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

Ladies and gentlemen, good day, and welcome to the Vicat First Quarter 2020 Sales Call. Please note that today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Hugues Chomel, Chief Financial Officer. Please go ahead.

Good afternoon, ladies and gentlemen. I am Hugues Chomel, Chief Financial Officer of the Vicat Group. With me today is Stéphane Bisseuil, our Investment Relations Director. I will be presenting to you our 2020 first quarter sales figures. Before starting the presentation, please have a look at Slide 2 where you can read our disclaimer regarding forward-looking statements that this presentation may contain. Let us now move to Slide 3 to the key points at the end of March 2020. The group's performance over the first quarter 2020 was solid, despite a sharp slowdown at the end of the period in March -- in France, India and Italy. Consolidated sales came to EUR 615 million, up 2.6% in the first 3 months of the year and was stable at constant scope and exchange rates. We recorded positive price trends overall. Faced with the sanitary crisis, our group demonstrated its flexibility and responsiveness by putting in place from the outset protective measures for our colleagues, our clients and suppliers and introduced strong measures to cut costs, increase control of working capital requirements and reduce investments in line with the situation. Industrial and commercial activity was maintained on almost all sites, in line with the market evolution, and this has attenuated the impact of the crisis. Nevertheless, visibility remains particularly low for the rest of the year and the significant impact on first half results and ratios is to be expected from this exceptional situation. Before I move on, please bear in mind that unless indicated differently, I will be commenting performance in terms of constant scope of consolidation and exchange rates. Let's move to France on Slide 4. After a start to the year that saw strong trends under favorable macroeconomic and sector conditions, business activity slowed abruptly following the introduction of lockdown measures on 17 March 2020. Industrial activity was never halted. However, commercial activity has moved in line with the slow return as markets were stopped by the lockdown measures. In Cement business, operational sales went down 3% over the period. And Concrete & Aggregate business, operational sales went down 12%. In Other Product & Services business, operational sales fell by 6.8%. Despite sharp slowing in business level at the beginning of the lockdown in March, the activity is on gradually improving trends with the reopening of trading, and more slowly, of building sites. Let us now move on to Slide 5. Sales in Europe, excluding France, improved at constant scope and exchange rate across the region, driven by strong growth in Switzerland. This performance was largely -- has largely offset the decline recorded in Italy following the introduction of strict lockdown measures in March. In Switzerland, consolidated sales rose by 9%, helped by price increase and a much milder winter than in previous year. Business in this country continued as normal with no significant impact from the epidemic and sector condition. Cement operational sales grew by 12%, while Concrete & Aggregates grew 22%. In Precast business, operational sales fell 2.6%. In Italy, consolidated sales fell 15%. The impact of the health crisis was felt in a substantial drop in volumes. We may now turn to Slide 6 for performance in the Americas. Reported figures for the region benefited from the favorable effect of the consolidation of Brazil over the whole of the first quarter of 2020. In 2019, Brazil was consolidated from January 24 onward. In the United States, the macroeconomic and sector environment remained favorable. The strong performance enjoyed in California more than offset the unfavorable weather conditions in the southeast. COVID-19 epidemic had had no significant impact on the sector condition by the end of March. As a result, the group consolidated sales grew 11%. In the Cement business, operational sales grew by 15%. In the Concrete business, operational sales moved up 13%. In Brazil, consolidated sales were EUR 30 million, an increase of 12%, 24% on a reported basis. Condition in the industry improved gradually in an environment that was not visibly affected by the health crisis during the period. In the Cement business, operational sales were EUR 24 million, an increase of 11%, driven by significant increase in prices. In the Concrete & Aggregates business, operational sales were up 16%. Please now move to Slide 7 for our performance in Asia. The Asia region benefited from relatively positive overall macroeconomic and sector conditions in the early months of the year, although the impact of health crisis had contrasting effect from one region to the other. Thus, Kazakhstan benefited from favorable competitive conditions at the beginning of the quarter as cement producers operated by Chinese workforces were forced to shut down production due to Chinese lockdown measures. Inversely, the industry in India was completely halted from March 24 as a result of the government measure to tackle the pandemic. In India, the group posted consolidated sales of EUR 69 million in the first quarter of this year, down 15%. After a small increase in volumes at the beginning of the quarter, introduction of lockdown measures at the end of March resulted in the total closure of the business and the shutdown of all region production sites. As a result, over the quarter, volume dropped by nearly 10% and selling prices were down year-on-year. Please note that the group received authorization in the third week of April for the reopening of its production facility in India. Activity resumed immediately. Please turn to Slide 8 for performance in the Mediterranean region. The region is affected by the deterioration in the macroeconomic and sector situation in Turkey, although this is now stabilizing gradually. In Egypt, the security situation and the competitive environment remained difficult throughout the period. In Turkey, sales were down 1.4%. This slight contraction in the business level reflected the gradual stabilization of our macroeconomic and sector conditions, although this process was then affected by the sanitary measures. In the Cement business, operational sales moved down 2.6%. Operational sales in the Concrete & Aggregate business rose 12%. In Egypt, consolidated sales were up 5% at constant scope and exchange rates and up 21% on a reported basis as a result of a rise in the Egyptian pound. Finally, on to Slide 9 for our performance in Africa. In the Africa region, construction market is growing and has been supported by the price increase seen at the end of 2019. Against this background and helped by improved operating conditions at the Rufisque plant, the group was able to take full advantage of favorable sector conditions at the start of the year with the opening of new grinding station in Mali. In Cement, operational sales rose 34% in Africa. In Senegal, consolidated sales in aggregate business were EUR 7 million, a fall of 46% over the period as volume fell 43% following the temporary freeze on government contracts that began in the second half of 2019 and a transport strike in January and February. On Slide 10, we have a snapshot of our first quarter profitability that we've exceptionally decided to provide you with in light of the current circumstances. It is important to note that historically, and given the highly seasonal nature of the group's business, EBITDA in the first quarter is not representative of full year trend. Group's EBITDA in the first quarter was EUR 57 million from EUR 58 million in the same period of 2019. This performance reflects improvement in operating profitability in most regions, limited by the significant impact of the health crisis in France and India during March. On Slide 11, I'll turn to the changes in the group financial position at the end of March 2020. At the end of March, the group's shareholders' equity was EUR 2.5 billion, and net debt stood at EUR 1.4 billion. On this basis, and excluding IFRS 16, the reference still used for the calculation of covenants, gearing at the end of March 2020 was 46.6%, down from 47.4% at the end of March 2019. Leverage was 2.53 compared to 2.67 at the end of March 2019. Taking account of IFRS 16, gearing was 56.1% from 57.4% at the end of March 2019. Leverage was 2.65 from 2.85 at the end of March 2019. It should be noted that the group has confirmed an available financing lines of EUR 399 million, sufficient to cope with forthcoming repayments due. As we pointed out, Vicat Group has taken full measure of the situation and has proceeded with a set of adjustments that are outlined on Slide 12 and 13. The group rapidly deployed a package of cost-cutting measures in countries where business levels were significantly affected by COVID-19 epidemic. Thus, in France, India and Senegal, the initial measures in the reduction of fixed costs have already netted approximately EUR 24 million. Depending on the course of the epidemic and its effect on economic activity, similar or additional measures are likely to be implemented at pace in affected regions. Also, the full year impact of the decrease in fuel costs, excluding volume effect, is expected to be EUR 23 million. Lastly, with regard to the working capital optimization measures implemented will significantly reduce working capital at June 30, 2020, when compared to June 30, 2019. Moving now to Slide 13 to the adjustments we've made to our investment strategy. At present, the group has put a freeze on its new investment projects. It is nevertheless continuing its existing strategic investment, notably in terms of energy substitution rates and renewal of industrial facilities. Thus, a new kiln project at Raglan in Alabama is continuing. Other investments have been suspended for the time being, pending better visibility and future conditions in each of the regions concerned. Considering all of these factors, the cash outflow for industrial investment is expected to be at a comparable level to that of 2019. To conclude now on our updated 2020 outlook, I invite you to move to Slide 14. I will read the beginning of this. In 2020, macroeconomic conditions in all of the countries where the group is active are likely to be significantly affected by COVID-19 crisis to varying degrees depending on health condition and government responses. At present, business is conducted within the strict framework of procedures adapted to the public health conditions in each country where the group is present. Within this framework, it is important to note that 12 countries where the group operates have been affected by the COVID-19 epidemic, sometimes with timing differences and the intensity of its impact. Business levels are highly volatile. The sharing of experience between countries allows good practice and operating modes to be introduced to help meet the demands of the situation in each country and ensure business continuity where this is allowed. On Slide 15, you have the conclusion of our outlook. Gradual upturn in activity, particularly in France and India, falling energy costs, the introduction of an ambitious cost-cutting program, close attention paid to working capital, and lastly, the scaling back of our initial capital expenditure plan are all factors that will help limit the impact of the crisis will have on the group's results and its financial situation. Given all these factors, the lack of visibility and the high level of volatility created by the current conditions, the group expects a decrease in EBITDA over the full year. Finally, I remind you that our updated 2020 outlook by market is included in today's press release. You can consult on website at vicat.com. So John, we can move on to questions.

[Operator Instruction]

[Foreign Language] Jean-Christophe Lefvre-Moulenq. I have -- can I ask 2 questions? First one, could we have more flavor on the ongoing price hikes in California and also Alabama are expected to stick in this difficult environment? Secondly, could we have more flavor on the ongoing situation in April and maybe early May, both in France and in U.S.? And also maybe a third question, where do we stand with Egypt? Do we -- some of your competitors try to increase the prices end of year 2019, but you didn't speak where do we stand to date in volume, pricing and competitive situation in Egypt?

Regarding price hikes in U.S., you may have heard already that quite a few of our competitors have announced that they will not implement the price increase at the beginning of April as it is usual in this market, and as we did announce previously. So there was no price increase in April yet. Nevertheless, the previous price levels are sticking. This is for Cement. In aggregate, the situation is somewhat different as it is on a contract base and that most contracts increased escalation costs, and the situation is not different from one regional market to the other on this aspect. And regarding the ongoing situation for France and U.S., I can give a quick update and come back on a few elements that we have in the outlook. We have had 3 markets that have been seasonally impacted by the crisis and response measures, which are France, India and Italy. In France, after a very severe drop in volumes at the end of March, there has been a gradual recovery in business level that has been continuing consistently up to now and we are observing in the recent days, encouraging levels of activity. Nevertheless, I would like to remind you that this is what we observed. These are not established trends that we can extrapolate for now, even the uncertainty of the situation. Specifically for France, let me point out, and this was publicly released in the press last week, that the different regions were affected differently by the crisis. And apparently, the eastern part of France has been so far more resilient than other parts. So group probably benefited as well from this situation. In U.S., at this stage, we have not observed any significant impact of the crisis and the activity. The construction industry was considered as an essential business and as such, was allowed to continue to operate. So this has protected the construction industry and sites are going on. For India, since it is a major market, I can address the situation as well. We had a complete shutdown from end of March to April 22, then we were able to resume activity, and we are seeing positive signs in the early days, the last day of April and early day of May. So it's still early to tell whether this is speaking for the future, of course. Regarding Egypt, obviously, the business trends that were difficult before are not very different. I mean the consumption level has not increased. So we have done volumes in Q1 that are somewhat better than previous year, but at very low levels historically. And we don't see a drastic change in price levels. Indeed, they tend to be lower from Q1 to Q1. And the small increase that we can see here or they are not sticking. And we are still holding the same position.

And our next question comes from Sven of ODDO.

It's Sven Edelfelt from ODDO. I would have a first question on your covenants. Can you maybe elaborate a little bit about your covenant given the context? And then the second question would be again on France and India. Can you maybe give us what's the current situation exactly? What's your current level of activity versus last year? Are you, let's say, flat versus last year at the end of last week? Or are you down 20%? Any indication would be very much appreciated.

Okay. Regarding covenant level, of course, you understand [indiscernible] private contract and they are not publicly available, so we did not publish them historically, and this is not changing. As mentioned, we have a leverage at 2.5 at the end of March, which is somewhat below what it was a year ago. Obviously, our expectations on the 2020 EBITDA will de facto apply more pressure on the covenant as you may understand. And we have taken adjustment measures on working capital requirement and on CapEx that are aimed to ensure compliance with covenants. So that's where we stand. On France and India, obviously, [indiscernible], and so I can give you -- or reiterate the indication I gave a few minutes back. In France, we started from very low levels at the end of March. We did observe a constant improvement through April and early days of May. We are still below previous year level, but we are coming closer to it. In India, obviously, the restart has been a lot more recent. We are still in a situation of lockdown that has been actually extended further into May, but with some specific authorization for construction site to resume. So we are gaining back some activity, but far from previous period level at this stage.

And our next question comes from Josep from Kepler.

Josep Pujal from Kepler Cheuvreux. I have 3 questions, please. The first one is on the energy bill. Could you remind us how much was it, the total energy bill, in 2019? It is to compare the EUR 23 million of decline that you expect this year. My second question is on the price increase in U.S. aggregates that you mentioned. Could you be more specific and give us a range or a figure? And the third one is on France and the level -- the current level of activity in France. I had seen a -- I would say, report or a poll made on 5,000 construction sites, which was saying that last week, only 22% of them reopened. So there is 78% which were still closed. That was last week. Your data seems to be very different from that. Are you -- is it what you are suggesting that the level of activity you see, it's very far from that? And maybe the easiest way will be, if you give a range or, yes, if you are more specific about the comments that you make on this market, please?

Yes. First, energy bill. The energy bill last year, I think, was -- globally fuel plus electricity was over EUR 300 million. And the indication we gave on the decrease of fuels is EUR 23 million for fuels only.

Okay. So it's a double-digit decrease in fuel only?

Right. No, and -- but this does not include the volume effect, right, that you will need to factor in. I'm not sure I do understand your second question regarding price increase in U.S. We did not...

U.S. aggregates. Yes, if you have the figure. Prices are growing by how much, 2%, 3% or 5%, 6%?

We are not having aggregates in U.S. region.

Sorry, ready-mix, excuse me. Not aggregates, ready-mix?

No, I'm not able to provide a figure, sorry.

Okay. Because you talked about escalation clauses, right?

Yes, right. Right. But this is -- it is contract by contract, and I don't have a global figure to say.

Okay. But the figure is a positive one, yes? It is...

It actually is.

Okay. Okay. Okay. So that was the second one. And the third one was on France, if you could be more specific?

Actually, I don't have the poll you're referring to. The figures I saw actually last week were actually more substantial than this one. And indeed, we are far away from the level you are suggesting in cement and as well in -- local activity has been recovering more slowly in ready-mix concrete and aggregate. They are above that figure.

Okay. But you have -- you do not have a figure on your own or a range that you would like to share?

No. I think, in that case, I would have put it in the press release.

I understand. Okay.

And our next question comes from Brijesh from HSBC.

Three questions, if I may. So the first one is on France. So you talked about you're continuing your plants and -- while positive demand was virtually not there in the market. So now, we are still in a low demand environment. How is your inventory position looking like? So will you be in a position -- I mean will you be forced to close the plants for some time in May just to make sure you don't have, what you call, inventories piling up at your plant level? So that's my first question. And the second one is on the EUR 24 million cost saving you talked about. So is it a temporary one? Or it's going to -- it's just because you've closed the plant, there are a couple of labors who were on a subcontractor or temporary basis, so we have stopped that payment? Or is it going to be recurring? And is this number an annualized number? And the third one is on CapEx. You're scaling back your CapEx to -- at the level of last year. So the reference point, could it be the EUR 290 million? Because if I recollect earlier in the year, you were talking about EUR 300 million plus finance lead of EUR 50 million, so EUR 350 million, I was building in. So if you can clarify that, that would be great.

Yes, of course. So regarding France activity level, when the lockdown measures were implemented in France, we were coming out of winter stoppage, so with relatively low level of inventory in our plants, but all plants ready for the full season. We -- so we were able to continue production in our plants. We will, of course, have inventory management to match the demand as it is in May and June, but we are not expecting long shutdown of kilns. And again, this is a pretty normal situation that we can -- we are facing customary at the beginning of high season. Regarding the cost-cutting measures, we have implemented measures that will save us EUR 24 million on the total 2020 year. We have -- we did not proceed to import -- reduction in workforce. We have frozen aisles, temporary contracts, external contractors use when it was adequate in different countries where government scheme for temporary lock out. This is dedicated to save costs this year, mostly. And you have to bear in mind that depending on the country, we have activity levels that are very different. And in quite a few countries, they are still quite strong. So we manage our cost and the cost-cutting policy on a country-by-country basis to adapt to the regional activity levels. And we are flexible and we'll continue to do so going forward, which is we can expand the scope of measures to countries that were to record a decrease if they are already doing well today. So that's what I can tell you on these measures. On CapEx, we are referring to disburse CapEx. But last year, we were somewhere above 200 -- we were between EUR 230 million and EUR 240 million, and it's what we are guiding the disburse CapEx, too.

And our next question comes from Pierre from Barclays.

The first one is on working capital. You seem pretty confident in the indication that working capital at the end of June will be lower. So I was wondering what's behind that? If I understand correctly, it's quite important because the lower working capital and lower CapEx are the main things that you're pointing on to respect your covenants. And the second question, and maybe it's a little bit early, but I was wondering if you had any insights as to what the pricing strategy could be in the recovery phase, especially in the emerging markets where we've seen weakness like India in Q1?

Well, working capital is a hard, hands-on daily work everywhere. So we are working everywhere with our operational teams breaking down our objectives entity by entity, level by level and to make sure we stay where we should be. And again, it is a very local action since the business levels are different from one country to another. So we try to be as pragmatic as possible to be -- to contain working capital, but not hamper the development of the business. So that's a fine trail, but we are on it and confident that we will deliver. Price strategy going forward. This is actually a difficult indication. So -- I mean it is very volatile today, especially in markets like India that now just reopening for 2 days, and where visibility and the underlying [indiscernible] is not very clear, and that's the reason behind giving no guidance. But generally, we always try to push prices one way if there's room for it.

Our next question comes from Tobias from MainFirst.

Yes, Tobias Woerner here from MainFirst. Two questions, if I may. Firstly, with regard to Turkey, if you could give us a little bit more flavor, you have given us some indication in the presentation, but what's happening of late? And also obviously, Turkey has suffered already over a number of years now. Whether you feel that COVID could take that further down or whether the situation is such that it actually should remain stable at a low level or come off a little bit? The second question is around Africa. Your markets in Senegal, Mali and Mauritania. When I look at data out here, last year prices in Senegal were about $108. You talked about a significant price increase. Is that high single digit? Is that double digit? Can you give some indications here? And then Mali and Mauritania prices seem to be quite high, quite significantly -- or quite a bit higher, 155, 152, respectively. They deteriorated a bit in 2019 versus '18. What is the price trend there? What are you experiencing there at the moment?

Okay. On Turkey, as we mentioned, we have observed business trends that were very comparable to the ones we had in the last quarter of 2019, with relatively limited effect of the current COVID crisis at this stage. I mean, no effect on Q1 and no measurable effect in the recent weeks. Nevertheless, we don't see, obviously, a quick recovery as it is communicated before. It is still early to tell whether the health crisis is over. I will stay away from any forecast on that. And it is difficult to compare the trends at the moment, since, as you know, Ramadan has started end of April compared to end of May last year. So we are entering in this traditionally lower level of activity for a few weeks, so it's difficult to tell what the trends are. We did not observe any sharp modification upward or downward so far. Regarding Africa, situations are quite different from one place to another. Regarding cement in Senegal, there has been a price hike last year that was effective in the last quarter that was representing about 10% price increase. So we are experiencing the full year effect now. There has been a new tax created that will limit part of this price increase in the coming weeks. And basically, it is back to 8%. Price in Mali and Mauritania. You have to understand that situations are very different there. Since there is no integrated cement plant there. So clinker has to come. And there is -- so the prices on this markets is reflected on the cost to bring the clinker to the different facilities and the cost to operate, which is rather high in each of this market. But prices have gone up slightly at the end of last year in Mali and are stable at the moment. Just one word on the Mali market, we have commissioned at the end of last year, the new grinding unit. And it has been starting operation quite successfully in this first quarter, and it is contributing substantially to the growth we are enjoying in West Africa at the moment. But only for a minute to touch a point you did not mention, but which is worth having in mind regarding Senegal, which is the Aggregate business, where actually this business was very dynamic last year until mid of last year, mostly driven by public infrastructure projects. There is quite a few projects still scheduled, and we have quite a good order book, but the project has been frozen by the government for not financing. So we expect this to resume at some point, but we have absolutely no visibility of when, and it has been already quite a few months since it has been frozen. So for now, our activity is suffering.

Okay. I mean, in general, do you feel that Africa or particularly West Africa is now coming out of what was a number of difficult years, or at least stabilizing?

Well, as you may recall, part of all difficulties last year were linked to the fact that we did not -- we were not allowed to increase selling prices for quite a while. So this has been done. And obviously, this has helped for the recovery of results. Secondly, we have experienced last year quite a few problems with our own plant. And I must say that all the action plans that were conducted last year has been providing us with good result. And the plant has been operating a lot better this year, and this has translated into better results. So I think we are set for better results. Now it will depend very much on the business trends. But as we said, we are still dynamic for Q1 and even in recent weeks, again, with little visibility of what's coming up.

And our last question comes from Yassine from On Field Investment Research.

I hope that all of you are safe and well. So my first question would be regarding infrastructure funding. Martin Marietta in the U.S. yesterday suggested that they see a potential decline in the funding for the Department of Transportation in the U.S. of 30% in the next 18 months because gasoline taxes revenue are coming down because nobody is driving. And what's your view on infrastructure funding? I understand that the industry is trying to get some money from the $2 trillion stimulus to offset this shortfall. There is also an election, a lot of political will, but it's a little bit unclear. It would be very useful if you can give us your thinking on this market. That would be my first question.

Well, I move to the extra elements that you included in your question. Indeed, [indiscernible] revenue impact that is fast. I mean I don't have the article, but I believe there's quite a few reports on the decrease of traffic and the decrease of revenues. This is obviously very temporary since the recovery of the [indiscernible]. Confinement is coming through and so activity will be recovering. I believe there is a lot of political will to sustain infrastructure. This will probably come through. However, our goal will be [indiscernible] is very difficult to tell at this stage. But we certainly expect some recovery, but totally more '21 than anything else. It is difficult to see it at the moment.

And the 30%...

[indiscernible] I don't have it in front of me.

And then my second question would be the same in France. Do you see local authorities facing some shortfall in revenues. And do you think that the French government could help offset this potential shortfall?

I have no report -- no such report on the shortfall.

And my last question would be, it looks like in the first half of 2020, you gained a lot of market share in Kazakhstan. Is it something that is sustainable, medium term? Or would you expect to give back some of this market share when your competitors are able to operate again?

We had a very good first quarter. Obviously, this is partially nonrecurring. But the volumes are not dedicated only to the capital market. We -- as you may know, we have quite good logistical tool with much better environment that allows us to adjust to the market conditions, varying during winter. We have been able to serve export market through Uzbekistan, Kazakhstan as well as the domestic markets. So the full volume rise that you are observing is not only domestic market share. And obviously, there was some excess stock, so we served the market. When they come back, we will serve the market again.

Ladies and gentlemen, that does conclude our question-and-answer session.

Okay. Thank you. This concludes our call for today. I'd like to thank you all for your interest in Vicat, and [Foreign Language]

Ladies and gentlemen, this does conclude our call today. We do appreciate your participation. Hope you have a great rest of your day. At this time, you may disconnect. Thank you.