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

Good day, and welcome to the Vicat Group First Half 2020 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Hugues Chomel, CFO of Vicat Group. Please go ahead, sir.

Good afternoon, ladies and gentlemen. I'm Hugues Chomel, Chief Financial Officer of the Vicat Group. By my side is Stéphane Bisseuil, our Investor Relations Director. Together, we will be presenting to you our 2020 first half results. Before starting the presentation, please have a look at Slide 2 where you can read our disclaimer regarding the forward-looking statement this presentation may contain. On Slide 3, you have the main points we will be addressing today, and I will begin with the highlights of the past semester on Slide 4. In the first semester of 2020, the group has demonstrated its flexibility and its responsiveness by taking steps from the outset of the pandemic to protect its employees, customers and suppliers and by launching strong measures to cut costs, control the working capital requirement and lower capital expenditures. We were able to smoothen the impact of the pandemic, demonstrating the resilience of Vicat's business model. We kept all production activities running at almost all sites to keep pace with market trend and seize any commercial opportunities by leveraging the strong relationship we've established with our customers. First half sales were EUR 1.3 billion, down 3.2% year-on-year due to the COVID-19 pandemic. All the countries in which the group operates have been affected with considerable differences from one region to another. India, France and Italy recorded a sharp fall in their sales from the end of the first quarter, followed by a rebound at the end of the first half, especially in France. This impact was partly offset by higher sales across all of our regions and a 1.1% scope effect owing notably to the full year consolidation of Ciplan in Brazil and small acquisitions in the Concrete & Aggregates business in France and Switzerland. EBITDA decreased 5.8% at EUR 213 million. This decline is mainly due to the 3.2% organic contraction and, to a lesser extent, a slight negative currency effect. Cash flow stood at EUR 175 million, up 1.3% on a reported basis and up 3.5% at constant scope and exchange rates. Free cash flow was EUR 100 million, up from minus EUR 54 million the first half of 2019. The group financial structure remains solid with leverage ratio at 2.49x compared with 2.95 at the end of June 2019. Finally, yesterday, the group entered into a 15-year maturity financing agreement structured as a U.S. private placement with a leading U.S. investor. This operation that will be disbursed to finance the 2010 USPP will contribute to extend the group debt maturity and substantially lower its financial expenses. Starting on Slide 5, we will move on to the presentation of the first half 2020 results. Slide 6 presents our simplified income statement. The group's consolidated EBITDA came to EUR 213 million, down 5.8% at constant scope and exchange rate and corresponding to a margin of 16.3% in the first half of 2020 compared with 17% in H1 2019. As we said before, during the semester, the group was impacted by volume contraction due to the slowdown in demand due to the pandemic. This has been partly offset by price increase passed notably in France, Switzerland, the U.S.A., Brazil and in Africa. In addition to the favorable drop in energy cost in the Cement business, the group also reaped the initial benefits of the cost-cutting plan, with savings netting almost EUR 13 million in the first half of the year. On Slide 7, exceptionally to help you sense the unprecedented period that COVID-19 presented, we've outlined here the group's monthly regional sales variation by region. You can see quite clearly the strong rebound in activity we are now witnessing. Slide 8 shows the variations in EBITDA between the first half of 2019 and the first half of 2020 by region. The group benefited from substantial improvement in EBITDA across the Americas, particularly in Brazil, and significant recovery in Africa supported by the improvement in the cement plant performance in Senegal and the ramp-up in the grinder in Mali. I will now be commenting the results by geographical region. I will begin with France on Slide 10. During the first half, the pandemic had a significant impact on the group's performance in France. Following a very sharp slowdown in March and throughout April, the situation gradually improved with the group recording solid business growth again in June. Even so, EBITDA declined sharply over the period as a whole, with the positive impact of lower energy costs and the initial benefits of the cost-cutting plan failing to fully offset the downturn in business levels. Lastly, it is worth noting that the group relocated its corporate headquarters in Isère effective October 1, 2020. Let us now move to Slide 11. Activity in Europe, excluding France, in the first half of the year takes into account starkly contrasting trends in Switzerland and Italy. The operating EBITDA margin on consolidated sales in this region contracted slightly to 20%. The Swiss market was not significantly affected by the pandemic in the first half, with consolidated sales moving higher by 3.7% at constant scope and exchange rate. EBITDA was stable. In Italy, the group recorded a very steep decline in its business as activity was stopped for several weeks during the first half. You may now turn to Slide 12 for our performance in the Americas. In both the United States and Brazil, activity level continued to move in the right direction owing to the robust local market in which the group operates despite worrying health-related trends. In the United States, conditions in the construction market remained broadly supportive despite the pandemic crisis. California benefited from a favorable base of comparison in the first quarter performance, which largely offset the impact of the severe weather condition in the Southeast. Against this backdrop, the group successfully maintained the price increases it introduced in cement in 2019 and implemented further increases in the Concrete business. In Brazil, the pandemic struck just as the macroeconomic environment was starting to stabilize. While certain regions seems to have been hit harder by the pandemic, the group has reaped the benefit of a fairly supportive industrial environment and been able to seize some growth opportunities by leveraging its efficient manufacturing base and the improvements made over the past 12 months. Let us now move to Slide 13 for our performance in Asia. Of all the countries in the group's geographical portfolio, India was worst hit by the pandemic. Strict lockdown measures imposed by the government led to the complete shutdown of the group's manufacturing facilities for almost a month before production and sales activities gradually resumed. The lockdown measures had also a very negative impact on the resumption of work on construction projects. These were affected by a labor shortage that prevented a more rapid and dynamic pickup in the sector. Given this environment, the group rapidly implemented a plan to cut and optimize its production cost in order to curb the impact of the pandemic crisis on the margin. Energy costs also dropped substantially in the first half. Overall, EBITDA margin on consolidated sales widened over the period to 23.6%. That's quite an achievement, and it illustrates the quality of our teams and of our industrial assets. In Kazakhstan, after a sharp increase in activity in the first quarter, the operating environment deteriorated in the second quarter as the pandemic crisis affected both the domestic and export markets. Please note that export markets have reopened in June. Please now move to Slide 14 for our result in the Mediterranean region. This region was again hit by the persistently tough macroeconomic and industry conditions. The pandemic crisis aggravated the situation in both countries, although its precise impact could not be measured. In this very difficult environment, the teams have clearly outperformed, leveraging the quality of the group's assets. In Turkey, sales totaled EUR 54 million, up 6% at constant scope and exchange rates and were up 11% in Q2. EBITDA was breakeven. In Egypt, the pandemic has amplified the effect of what was already an unfavorable situation with macroeconomic trends barely improving, severe logistical constraints and fierce competition. The group is pushing ahead with its work on both kilns to lift its operating performance. Finally, on Slide 15 for our performance in Africa. In this region, the environment remained positive despite the pandemic's substantial impact, which brought large government-funded projects in Senegal to a standstill. In the Cement business, consolidated sales advanced by 39%, thanks to the major improvement in the production performance of the Rufisque plant in Senegal and the ramp-up in the new mill in Mali. Selling prices also improved sharply as a result of the hike introduced in the third quarter of 2019 in Senegal. As a result of these factors and lower energy costs, EBITDA generated by the business surged 122%. The aggregate business in Senegal was held back by the stoppage of many government-funded projects, a situation made worse by the pandemic. We can now move on to the cash flow statement and balance sheet. On Slide 17, you have our financial position in terms of cash flow. Cash flow totaled EUR 175 million during the first half, representing an increase of 3.5% at constant scope and exchange rate. Capital expenditures during the first half came to EUR 122 million. Close to 1/3 of this amount relates to the construction of the new kiln line at the Ragland plant in the United States. Scheduled entry into service dates remain unchanged in the first half of 2022. This new installation will significantly reduce production costs, improve our carbon footprint and increase the plant's existing capacity. Given recent macroeconomic trends across the various regions, the group plans to resume certain investments that have been delayed as a result of the pandemic crisis. Capital expenditures is now expected to total around EUR 280 million over the full year. A significant portion of these investments will be supporting the group's low-carbon strategy and contribute to its energy transition goals. Lastly, the group's free cash flow was EUR 100 million during the first half, supported by -- in particular by a strong reduction in working capital requirements, strong improvement of the performance -- on the performance of 2019 when the free cash flow amounted to minus EUR 54 million. On Slide 18, you'll have the changes in our consolidated financial position. At the end of June 2020, the group had a solid financial structure. Shareholders' equity amounted to EUR 2.4 billion. It's important to note that the currency devaluation at the balance sheet date had a major impact on both assets and equity. Net debt totaled EUR 1.27 billion compared with EUR 1.4 billion at the end of June 2019. On this basis, the earnings stood at 53% at June 30, 2020, and leverage ratio was 2.49x. Adjusted for the impact of IFRS 16, which is the reference still used for calculation of covenants, gearing at the end of June 2020 stood at 44%, and leverage ratio was 2.38. Based on these factors, the group reiterates that it has secured the refinancing related to the due date of its 2010 USPP commitment. Its borrowing needs are covered by EUR 442 million in undrawn secured available and sufficient credit lines to meet forthcoming repayments in addition to the cash it has at its disposal. Covenants stated in its borrowing agreements are met. On Slide 19 now, yesterday, the group entered into a 15-year maturity, EUR 175 million financing agreement structured as a U.S. private placement with a leading qualified U.S. investor. The facility will be drawn down on November 30, 2020, to repay maturing U.S. private placement established in 2010. Given the fixed interest rate agreed of 2.07%, we will deliver significant financial expense savings for the group from 2021 onwards. Let's move on Slide 21 to the 2020 outlook. To begin, bear in mind that in 2020, macroeconomic condition in all the countries where the group is active are likely to be significantly affected by the COVID-19 crisis to varying degrees depending on health conditions and the governmental responses. On this basis, the upturn in activity levels, particularly in France and India; the decrease in costs for a total amount of EUR 51 million for the full year, mainly linked to the drop in energy costs expected to exceed 8%, representing a total impact of EUR 23 million; introduction of a structural cost-cutting program now expected to deliver EUR 28 million in savings; a clear focus on working capital requirement; and lastly, the scaling down of the original capital expenditure plan, should help curb the crisis impact on the group results and financial position. Taking all these factors, the lack of visibility and the high level of volatility, the group anticipates a moderate decline in EBITDA over the full year subject to the effects of any second wave of the pandemic might have. I remind you that our detailed outlook by country is available in our press release and that you may download on your website. So Marie, can we move on now to questions?

[Operator Instructions] We can take our first question now from Yassine Touahri of On Field Investment Research.

Yes. So a couple of questions. In France, it seems that you performed a little bit better in terms of volume than the market in the second quarter. Is it because of some of your competitor had to close some plants? But at the same time, it looks like your margin suffered quite a lot. Was it because of additional logistical costs? And could we see a reversal in the second part of the year where you could give back some market share and having better logistical costs? That would be my first question. And then my second question is that, could you give us a little bit of color on what kind of volume you can see in the month of July? Some of your peers are talking about sales growth in France, in Europe, in U.S. with good order book. And do you have notably a bit more visibility on what's happening in India?

Yes, thank you for questions. Regarding the French performance, we had indeed a strong rebound at the end of the quarter. To my knowledge, the market figures are published with a few months delay. So I don't them -- have them on hand yet. I believe that some differences that may arise may very much depend on the regional exposure and specifically on the type of market that you are addressing. The rebound in activity has not been even in all types of projects, has been more dynamic on small diversified projects than on large ones. So depending on what is your customer base in each region, it would depend. Regarding -- so I'm not able to give you any forecast on market -- on future market share as usually. Regarding the trends in July, you have to keep in mind that the situations are volatile. So far, we did not see any change in the trends that we have observed in June in most of our markets. It is -- and in India, as you know, from the press, there has been a lockdown, then there is some additional lockdown locally. This does not prevent the business to operate, and it has been recovering gradually.

We can now take our next question from Robert Whitworth of Exane BNP.

My first question is broadly around the pricing environment. I just wanted to know if you could give us generally an overview across regions how pricing is progressing. In the U.S., for example, how much of price hikes are sort of sticking and what the time line is there? And my second question is more on the situation in Egypt. Based on some of the commentary that I've heard from some of your peers, I just want to get a better understanding of the dynamics in that market in pricing and sort of how it's evolving.

As expressed in our press release, the pricing environment has been globally favorable. More specifically, we had a price increase in France. In Senegal has an effect of the one we placed last year in the first quarter. In U.S., again, this was the full year effect of the last year price increase in cement, has not been the price increase in cement in April as usual. We have postponed it to later in the year, and we will certainly do our best to pass it on. Egypt and Turkey has been more difficult with pricing being still low in Egypt. We have still a very similar situation to what we have experienced in previous year, which is a market which was not growing, still strong pressure addressed by the Army plant on the market, which is keeping prices low.

[Operator Instructions] And we can take our next question now from Brijesh Siya of HSBC.

Congratulations on a good set of results. I have 2 questions if I may. The first one is probably on France again. You talked about the difference between regions as well as end markets. If you could talk and elaborate a little more on that, which segment of the market is doing well and which is not, that would be helpful. And the second one is on India. Can you tell us -- you talked about some price increase in June. Can you talk about what's the magnitude and how much it fell in first half and how much time to recover now? And third one is probably on Kazakhstan. It had a good start then the pandemic hit and the things turned negative there. Can you tell us what's going on right now there? Were there any improvement you are now seeing there? Any visibility on how export is going on?

On France, my comment was mostly driven at the pace of recovery, where we did witness a more dynamic recovery on small construction sites compared with infrastructure. So typically, a large infra project like the Grand Paris or other ones of this magnitude, it restart more gradually, and small projects were quicker to resume as early as April. Nevertheless, in June, the activity has been very dynamic in all segments. So I cannot really say that now we will still observe a substantial difference. In India, we had a sequential -- the price increase in June indeed. And compared to the previous month -- again, as you know, we are serving a very broad geographical area covering most states of the South as well as Maharashtra. Obviously, as you very well know, those are very local markets with different dynamics. So it depends. Again, in India, we observed a client mix difference as well where we have the trade business resuming quite nicely and the non-trade business linked to infra projects being more difficult to resume. So making out an average price difference from all of that is not always meaningful. But indeed, we did observe a sequential difference from 1 month to the other. Oh, Kazakhstan. Sorry, I was about to forget that. In Kazakhstan, the Q1 was quite dynamic. After that, the country did implement quite stringent lockdown measures that did not block but slow down the activity. And at some point, Uzbekistan did close its border as well. This limitation has been gradually lifted, and now we are able to operate more normally and with business levels that are comparable to previous year.

And we can now take our next question from Benjamin Terdjman of Kepler.

Yes. I just have a few questions. First one is on the -- on your CapEx program. So you mentioned that you are scaling down your original plan, so -- which is already what you mentioned earlier. But now that actually, you have been quite resilient in the crisis. So does it mean that even beyond 2020, you expect to also reduce your CapEx level? I'll go after for the other questions.

Okay. You will. On -- we have been very careful about the pace of our investments in H1. As you have seen, against an original guidance of EUR 300 million, we did limit it to EUR 122 million in the first half, large part of it being the pursuing of the Ragland project as initially planned. Just as a reminder, it's an important investment for the group. It will reduce the operating costs, improve carbon footprint as well as boost the plant's existing capacity. Now we are looking at gradually releasing some of the CapEx we have postponed or blocked. We'll be very cautious doing that, looking and doing it proportionally as we see the visibility improving with the month hopefully. So we did show you -- you did notice this update to our guidance to EUR 280 million. And a large part of this additional CapEx are efforts toward energy efficiency, lower the carbon footprint and support our low-carbon strategy and energy transition. So we are really looking forward to be able to implement those as the visibility allows us to do. Regarding 2021, it's surely too early to give you elements.

Okay. So just another question on the working capital. So what can we expect for the second half of the year? Are there any one-off items that we can anticipate?

Working capital requirement is ongoing very -- ongoing efforts of every day everywhere, but -- to gain results, so we have surely increased the focus specifically on receivables. On some markets, we did move our payment terms to cash when the situation did command and we did surely increase the focus of teams, so we will not release this focus and continue the efforts. Obviously, the effect of working capital is fluctuating with the activities. So the effect of it is surely not as strong by year-end as the peak of activity in June. On top of that, we did use a non-reconstructuring (sic) [ restructuring ] program in -- at midyear in the context of the situation of the commercial paper program. We may or may not reuse that later in the year depending on the situation of the market.

Okay. What was the amount of the restructuring program?

It's about EUR 60 million, EUR 70 million -- between EUR 60 million and EUR 70 million.

Okay. And just one last question. Could you just explain us what is behind the increase in energy cost in Kazakhstan?

What you have to know is that the energy costs in Kazakhstan are far from the world market levels and do not behave typically at the same level as other markets. So they have their own dynamics. And so over years, they are a lot lower than -- and they are still a lot lower than world markets. So we cannot expect to have them follow the same trends.

And we can now take our next question from Tobias Woerner of MainFirst.

Just 2 questions if I may. They're sort of related. Number one, Africa, you saw some good price increases especially in Senegal. I look at data across the whole of Africa, and it seems to me as if the pricing situation seems to be stabilizing. Is that a fair reflection? And why do you think that is the case? That's number one. And number two is related, the Baltic freight rates seem to be going up from very, very low levels. Do you expect it to have an impact on imports into Africa?

So can you repeat please your second question, please?

The Baltic freight rate have been very low but, of late, have been going up quite strongly. Would you expect that to have an impact on imports into Africa, i.e., that they have to be priced more expensively?

Okay. Just -- so regarding price increase in Senegal, we did implement a quite significant price increase last year in Senegal after a long period with no price increase since it was controlled by the government for the last 3 years at least. And before that, by -- it was capped by the entry -- by new entrants. So this was kind of a recovery in a context where Senegal is a lot lower than most of the other African countries. So you cannot really do a parallel between Senegal and market prices and other African situations. Regarding the potential effect of freight prices, this -- there is today quite very little cement import in Senegal, first of all, because there is sufficient capacity there with 3 existing players. Secondly, there is custom duties on cement, which does not make it very competitive. So it will probably help produce with coal and combustibles, but I don't expect, in Senegal, a strong impact. On other African countries where I don't have limestone and don't produce chemical, it is obviously a different story.

And we can now take our next question from Pierre Rousseau of Barclays.

Just to follow up on West Africa. Very strong performance there, and apparently, it was without the support of the infra market and of aggregates, which are fairly profitable operations. So I was just wondering if you could comment on that and see if the outlook for that end market specifically could improve. The second question is on the U.S. outlook in your key states. What are you seeing in terms of the future spending of the local states? Because there's pressure on state revenues from -- in the aftermath of the COVID-19 crisis. So I was wondering if you had any color at this stage on the potential implications for California, Alabama and your other markets.