Vicat S.A. (VCT) Earnings Call Transcript & Summary

Good day, and welcome to the Vicat Group Full Year 2019 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Sidos. Please go ahead, sir.

Thank you, Kevin. Good afternoon, ladies and gentlemen. Welcome to the presentation of Vicat 2019 Results. I'm Guy Sidos, Chairman and CEO of the Vicat Group. With me is Hugues Chomel, Vicat's CFO. Let's go to Slide 2. This slide contains a disclaimer. It draws your attention to the fact that in this presentation, statements relating to 2019 as assessments of trends expected in the Group's various markets and that there should not change circumstances be regarded as forecast. To note, figures from the 2018 financial year are presented on a pro forma basis, after taking into account, the effect relating to the application of IFRS 16 as disclosed on 29 April 2019 as a press release entitled New Geographical Information and Impact of IFRS 16, available on the company's website at vicat.fr. On Slide 3 now. The presentation has 6 sections. I will start by looking at the highlights of 2019, and I will present the Group's financial results to you. Hugues Chomel will then take over for the analysis of our performance and the main balance sheet and cash flow items. I will then make a short focus on our climate plan, and I will conclude by looking at expected trends in the current year. In terms of preliminary comments, I'd like to begin by saying that the Vicat Group's solid performance in 2019 reflects the relevance and our business of its business model. The purchase of Ciplan in Brazil in January 2019, has allowed the group to continue its international growth in a region offering strong potential by integrating teams and assets of the highest quality. In this context, retail group continues to pursue objective of profitable growth and its policy of debt reduction, backed by a solid balance sheet and strong cash flow generation. On Slide 4, Vicat Group's consolidated sales in the first half of 2019 came to EUR 2.7 billion. Consolidated EBITDA was EUR 526 million, up 6.9%. Cash flow came to EUR 425 million, and free cash flow before dividends amounted to EUR 159 million in 2019. Our priority remains reaping the benefits of our past investments and to pursue our debt reduction. Net debt at the end of 2019 was slightly below EUR 1.3 billion, due mainly to the acquisition of Ciplan and the consolidation of debt. This is a figure that takes into account, the strong reduction in debt that began in the second half of 2019. The Board of Directors is confident in the group's ability to generate profitable growth and so has decided to propose an unchanged dividend payment of EUR 1.50 per share to shareholders at the group's Annual General Meeting due to be held next April 3. On Slide 5 now. The word on the Ciplan acquisition that was a milestone in 2019 for the Vicat Group. Ciplan operates a modern cement plant close to Brasilia, with annual capacity to produce 3.2 million tonnes of cement and has a large amount of high-quality mineral reserves. With this acquisition, we are pursuing the group's strategy of selective acquisitions and geographical diversification, while establishing Vicat in a new emerging market with a strong growth of Group. In 2019, we have started to capture the full potential of the Brazilian market's potential growth, leveraging a highly efficient initial asset base, high brand recognition, abundant quarry reserves and strong competitive positions in local markets. The introduction is moving in line with expectations, and we are confident in our ability to pursue a strategy of system profitable growth in this market. Let's move to Slide 6. To finance this acquisition, the Vicat Group successfully completed EUR 290 million German private placement on 26th April 2019 to refinance its debt while lowering its average borrowing costs, extending its average debt maturity and diversifying [indiscernible] it's funding resources. The size of this private placement issue was increased from EUR 150 million to EUR 290 million, and it was placed with a very broad base of banks and European and Asian institutional investors. Let go to Slide 7, and let's now look at the results on Slide 8. You have here our simplified P&L. To note, Vicat Group's EBITDA rose by 2.1%, 6.8% on a reported basis with EBITDA margin increasing slightly, like-for-like, and excluding the impact of nonrecurring income in the U.S. in 2018 and Brazil in 2019. And as I stated previously, cash flow came to EUR 425 million, up 9.7% on a reported basis and plus 0.8% like-for-like. Let's go to Slide 9, and I will now hand over to Hugues Chomel for the analysis of our performance.

Thank you, Mr. Sidos. I will begin with the factors that drove the changes in EBITDA between 2018 and 2019. Beyond the perimeter impact generated mostly by the integration of Ciplan, you can see the extent to which the group was able to take advantage of higher prices in all its markets, excluding Egypt, to improve its financial performance. This result -- this return to strong pricing power, largely offsetting the impact of lower volumes. To note, almost half of the inflationary evolution in variable cost comes from Turkey, due to the impact of the devaluation. Please turn to Slide 11. You have seen the breakdown of EBITDA valuation by geographical area. And you can see clearly a difficult situation of the Mediterranean region, the progression in profitability in France, in Asia, driven by the improvement of India; and finally, the contribution of Brazil and especially the U.S., excluding nonrecurring items. We may move on to Slide 12. Business levels in France remained solid in 2019 against the background of favorable macroeconomic and sector conditions. Satisfactory business levels in infrastructure, industry and commercial segment offset the downturn in the residential market. In this climate and given the inflation in electricity cost, the group was able to introduce price increases across all its main business areas. The EBITDA margin on consolidated sales was stable at 18.5%. The increase in EBITDA was essentially driven by an improvement in the concrete and aggregate business on the back of solid price hikes. You can now move to Slide 13. Activity in Europe, excluding France, confirmed the trend seen over the past 18 months. We have a gradual stabilization of sector conditions, notably in Switzerland. Although the various business segments saw contrasting in trends. Consolidated sales in Switzerland fell mainly because of the decline in the precast business. Cement business, by contrast, continued its recovery. The good performance continued to improve in Italy. Against this background, EBITDA was stable and the EBITDA margin on [indiscernible] sales came to 24.1%. Let's now move to Slide 14. The Americas region was formed following the recent acquisition of Ciplan in Brazil. Sales growth on a reported basis, therefore, reflects a significant positive scope effect but also the solid growth in the U.S. business over the whole of 2019 despite poor meteorological conditions. In Brazil, we have a macroeconomic and industry conditions are stabilizing. Integration of Ciplan is proceeding in accordance with the Group expectations. In the United States, the macroeconomic and industry environment continued to improve. However, the year as a whole was affected by relatively unfavorable weather condition in California and in the Southeast. With the market penetration remaining conducive to price rises, the group achieved plus 6.4% rise in sales over the year as our EBITDA for the year stood at EUR 86 million. Adjusted for nonrecurring item recorded in 2018, EBITDA rose 13%, with EBITDA margin on consolidated sales rising [ 100 ] basis points to 19%. In Brazil, the situation is improving gradually after several years in which the macroeconomic environment was subdued. Consolidated the sales generated since the Ciplan acquisition was completed, amounted to EUR 135 million. EBITDA was EUR 29 million. Restated from the nonrecurring item, EBITDA was EUR 17.2 million. Initial measures introduced to improve technical performance and beginning to bear fruit. Please go to Slide 15. The picture in India was more mixed with a solid market in the first half, but much weaker trends in the second half of the year, following the national and regional elections held in the second quarter. [indiscernible] the group focused on raising selling prices and on improving its EBITDA margin. Volume fell by almost 16% and selling prices rose sharply over the period as a whole, although prices were more stable over the final quarter. Given this trend, EBITDA for the year was EUR 65 million, an increase of 20%. In Kazakhstan, consolidated sales moved 10% higher. Once again, the plant outperformed its expected output. Cement volumes grew slightly and average selling prices were significantly higher in both the domestic and export market. As a result, EBITDA for the year came in at EUR 23 million, the EBITDA margin narrowed slightly. On Slide 16, we present the results of the Mediterranean region. The region was affected by a significant deterioration in the macroeconomic and sector situation in Turkey, resulting from the devaluation of the Turkish lira in August 2018. In Egypt, the security situation and the competitive environment remained very difficult throughout the period. In Turkey, sales were EUR 131 million, down 11.4%. After a particularly difficult first half, due notably to the highly unfavorable basis for comparison, business levels saw a resumption of growth in the second half. Solid increase in selling prices could not offset the effect of lower volumes and sharp inflation in costs. EBITDA amounted to EUR 13 million, down 50%. In Egypt, consolidated sales came to EUR 40 million, down 6%. This contraction in sales came against the background of tough macroeconomic environment, major logistical challenges in this region and the deterioration of the competitive climate. Given all these factors, volumes were stable over the year and sales price fell, affected by the increased output from the new factory operated by the Egyptian Army. The group recorded a loss at the EBITDA level of EUR 17 million in 2019. Please move to Slide 17. In Africa -- in the Africa region, the macroeconomic and sector environment was favorable. However, performance over the year was affected by the presidential and parliamentary elections in Senegal by the political decision to [increase] prices. In addition, operational issues in the Cement business and labor disputes external to the Group in the Senegal transport industry, particularly affecting aggregates, also had an impact on performance in 2019. In the Cement business, consolidated sales for the Africa region will -- the decline was caused by a fall of over 3% in cement volumes over the period as a whole as a result of production constraint. Prices rose over the course of the year, following an increase introduced in August 2019, but the impact of this was only felt in the final quarter of the year. Given this progression and the fall in energy cost, EBITDA generated by this business rose by 31%. In Senegal, consolidated sales into the aggregate business fell 27%. This decline resulted largely from the construction in volumes, due notably to the temporary freeze on public tenders in the second half. Against this background, EBITDA fell 24.8% at this business. Lastly, during the fourth quarter of 2019, the group began production at a new cement mill in Mali, near Bamako, with an annual production capacity of 800,000 tonnes per year. I will now look at the balance sheet and cash flow statement on Slide 19. Cash flow in the period came to EUR 425 million, up 10% on a reported basis and 0.8% at constant [indiscernible] and [indiscernible]. The group capital expenditures for 2019 came to EUR 291 million after application of IFRS 16. Excluding the effect of IFRS 16, it was EUR 241 million, an increase compared to 2018. This increase resulted primarily from the investment in the cement mill in Mali, which came into operation in the fourth quarter. And the first payment at the end of the year related to the investment in new mill in Raglan, U.S.A., and will come back to that later. Financial investments amounted to EUR 379 million, essentially due to the Ciplan acquisition. Lastly, the Group recorded free cash flow before dividend of EUR 159 million from 2019. Let's turn to Slide 20. At December 31, 2019, the group had a solid financial structure with substantial shareholders' equity at EUR 2.6 billion, which was EUR 115 million over the year. Net debt reached EUR 1,290 million at December 31, 2019, and EUR 1,052 million, excluding the effect of IFRS 16, due mainly to the acquisition of Ciplan in January and the consolidation of its debt. On this basis, and excluding IFRS 16, gain was 40.4%, and the leverage ratio was 2.3 at the end of December 2019. After application of IFRS 16, the Group's gearing and leverage stood at 49.7% and 2.45x, respectively. I will now hand back to Mr. Sidos.

Thank you, Hugues. Let's now move to Slide 21. I would now like to turn to Vicat Group's climate plan. As you know, Vicat is a group with a long history. While our Group has always taken great care to pass on its expertise and to prepare the future for the next-generation. This sets the background for our approach to actions towards the climate. For a long time now, this strategy has been at the foundation of our business. It takes the form of a plan with a number of components that involve every level of the company. Above all, it is an initiative that I am personally committed to driving forward because for me, it is the foundation of our profitable and sustainable growth. Let's move to Slide 22. Before discussing the action areas we are addressing across all of the group's regions, I thought it would be useful to take a brief look at the regulatory framework running our European businesses. As part of its policy to reduce greenhouse gas emissions, the European Union has set a number of targets, spread over time and divided into phases. To companies meet these targets, EU has introduced the cap and trade system, allocating three CO2 quotas to companies, alongside this quotas, the quantity of which will fall over time. There is a market, allowing the value to be extracted and for them to be traded. On Slide 23 now. Under this emissions reduction policy, Vicat is subjected to the European emission [ policing ] system or EPS for France and Switzerland, beginning in 2021. You have in front a few of the equations that is used to calculate the number of free quotas that are allocated to companies. It is based on a historical level of pollution, a benchmark of emissions by [indiscernible] and includes reduction and adjustment to efficiency. On Slide 24 now. This slide shows the accounting stock of quotas held by Vicat Cement in France since 2005. You can see our strategy of investing in the modernization of our facilities through our performance plan has allowed us to reduce our footprint considerably since 2008. This accumulating quotas, which has enabled us to anticipate the various phases of CO2 reduction that will be applied to companies. So since 2012, Vicat's community surplus of certain quotas have risen continuously putting us in an excellent position as we move into the next phases of the regulatory framework. This policy of cautious anticipation has allowed us to manage the financial risk which consists of the need to purchase quotas in the market in the phase that will shortly begin. From Phase 4, which will begin in 2021, and I come on with most other actors, the allocation of quotas will not be sufficient to cover the Group's emissions. And Vicat will begin to grow against its accumulated surplus. The surplus we have built up is substantial, however, and we should still be in surplus in 2030. We will, therefore, not be required to buy quota in the auction market, where prices may prove highly volatile. On Slide 25 now, our climate plan comes with clear and measurable targets. We already made progress by the end of 2019 reducing our net CO2 emissions by 15% compared to 1990, you see [ from the ] historical scope. Our commitment for 2030 is to achieve a further reduction in these emissions of 13% to achieve net emissions of 540 kilograms of CO2 per tonne of cement, it's significantly less in France. This commitment is underpinned by increased use of alternative fuels. Our aim is to achieve full substitution in Europe by 2025 and 40% substitution across the group by 2030. We are also committed to a reduction in the level of clinker cement, with a target of 75% by 2030. Lastly, the Vicat Group has set itself the ambition of being carbon neutral [indiscernible] valuation by 2050. This ambition is dependent on the development of disruptive technological processes that will allow us to capture and reuse of stored carbon. Let's go to Slide 26. On this slide, showing our actions in the cement business, you can see the 4 levers the group is using to help reduce the carbon footprint of its production processes. We're acting on the conception of energy by modernizing our equipment, eliminating fossil fuels and developing the production of clean electricity. The [ addiction ] in [indiscernible] content is a major level, and unlike others, we are concentrating on options that could become lasting solutions. Thus, we are working on the micronization of [calcium] carbonate, activated [indiscernible] and the increase use of network for [indiscernible]. The initial policy requires us to be linked in short production chains in the secular economy where securing supply of our resources is a [indiscernible] of the execution of our strategy, which strengthens our integration with local economies. And lastly, as part of our goal of carbon neutrality by 2050, we work with others to develop the necessary [indiscernible] to capture a new technology is advanced which are already at the pilot [indiscernible] level, are utterly promising. It was remembering that through catch for climate project to join forces with 3 European cement groups to develop solutions to enrich gases with CO2 [indiscernible] cost? [indiscernible] capture program run by iStar, Zero laboratory, [indiscernible]. So to capture cement tile is a partnership with Total. Volume is a meaning -- hydrogen production. Quite apart from the overriding need to help protect help protect our planet, who're convinced that this represents a key competitive advantage for Vicat. An advantage that is interest of all our stakeholders, our employees, our clients and our shareholders. Let's move to Slide 27. Lastly, it's only natural that the actions to tackle climate change go beyond cement production and encompass all of the company's activity. We set out here the main steps we are taking across the whole value chain. More details are provided in our 2020 reference document to be published soon. We are passionate about this project, passionate about using new technologies to reduce the cement content of concrete. Our engineers are also working to reduce the amount of concrete used in construction and extending the life span of structure. In the area of recycling materials, we developed a cement form to provide a cheaper substitute for function of thermal and acoustic insulation. There are many projects, many pieces of the puzzle that are making a contribution to transforming our Group for the better. During this process, we have appointed a director of climate strategy, who reports to me, and formed a climate committee that I chair. The success of our [indiscernible], our responsibility goes beyond our financial accounts, there is no alternative to cement if we are to meet the need for construction materials of the expected 2.5 billion additional people on our planet by 2050. Our mission is to ensure that we can meet this challenge in a sustainable way. Let's go to Slide 28, and I will now finish by looking at our prospects for the -- year. On Slide 29 now. I will begin with an outline of our initial investments. Given the challenges of climate change, growth prospect in its market and expected level of cash flow over the coming years, Vicat Group has taken the decision to increase its initial investment from 2020, with notably the construction of a new [indiscernible] is USA at the Raglan plant in the southeast of the U.S. to replace the existing facility. Commissioning of this project is expected by year 2022 for a total initial investment of around USD 260 million. This [indiscernible] will bring forward the plant capacity to 1.8 metric tonnes per year from 1.2 million tonnes currently. And we use the latest cement industry technology. It will just enable the Group to address the market growth expected in the southeast of the United States, considerably increase the use of [indiscernible] fuels and significantly reduce production costs. And lastly, an increased effort on strategic projects on user groups, energy cost and carbon footprint. I didn't order a coal mill to fuel the new plant in the USA. Therefore, the cash outflow for initial investment is actually to be around EUR 300 million in 2020. On Slide 30, now. I will let you read this short paragraph, which summarizes our prospect for the [indiscernible]. I will remind that use of details [indiscernible] outlook, but geographical region are in our press release. In 2020, the macroeconomic context is likely to continue to improve in most of the regions in which the group is active as those certain emerging market regions will continue to face an uncertain sector environment. Consumed energy prices are likely to continue to fall, given the evolution of worldwide prices and the group's internal strategy of replacing fossil fuels. Against this background, the group expects a further improvement in its EBITDA over the year as it -- as a whole. Let's move to Slide 31. And I want to thank you for your attention. Mr. Chomel and I will be happy to answer your questions. Kevin, can we move now to -- move on to questions?

[Operator Instructions] Our first question comes from Yves Bromehead of Exane BNP Paribas.

Especially, on the climate plan slides. I guess most of my questions will be on that in that matter. So I'll start with the first one. You talked about reducing the clinker ratio to 75% by 2030. And you also talked about different technologies to reduce the clinker content with limestone, micronization, active clay, and natural [indiscernible]. Can you maybe talk about the access to those raw materials, where are the reserves? Who controls them? How can you get access to those materials, et cetera? That would be the first question. And the second question is, do you not believe that substitute materials, such as wood, might actually start to gain market share? Especially when we talk about buildings. France has recently announced that most of the buildings for the Olympic Village will be made of wood and the RT 2020 is also favoring wood-based construction. So that would be interesting to get your views on that. And the last question is, you recently increased your CapEx, most probably because of the U.S. plant. But just trying to understand with all your KPIs on the climate side in reducing your footprint, what should we expect in terms of CapEx post-2020. Is EU 300 million a sustainable level? Or do you need to ramp up the CapEx investments?

Thank you for your question. This is Guy Sidos talking. Access to raw material that will be need for -- to produce new cement issues materials, like active clay, [indiscernible]. And believe me, we've been looking for years to secure reserves, and we'll start our first -- in fact, that's the second because [indiscernible], we have one in Brazil already in [indiscernible]. We have one click in, but we'll start our first new click in, I would say, which is a flash [indiscernible] in France in [indiscernible], where we have enormous reserve of clay we can activate because some clays are good, some are not and we will start with the first-line of 100,000 tonnes of activated clay in this plant in the eastern part of France. And we have a plan, a very [indiscernible] plan for other places, and your question was right because it's as important as having enough limestone to produce [indiscernible]. About other materials. I will always advocate for the right material in the right place. Believe me or not, we are on the Olympic Village project with, of course, some concrete, but also some very new concrete with AMP, which are very popular, very efficient, and that provides a good insulation and good with housing. So it's -- we're not even in a fight for -- with other materials. We want -- with 2.5 billion additional people on the planet in 2050, which is tomorrow, there is no room for fight between different construction materials. There is a logic to follow. And I really believe that there is no substitution possible for cement to provide accessible material in quantity and in price where this new population will live. For the last -- your last question, I will hand over Hugues Chomel, about CapEx.

In the expected level of CapEx of EUR 300 million, the better part of the increase is related to [indiscernible] project. And of course, this project is -- the rationale of this project as presented is, of course, some capacity but substantial cost reduction has -- which is a key driver in our investment altogether, as well as a long years to ramp up substitute fuels and drive additional energy efficiency. The effort to further ramp up substitute fuels does not trigger any change in the level of efforts that we have already implemented in the last years. We are already in this movement for quite some time, and you should not expect a substantial effort on that. Beyond that, of course, we are starting to work on -- as presented by Mr. Sidos, on various elements of a pilot phase of new technologies, especially on carbon capture and storage. Those pilots will not constitute initially tremendous level of CapEx, you can expect EUR 10 million to EUR 15 million per year in the coming years. So nothing that is driving a different level -- substantially different level of CapEx for us.

Our next question comes from Yassine Touahri On Field Investment Research.

A couple of questions for myself. First, the newly elected President of the European Commission said, she will consider a carbon tax on imports. What would be your view on the feasibility of such a tax, given the potential concern from the world trade organization? And when would you expect the new commission to give an update on this tax? Do you think we'll have to wait after the U.S. election? Or could we get something earlier? That would be my first question.

Yes, Yassine, I'm Guy Sidos. About carbon tax, so the position is that it should be on top of ETS of European [indiscernible] System. The WTC -- discussions with the WTC, however, are not against it, by that it brings something fair. For the agenda of the EU commission, the best is to ask them. Unfortunately, they don't follow always on it. We believe that a fair system will be to keep ETS and then to add the -- a fair system with carbon tax at the border. That prevent us from carbon leakage.

Okay. And then the second question is, have you hedged part of your fuel expenses for 2020, and on the part of your energy expense that you have hedged, what kind of decline would you expect in terms of energy costs compared to 2019?

As I've communicated before, we have always mostly a physical hedging strategy meaning that depending on the plants and their fuel mix, we have inventory is -- fuel inventories. As well as we buy forward coal and pet coke when we use them, when -- in U.S., when we use gas, we hedge it. So those hedges covers us well into next year. We have not shared the percentage of decrease that we've seen price to the market.

But if I understand, in 2019, you didn't have much of a change in your fuel bill because you were hedged quite substantially. We've seen since -- yes?

Yes, you have to remember that the full cost as fired is the mix of the energy cost itself, plus a substantial part of transportation first. So the variation in the energy cost does not translate directly into the cost of energy in the [indiscernible]. Secondly, there is some local markets that are disconnected from the world prices. Finally, we have declined in quite numerous markets, but we have as well -- it's very substantial increase in Turkey linked to the devaluation of costs. This, as you may have heard in my presentation, accounts almost for half of the inflation of variable costs at the group level.

And for 2020, so you would expect -- would you expect a decline in energy costs in 2020?

We do expect a decline in energy costs into 2020.

And if I may, here...

Yes, it is too early.

If I may, this is Stephane. Our substitution policy led us to almost 27% of substitution last year. This is coal and coke, and petroleum coke, we don't buy. And this market -- this substitute market is not linked with the overall fuel market. And our goal for 2030 of 40% substitution across the group operations is equivalent to almost 1 million tonne of coal.

That's very clear. And maybe the last question on India. So last year, you focused very much on margin rather than market share. Would you -- what has been your commercial policy since the beginning of 2020? Are you trying to follow the market? Or do you continue to favor margins?

No, we want to increase our profitability again in India. We are -- it is a very volatile market. We catch opportunities. We improve -- we decreased our cash cost. We decreased our logistics costs and take advantage of the good markets, which can lead to increase market share in some places and in case of profitability, everywhere.

Our next question comes from Brijesh Siya of HSBC.