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

Good day and welcome to the Vicat Group 9 Month Sales Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Hugues Chomel, Group CFO. Please go ahead, sir.

Good afternoon, ladies and gentlemen. I am Hugues Chomel, Chief Financial Officer of the Vicat Group. On my side is Stéphane Bisseuil, our Investment Relations Director together we'll be presenting to you our 9 months 2020 sales figures. Before starting the presentation, please have a look at Slide 2, where you can read our disclaimer regarding the forward-looking statements that 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 period on Slide 4. Vicat Group's performance of over 9 months of 2020 is demonstrated resilience and its tremendous ability to capture growth opportunities arising in its market. I remind you that in the 12 countries in which it operates, the group has remained at all times fully focused on ensuring the health of its employees, customers and suppliers by applying strict procedures adapted to the public health conditions. This emphasis on strict procedures has enabled the group to continue operating at all times, except when forbidden by local authorities. As a result, the impact of COVID on the group's operating profitability was eliminated by the end of July, and the group has seen good momentum, particularly in most recent operations in India and Brazil. As a result, EBITDA grew by 12% and EBIT by over 20% over the 9 months period as the group took advantage of lower energy costs and continued to -- its efforts to reduce its structural costs. In addition, its balance sheet liquidity was strengthened by renewal of credit lines on excellent terms. Note, the group appointed a second Chief Operating Officer, Lukas Epple; Director of Strategy and 2 new Deputy CEO; Christophe Brenger; Director of Human Resource and myself. Starting on Slide 5, we'll move on to the presentation of the 9 months sales figures. Slide 6 outlines the regional variation in consolidated sales. During the third quarter, consolidated sales came to EUR 762 million that represented an increase of 6% on a reported basis and up 12% at constant scope and exchange rates. In line with trends in June 2020, this rise was driven by a solid upturn in activity levels once the strict lockdown measures were lifted, and by a catch-up effect over the summer which delivered a boost to all group's activities. Note, over the 9 months period, consolidated sales included a negative currency effect of minus EUR 52 million. I will now be commenting the sales by geographical region. We'll begin with France on Slide 8. Following a very sharp slowdown in late March and throughout April, the situation has gradually improved with the group recording solid business growth again in June, which continued into the third quarter at plus 7.7% at constant scope. The Cement business, the group recorded a healthy upswing in June, which carried forward into the third quarter, with operational sales advanced in 19.1%, selling prices moved higher in the domestic market. Concrete & Aggregates business dipped 10.4% by way of comparable volume decline. Inversely, average selling prices moved higher and during the third quarter, business recorded a healthy recovery. The Other Products & Services business, operational sales dropped 6% even as business picked up by 5% in the third quarter. Let's now move to Slide 9. In Switzerland, the group's consolidated sales climbed 3.5% as business there continued with no major impact on sector condition arising from the pandemic. The Cement business, operational sales grew 3.7%, thanks to a steady improvement in volumes and selling prices. Concrete & Aggregates business, operational sales rose 9.9% and [indiscernible] volume rose significantly in a more competitive environment, but so our average selling prices moved lower. Higher aggregate prices helped to make up for a small decline in volumes. In the third quarter, business grew by 4.3%. Precast business sales posted stable sales. In the Italy, consolidated sales declined 16.2%, resulting from steep volume contraction, partly offset by a clear improvement in selling prices. In the third quarter, conditions improved significantly. You may now turn to Slide 10 for performance in the Americas. Reported figures for the region take into account as full 9 months consolidation of Brazil. The United States, the macroeconomic and sector environment remained favorable throughout the 9 months period. Group consolidated sales rose 4.2%. During the third quarter, activity levels were mildly affected, up particularly in Concrete by unfavorable weather condition in the Southeast and by the Californian wildfire. Even so, sales rose almost 2%. In the Cement business, operational sales rose 9.4% with volume advancing well, especially in California. Selling prices also hedged higher and third quarter activity levels remain a bit [indiscernible]. Hike in selling prices in California initially planned for April, but then pushed back as a result of the pandemic situation while in the end introduced in September and is expected to have positive impact going forward. In the Concrete business, operational sales were stable with price hikes recorded in California and Southeast taking up our volume contraction, especially in the Southeastern region. Third quarter sales were down as a result of lower volumes in California caused by the impact of more restrictive public health measures in the region, offset partially by higher selling prices. In Brazil, consolidated sales came to EUR 113 million, up 43% at constant scope and exchange rates, plus 15.5% on a reported basis. PBT levels accelerated even more during the third quarter at plus 75%. Cement business, operational sales were EUR 93 million, an increase of 54%, driven by a strong improvement in volume and selling prices. Concrete & Aggregates business, operational sales came to EUR 13 million, an increase of 32.6% with an increase in volume and prices, particularly in Aggregate. Let us now move to Slide 11 for our performance in Asia. In India, the strict lockdown measures imposed by the government had a major impact on business, particularly during the second quarter. Activity levels have since picked up with a very gradual start-up in construction projects. [indiscernible] the group posted consolidated sales of EUR 195 million in the first 9 months of 2020, down 11.6%. Trends reflect a volume decline offset to some extent by firming-up in average selling prices since the second quarter. In the third quarter, activity levels picked up very substantially. Sales grew 16.9%, thanks to a significant increase in selling prices and volumes that led to record levels of profitability despite the effect of a strong monsoon. Consolidated sales in Kazakhstan came to EUR 51 million, up 1.2%. Volumes moved higher throughout the period, making up for a slight erosion in the selling prices. The third quarter sales advanced 3% and selling prices firmed up. Please now move to Slide 12 for results in the Mediterranean region. In Turkey, despite the pandemic crisis and continuing depreciation in the Turkish lira since August, 2018 that continue to affect the macroeconomic and sector environment, the recovery in the construction market remained on track. Sales were up 10% at constant scope and exchange rate, down 8% on a reported basis. The Cement business, operational sales was 10%, a firmer trend in the second quarter continued into the third, pushing operational sales up by 15.5%. Operational sales in Concrete & Aggregates business rose 15.2% and 19% during the third quarter. In Egypt, sales totaled EUR 33 million, up 5.2%. Pandemic accentuated the effect of what was already an unfavorable situation with macroeconomic trends barely improving, severe logistical constraints and fierce competition. Volume rose by over 16%, but were still at low level. Selling prices continued to fall as a result of the pressure created by the Army plant. Finally, on Slide 13 for performance in Africa. In Africa the group reaped a benefit of a favorable sector environment despite the pandemic crisis. Fourth quarter trends remained on track with sales advancing 26% despite the weather conditions. The Cement business, operational sales grew 36%, notably with -- supported by the ramp-up of the grinding station in Mali and operational improvement on the Senegalese Rufisque plant. Performance reflected a strong increase in cement volumes, I think prices in Senegal also rose significantly, given the price increase introduced in 2019. Third quarter operational sales moved 16% higher despite less favorable winter than in 2019. And what was an expected decline in selling price as a result of the introduction of a new tax on cement. Senegal, Consolidated sales in the Aggregate business were EUR 18 million, a fall of 42%. Volumes dropped as a result of the shutdown of numerous state finance construction project amid the pandemic crisis. We can now move on to profitability performance and financial position. Slide 15 now. As an exception to our usual practice, the group has decided to publish the EBITDA and EBIT generated in the first 9 months of 2020. Hence, Group EBITDA came to EUR 403 million in the first 9 months of 2020 versus EUR 373 million in the same -- in the end of 2019, representing an increase of 8.1% on a reported basis and 11.7% at constant scope and exchange rates. Group EBIT came to EUR 201 million in the first 9 months of 2020 versus EUR 175 million, in the same period of 2019, up 14.6% on a reported basis, plus 20.5% at constant scope and exchange rates. This increase reflects a continuing improvement in operating margins across the Americas, Africa, Europe, excluding France and Asia. The clear rebound in activity levels in France during the third quarter was not enough to make up for the decline in the first 6 months, and so profitability was lower year-on-year over the first 9 months of the year. Mediterranean region was alone in recording a further decline in its operating margin for the third quarter and also the first 9 months. On Slide 16, you have the changes in our consolidated financial position. At September 30, 2020, the group had a solid financial structure with a strong deleveraging. Its equities stood at EUR 2.4 billion, and its net debt at EUR 1.3 billion versus EUR 1.4 billion at the end of September 2019. This basis, gearing was to 53.1% versus 54.9% a year ago. Leverage ratio was 2.27x compared with 2.88x [indiscernible]. On Slide 17, a quick word on our recent refinancing operation. The group has renewed CHF 200 million syndicated loan and signed an additional EUR 50 million bilateral line of credit. These 2 facilities have the 5-year maturity. After taking these 2 lines into account, the group has further strengthened liquidity of its balance sheet and has confirmed unused financing lines of close to EUR 0.5 billion. Let's move on to Slide 19 to the 2020 outlook. Our updated outlook states subject to any development in the public health situation and weather conditions at the end of the year. The group now anticipates a marked growth in its EBITDA at constant scope and exchange rates over the full year taking into account. A recovery in activity levels, especially in France and India and strong performance in Americas and Africa regions. A 8% reduction in energy costs estimated impact of EUR 24 million, excluding volume and currency effect. The program to cut structural cost by an estimated EUR 28 million. In addition, in order to reinforce its financial strength, the group is focusing clearly its attention to reducing its working capital requirement and keeping a tight grip on its capital expenditure. Capital expenditure is now expected to total around EUR 280 million over the full year. I remind you that our full press release is available on our website. So this concludes today's presentation. Kevin, we can now move on to questions.

[Operator Instructions] Our first question today comes from Jean-Christophe of Lefèvre-Moulenq.

Do you hear me Hugues?

Very well.

Excellent. [Foreign Language] I have luminary remark and 3 questions, if you don't mind. My luminary remark and probably it is the same for my colleagues. We are deeply regret that the Vicat didn't publish the table -- the breakdown table between activities and regions anymore as it was the case until end of 2019, would appreciate that if Vicat could publish it again, but it is up to you, but it will be very helpful. Second -- first question. In France, the sales growth over the third quarter was 2.1% with these [disappointing] figures for Aggregates and Ready-Mix Concrete, what is the reason? And do all things being equals, would -- will you be able to improve this number over the fourth quarter? My first question. Secondly, it Egypt, could you repeat the volume mix -- the sales growth effect over the third quarter? And maybe give us an update of the competitive situation across Egypt. What is now the market share of Vicat? What is the market share of your main competitor, the cement plants managed by the Army? And finally, maybe is the price hike in U.S. sticking or not?

Thank you for your comments and questions. I believe we try to provide very detailed information by active -- countries and activities, and I'm not sure that all payers provide you the same granularity. So we do our best, and we'll keep doing it going forward. On the sales growth in France, you indeed pointed out that Ready-mix concrete and Aggregate has not as brilliant as Cement. This is mostly reflects the trend of recovery. But as you probably know, as first started through the distribution and bag consumption, and then on small construction sites, mostly served by independent Ready-mix Concrete players and then on larger construction site, mostly served by majors. And so indeed, the Ready-mix Concrete operation did grow less and later stage than cement, which is first distribution and then independent players. So we believe this will level out with time as we go farther in some recovery, hopefully. In Egypt, as you understand, the situation is still relatively complex with a market which is not going where -- but has faced this year, additional headwinds with the pandemic, we have a temporary ban on construction permits as probably know, but has been lifted recently. In this context, our plant has been continuing to recover more normal level of activity, but still has at a relatively disappointing level. At the same time, given the fact that only plant is weighting on market prices and is limiting to market prices at predevaluation levels. We are not pushing for market price -- market share, sorry. And in the U.S., yes, the price increase that was implemented in October is picking -- in September is picking up.

Excellent. So just a follow-up question. 2.1% was consolidated sales growth over the 9 months. Could we have a split between the volume and pricing, maybe?

There is a limited price effect you are speaking about France, right?

No, no. Consolidated sales, it's on the Vicat level, consolidated Vicat level 2.1% growth for the group over the 9 first months.

For global percentage price does not make much sense to me.

The next question comes from Brijesh Siya of HSBC.

I have 2 questions from my side. And the first one is on India. I've seen a strong rebound in activities in the Q3, and we hear that the prices were pretty strong in third quarter and going into Q4 as well. If you could say a little more detail about how much is the price and volume impact of that 17%? And how things are evolving as we speak now? And similarly, if you can give a little more granularity about Brazil market? It seems that, that market is quite hot and COVID seems to have not impacted that at all. So if you can give a little more color on that as well?

Thank you, Brijesh. I'm sorry, I'm not sure I got the second half of your question, but I will already give an update in India and let you reformulate your second question later on. On India, as you know, the construction market did tune very gradually and so did our activity. So the recovery in volume and prices is -- came up with a changing mix, both on commercial channels because it started a little bit similarly what I was saying on France earlier. It started originally to the trade segment and then gradually, the nontrade did pickup pace as well. And with a changing geographical mix as well, initially it resumed in the rural area closer to the plants and then progressively into the metros and lastly, in infrastructure projects. So infrastructure programs are still ramping up, and will -- are supporting the growth going forward. So there is an improvement in market prices, invoice to the customer, but there is as well, during this third quarter, a favorable mix effect, both geographical and channel wise. Could you remind me your second question, please?

Sure. Just a follow-up on India first. Would you be able to split that number into volume and price? I know there's a mix impact coming in there, but how much would that be in terms of volume?

Brijesh, it's Stéphane speaking. In terms of volume, as you probably seen in H1, we had a strong decrease in volumes. We had a nice catch-up in Q3 with increase of volume, which was slightly over 9%.

Understood. And my second question is on Brazil. If you could elaborate a little more about how the market is behaving and especially your regional performance there?

There is multiple factors in this good performance. One is surely a strong recovery of the market that is -- has been further helped by the government help to the informal sector, but has been -- but in May and has been continuing and it's still, to some extent, continuing into Q4. So this has supported bag consumption, a small extension or maintenance projects that people are doing. And so the market has been very dynamic in volume. At the same time, I think there has been -- we did implement there very early in the pandemic prices, the lesson learned in other geographies. So all teams were ready to operate the plant during the full time. We did as well benefit from all the work done since the acquisition on reorganizing the commercial team on upgrading the plant and the performance. And there has been as well -- and we have been available to serve this local needs. So I think it went well all in all.

If I may just add 1 more question? It's regarding energy cost. So this year, obviously, you had a big benefit around 8% reduction. Thinking about next year, have you started negotiating rates for next year? Or have you contracted anything for next year as well?

It's a little early to speak about next year. But obviously, we are continuously buying forward part your consumption and hedging our position on combustible. So this is an ongoing effort and obviously, in this current situation as well. So that's moving the movements both ways when it comes down or when it goes up.

Our next question comes from Deepak Kumar of Citi.