge in public and private investment across a low interest rate environment continued to stimulate growth. At the same time, we have clear signs that the peak of energy and freight cost is behind us, though not reverting to last year's levels. Recently, announced price increases for our products will aim to recover the margin lost over the past couple of quarters due to cost inflation. In the U.S., we anticipate housing demand to continue to exceed supply, thereby, ensuring the growth of residential construction. Infrastructure investments received the long-awaited impetus with the approval last week of the 550 billion incremental spending as part of the infrastructure investment and Jobs Act. With large amounts specifically allocated to cement intensive roads and bridges projects, the bill will underpin increased levels of demand for heavy building materials in the U.S. for several years ahead. Amidst the solid industry backdrop, surge in cost inflation requires significant price increases to safeguard operational profitability. At the same time, recognizing the growth potential of the U.S. market over the next 3 years, we are investing to expand our supply capacity in the market. We announced the construction of a new storage dome at our Tampa terminal that will greatly enhance its capacity. Aiming to improve operational efficiencies, we will also continue with our investments in the digitalization of our plants and processes as well as with carbon mitigation, so that we are a preferred low carbon cement supplier of choice in the market. In Greece, indicators are encouraging that the stimulate of demand are in place to sustain the pace in recovery for the years ahead. Residential construction is supported by an increased number of permits issued, which should translate into building activity in the coming years. On the commercial, private industrial segment, many projects are continued across the country, while following a very strong summer tour season, more tourist related projects are now underway. In Southeastern Europe, solid performance should continue to the year's end, beyond and beyond in a favorable construction sector climate with a mix of residential, private commercial industrial as well as infrastructure projects across the region. In Egypt, the stabilizing macroeconomic environment and the country's housing and infrastructure needs bode well for demand amidst the rationalized production regime set by the authorities. Under these conditions, demand should continue to recover and prices to further pick up conducive to an improvement in operating performance. In Turkey, the precarious state of the economy weakens outlook for construction. However, thanks to the lean structure and solid balance sheet of Adocim, our subsidiary in Turkey, we remain confident in its operational efficiency to withstand the turbulence. Finally, in Brazil, demand drivers are in place and construction confidence indicators remain stable, but a lot will depend on the macroeconomic situation in the country. This concludes our presentation. And we'd now be ready to take your questions.

The first question comes from the line of Woerner, Tobias with Stifel Europe.

Two, if I may, very quick ones. In Greece, when you look at the official cement price data, which is publicly available. It seems that in September, prices have gone up by about 5% year-on-year. And I look how much month-on-month by about 6.7% month-on-month. Does that tie in with what you're seeing? Or is the state reliable? That's the first question. The second question...

Let me just pick. I don't know what index you're referring to, there is definitely no such statistic up-to-date, price -- statistical on price are really at least a year back. But in any case, just to give you an indication, we announced the price increase in April, which was about EUR 3 to EUR 4. And this or around just a few -- in a couple of weeks ago, we announced the second price increase, which is the one that -- well, had we known in advance, we would have gone to a hiring earlier on. But in order to cover the cost and maintain the margin, second price increase was announced, which is in the region close to 10%.

The second question is with regard to your increased selling of type IL cement in the U.S. which reduces the clinker factor by whatever, 10%, 15%, if I'm not mistaken, 15%. 15%. Does that imply that effectively you could sell, i.e., your capacity utilization goes down in the kiln, and you have more capacity selling into the market, which probably at this point in time is not a bad thing to have?

That is absolutely correct. So the benefit is double. It's not only the environmental, but it also frees up the kiln production to produce more cement with the same clinker to be able to produce more cement. And then, the burden on the bottleneck goes to the grinding plant.

And does the grinding plant manage that? Or do you have to possibly expand the grinding plant in future?

We are investing in that as well. We are investing there as well.

The next question comes from the line of Betts, Mike with Data Based Analysis.

I've got 3 questions, if I could, please. Firstly, on freight, could you give some kind of indication of the magnitude of the total impact of rising costs of freight? And I guess it was in Greece, U.S. and Turkey, but some indication of where -- maybe where the biggest impact was, I guess, potentially the U.S. My second question, there's been some reports of Some price weakness in the U.S. where too much imports we're waiting to unload, and therefore, they would take more charges, if that's pronounced correctly. Is that something that you saw, particularly in the Northeast, have there been any downward pressure from imports in the Northeast? And then, the third and final question, please, on Southeast Europe. I appreciate it's still a very high margin, but it was the biggest reduction I think, in Q3, on my calculations, it fell by 9 percentage points. Were there any one-offs in that region? Or was it just energy costs going up by more than prices?

Freight, the first question, the freight we have been experiencing for years were relatively stable, gradually increasing, but the resulting costs being below EUR 20 per tonne until 2019 or mid-2020. Then soft market in 2020 due to COVID. And the post COVID growth in economic activity as well as the contraction imports really led to skyrocketing freights for a period. We started -- we had a gradual increase in the first half of the year but as of June, let's say, we've seen constant rises month after month, reaching a peak in September, early October. And we are talking very crude numbers, but the EUR 20 per tonne became, let's say, EUR 30 by June and EUR 50 by -- at the very peak of the market and has since dropped, as I mentioned before, the index as well as actual spot quotations have dropped 40% from 22nd of October. If I recall well, was the peak market and has dropped by 40% by yesterday. And we have been now booking not just hedging on the financial markets, but also booking for mortgages at current spot rates. And the expectation, if you look at the futures market is that the market will further decline. Now...

And its impact mainly in the U.S. and Greece?

Greece, U.S. is the relevant -- the most representative -- the figures I quoted were for Greece U.S. The -- now pricing in the U.S., we have announced price increases twice last year, not very successfully. We only managed to get a couple of dollars increases on average more in some areas and less in others. We've had 1 or 2 very strong competitors going for volume instead of margin improvement so we had to react. But what we have seen now is that the whole market is announcing significant price increases for January. So we are much more optimistic about the price increase that was announced.

And are these competitors that have caused the problem, was that through imports or was it...

That was domestic producers. Well, domestic plus imported.

Okay. And was it in the Northeast?

Main operators. Further South, at least in our case. Now in terms of Southeast Europe, the real hit was in electricity, solid fuels as well but not as much. Electricity has really shot up for a couple of months, easing a bit now, but still not -- we have not entered into new contracts for 2022. We're actually negotiating new contracts now. It's I would say, a one-off spike. We don't know how much it will reverse. It also depends on weather. There is a lot of hydropower in the region, so there's a lot of rain, there will be cheaper electricity and vice versa. But that's the only cause for the decline of the profitability.

And in the chart, you used Hungary, which as far as I'm aware, for your electricity cost data, which maybe is the only data. I don't think you're actually in Hungary, but is that representative for Southeast Europe?

It's an exchange in Budapest, which -- where electricity for the region is traded, electricity contents for the region are traded.

The next question comes from the line of Edelfelt, Sven with ODDO BHF.

So 2 from me. You announced an investment in Kamari, EUR 25 million to modernize your plant. And when I was looking at your emission reported by the European Union, it seems to me that you will also need to invest in Thessaloniki and Patras to lower CO2 emission and maybe switch to more alternative fuel. So is there something scheduled any time soon in this regard? That's the first question. And then the second one, you mentioned the lower carbon segment in the U.S. with Portland, Limestone Cement. What is the kilogram of CO2 per tonne of clinker? And just a clarification, this blended segment can be used everywhere, meaning road, bridges, building and basically replace 100% of a traditional Portland cement? Or is there a special application, meaning a niche market from the percentage of your production in the U.S.? It seems not but can you maybe clarify?

Okay. I will take both questions, if I may, Michael. Starting with Greece. Indeed, all grid plants need to reduce their emissions and this is part of the blueprint that we have in the path that we have in order to reach our global commitment of 500 kilos per tonne of cement issues. There is an approval that we took in Thessaloniki last year. We announced it to extend the range of alternative fuels that we can use and a corresponding investment is being prepared. Patras is a bit behind on alternative fuels, but we'll also -- we'll see what we can do there as well. However, let me point out that the main driver in reducing CO2 emissions is actually the clinker to cement ratio. Obviously, the less clinker you use, the lower CO2 emissions. And in that respect, we have introduced in Greece, both for the local market and for our exports to the EU and to the U.S., lower clinker cement. And this is something that we can do from all our plants and is driving -- is the main driver in our CO2 reduction. This relates a bit to your question on the Type 1L. The standard for the Type 1L is that it should contain 5% to 15% by mass of fine ground limestone. So the rest is clinker. The performance is very similar, or I would say the same as the Type 1, 2 cement. So that explains why we have been able to be so successful in the penetration of -- with this product.

The next question is from our webcast participant, Polys Polycarpou with Research Greece and his quote: If energy, electricity input costs remain at current levels to maintain profitability, cement price should, on average, increase by 10% to 12%.

No, that is an exaggerated percentage. Cement -- sorry, fuel and electricity are about, let's say, 20% of cost of goods sold, 20%, 25%, whatever. If they are stable and if the price increases we have announced stick, then we would not need to increase any further. Now if there are further increases, then that will change the equation. But the price increase we have announced in Greece, in the U.S., Serbia, Albania, already in a number of countries are exactly to recover the lost EBITDA margin.

The next question is a follow-up question from the line of Woerner, Tobias with Stifel.

It's just a short one with regard to Turkish prices. We've seen an improvement to which you alluded as well over the last year. Could you give us a sense of the magnitude, both in percentage and euros per tonne, if possible, please?

In euros per tonne, it should be negligible in the sense that there are significant price increases in local currency, but almost flat in euro terms. In Turkish lira, the price increases have been over 30% year-on-year but in actual euros, it's a low single-digit number.

Next question comes from the line of Kladis, Panagiotis with Eurobank Equities.

Two questions, if I may. The first one is actually a confirmation. Did you say in your -- in the beginning of your remarks that you expect pressures from energy and freight cost to alleviate in Q1 or Q2 next year? And second, if you can give us an update on your CapEx plan for this year and next year.

Okay. Well, regarding our expectation on energy and freight, I think we have put up the slides -- on Slide 5, we've put up the charts, which indicate the futures markets, and what we confirm is that some actual forego transactions that we have done, both in energy and in shipping freight are in line with those projections. So Q1 to Q2 is the period we expect to see these declines. On Capex, order of magnitude around EUR 120 million this year, maybe a bit less, not over. And next year, we are in the budget process, I cannot give you a clearer indication but given the growth potential in the U.S. around the intention to strengthen our presence in the U.S., I expect that next year will be maybe EUR 10 million or EUR 20 million higher.

So you said of EUR 120 million for this year?

Yes.

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. Well, we would like to thank everybody for joining us today. To remind you that our full year results presentation, the announcement of results will be on the 17th of March. Of course, if there are any significant developments in the meantime, we will communicate that by press releases. Thank you very much for joining.