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

Hello, and welcome to the Vicat full year results call. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Mr. Guy Sidos, Chairman and Chief Executive Officer of the Vicat Group to begin today's call. Thank you.

Thank you, Jess. Good afternoon, ladies and gentlemen, and welcome to our 2020 full year results conference call. Guy Sidos speaking, and today with Hugues Chomel, Deputy CEO and Chief Financial Officer of the Vicat Group; and Stéphane Bisseuil, our Investor Rations Director. Before starting the presentation, please have a look at Slide 2, where we can read our disclaimer regarding the forward-looking statements that this presentation may contain. On Slide 3, you have the main points we'll be advising today, and I will begin with the highlights of the past year on Slide 4. Thanks to our employees' tremendous effort and commitment. The Vicat Group strengthened its position in 2020 amidst the unprecedented current pandemic. Our resilience and flexibility allowed us to make organizational changes in order to reconcile our competing imperatives of keeping everyone safe and healthy, unlocking savings and making rapid adjustments such as relocating our Paris head office to L'Isle d'Abeau in the Auvergne-Rhône-Alpes region. Towards the year, we made improvements to Vicat's governance and stepped up our environmental and digital transformation programs. Given the strength of our cash generation at 12.9% at over EUR 460 million, we were able to resume key productivity investment programs for the future. Despite the adversity we face, our teams, of course, all of [indiscernible] region successfully delivered higher production efficiency level, grew our revenue by plus 5.5% and met market demand cost effectively, paving the way for a plus 10% increase in EBITDA and plus 17.5% rise in EBIT. On the basis of this full year 2020 results and confidence in the group's ability to pursue further development, the Board of Directors decided to propose maintaining the dividend at EUR 1.5 per share. Starting on Slide 6. We'll move on now to the presentation of the 2020 figures. Slide 6 presents our income statement. As I pointed out, our business grew well in 2020 with consolidated sales reaching more than EUR 2.8 billion marked by a plus 0.7% cap effect and unfavorable currency effect of minus 3.7%, representing a negative impact of minus EUR 105 million over the full year as a result of euro appreciation. And lastly, strong organic sales growth of plus 5.5% across all regions except for France. In 2020, EBITDA margin widened by 0.7 points to 19.9%. For the full year, consolidated third net income totaled EUR 172 million, at plus 7.7%. The improved performance in Brazil and India gave rise to a significant increase in the share attributable to minority shareholders. On Slide 7 you have the year-on-year variations in combination to EBITDA by geographic results. As you can see, France accounted for the strongest decrease as a result of the pandemic's impact across volatilities in the first half. This was closely followed by the mid turn and zone, marked by the non-EBIT macroeconomic and competitive environment in Turkey and Egypt. Obviously, this Americas, driven by Brazil, Asia, despite 33 days of stoppage in India and Africa, all increased their contribution to EBITDA when compared to 2019. Considering the pandemic conditions, this represents an outstanding performance and is testament to the strength and dedication of our teams in these zones. On Slide 8, you have seen 2020 EBITDA bridge bifactor at reported rates. You can clearly see the roughly comparable positive contribution that both volume and pricing effects are down EBITDA variation in 2020. The reported EBITDA performance was also impacted by very minor positive scope effects coupled to unfavorable currency effect of almost 24 -- minus EUR 24 million. On the like-for-like basis, the EBITDA increase was driven by the business growth compared to the benefits of the cost cutting plan and lower energy costs, representing a positive impact of around plus EUR 57 million when compared to what had been initially planned. I will now hand over to Hugues Chomel, who will be commenting our performance by key geographic results.

Thank you, Mr. Sidos. I will start with France on Slide 10. During the year, the pandemic had a significant impact on the group performance in France. Following a near total shutdown in mid-March, the situation did gradually improv in the group returning to solid business growth again in the second half. Even so, this was not sufficient to offset the impact of the initial rundown on the group activities during the first half of 2020. Accordingly, EBITDA declined over the period as a whole, with the positive impact of lower energy costs and the benefit of the cost-cutting plan saving to fully offset the downturn in activity levels. Let us move to Europe on Slide 11. Activity levels in the zone in 2020 reflect contrasting trends in Switzerland and Italy. The Swiss market was only barely affected by the pandemic during the year, while Italy experienced a very challenging pandemic and macroeconomic situation. As a result, the EBITDA margin on consolidated sales slipped 1.1 points to 23%. In Switzerland, the group consolidated sales rose by 1.8% and EBITDA fell 2.2%. In Italy, consolidated sales declined 10.5% over the full year, and EBITDA fell 34% compared to -- with 2019. You may now turn to Slide 12 for our performance in the Americas. Despite a concerning pandemic situation in both the United States and Brazil, activity levels continued to move in the right direction, thanks to the economic measures implemented in response to the pandemic. Sales in the region thus recorded favorable. As a result of these factors, Americas region sales and EBITDA improved significantly. The EBITDA margin and consolidated sales picked up to 22.3% from 19.6% in 2019. In the United States, the construction sector was rapidly recognized as essential by the authorities and thus permitted to continue operating. Accordingly, infrastructure and residential markets continued to grow. Thanks to economic stimulus measures. The group's consolidated sales in the United States rose 8%. EBITDA was up 16%. The investment in a new 5,000 tonne per day kiln at the Raglan plant in Alabama launched during 2019 continued during the year and is scheduled to enter service in the first half of 2022. This new installation will increase the plant's existing capacity, significantly reduce production costs and actively help the group to meet its CO2 emission reduction targets. In Brazil, while certain regions have been harder -- hit harder by the pandemic, the group reaped the benefit of fairly favorable industry conditions supported by the government's economic incentive and low interest rates, which helped underpin the residential sector development. The group took full advantage of these highly efficient production facilities and the operational improvement made following the acquisition of Ciplan. Consolidated sales generated in Brazil came to EUR 156 million, up 49%, reflecting the depreciation in the Brazilian real against the euro. EBITDA recorded solid growth to EUR 43 million, up from EUR 29 million in 2019. Let us move now to Slide 13 for our performance in Asia. The Asia region was severely affected by the pandemic crisis, which led to a significant deterioration in the macroeconomic and sector environment in the first half, ahead of the clear rebound and activity levels in the second half. Amid these conditions, the group focused on implementing cost-cutting measures without compromising its ability to seize new market opportunities. India has been worst hit by the pandemic of all the countries in the group geographical portfolio. The strict lockdown measures imposed by the government led to a complete shutdown of the group manufacturing facilities over months during the first half. Lockdown measures also had a very negative impact on the resumptions of construction projects. These were affected by labor shortage, presenting a more rapid and stronger pickup in the sector until the end of the third quarter. Once the situation returns to normal in the final quarter, the government subsidies supporting the economy and the robust level of activity in the construction sector, in particular, offset the negative effect of the pandemic. As a result, group recorded EUR 286 million in consolidated sales in 2020 and almost stable performance. As a result of this and the cost reduction plan, EBITDA rose plus 45% to EUR 82 million. In Kazakhstan, after a sharp increase in activity in the first quarter supported by export markets in particular, the operating environment deteriorated in the second and part of the third quarter as a result of the pandemic crisis before volume growth returned from September onwards. As a result, consolidated sales rose by 3%. EBITDA declined 3.8% to EUR 20 million in 2020. Please now move to Slide 14. Our results in the Mediterranean region where macroeconomic and competitive conditions remain challenging, with selling prices coming under significant pressure. Taking these factors and also higher energy costs in the region into account, the group recorded a negative EBITDA. In Turkey, sales totaled EUR 124 million, up 19%, demonstrating the group's healthy resilience in a tough environment. The EBITDA generated in Turkey came to $8 million, down 25%. After a breakeven EBITDA performance in the first half, trends improved significantly during the second half which again bought solid growth at constant scope and exchange rates. In Egypt, sales totaled EUR 49 million, up 18%. The pandemic has accentuated the effects of what was already an unfavorable situation with macroeconomic trends barely improving, severe logistical constraints and fierce competition. The group recorded an EBITDA loss of EUR 19 million over the full year compared with a loss of EUR 17 million in 2019. Lastly, the group decided to write-down its Egyptian assets by EUR 19 million, even the persistently unfavorable macroeconomic and industry conditions and the prospect of a slow improvement in the situation. Finally, on Slide 15, for our performance in Africa. In Africa, the environment remained positive despite the pandemic impact, which brought large public project to a standstill in Senegal. In the Cement business, consolidated sales advanced by 15%. This reflected a significant increase in cement volumes in Senegal, thanks to the improvement in the production performance of the plant. As a result of these factors and lower energy costs, the EBITDA generated by the business served by plus 46%. The group's activity trends in the other West African countries also recorded a strong increase. Overall, both Mali and Mauritania recorded EBITDA increases. Conversely, the aggregate business in Senegal was held back by the stoppage of numerous government-funded projects and EBITDA 53% lower. I will now look at the balance sheet and cash flow on Slide 17. At December 31, 2020, the group had a solid financial structure with EUR 2.4 billion in shareholder equity compared with EUR 2.6 billion at end December 2019. It is important to note that the currency depreciation at the balance sheet date had a major impact on both assets and equity. Net financial debt totaled EUR 1.2 billion at December 31, 2020, down EUR 88 million compared with end December 2019. To note, after refinancing in 2020, the average maturity of debt increased to 5.1 years, up from 4.4 years previously. Leverage now stands at 2.16x, down 0.3% and the figure of 2.45x at the end of 2019. On Slide 18, you have our financial position in terms of cash flow. In line with operating profitability, cash flow totaled EUR 461 million during the year, representing an increase of 12.9% at constant scope and exchange rates. Given the strong level of cash generation in the second half, the group decided to resume towards the end of the year the investment it had postponed during the first half in view of the COVID-19 situation. Thus net capital expenditure during the year as a whole came to EUR 300 million. Close to half of this amount relates to the construction of the new kiln line at the Ragland plant in the United States. Lastly, the group's free cash flow came to EUR 228 million in 2020 compared with EUR 159 million in 2019 as a result of the improvement in EBITDA and a clear reduction in the working capital requirements.

Thank you, Hugues. I will now be updating you on our climate plan. You have on Slide 20, the 3 primary markers of Vicat's climate plan. In 2019, was achieved on our historical scope of France and Switzerland, a 15% reduction in net CO2 emissions when compared to the level of 1990. We are committed to a further 13% reduction in emissions by 2030 that will apply to the current parameter of 12 countries in which we operate. And the third step is carbon neutrality throughout the value chain objective we mentioned to reach by 2050. On Slide 21 now. You have on this chart, the underlying figures of our climate road map. In France and Switzerland countries subject to ETS regulations, we reached emissions of 523 kilograms of CO2 per tonne of cement produced in 2020. Our ambition is to lower that figure to 430 kilograms of carbon dioxide in 2030. These 2 countries that has the laboratory of best practices for what we aim to achieve for the group. At the group level, which includes Brazil, we currently stand at 620 kilograms of CO2 per tonne of cement produced and aim to achieve emissions of 540 kilograms of CO2 by 2030. We can reach that figure by working on 2 main parameters. Firstly, lowering the proportion of clinker used to produce a tonne of cement. Secondly, by increasing our share, alternative and secondary fuels. We already have over 50 different programs in place today, making advancements on these planned realities. Let's move to Slide 22. Now, in order to achieve our ambition of neutrality, we focus on the variety of factors throughout the value chain. The only way to affect any real change is to materialize the whole process and work on optimizing our performance at each component. How do we do this? We start with raw materials. As you know, this means cement and we focus on energy efficiencies, secondary fuels, CO2 capture and [indiscernible] Then we move on to the actual product in our business. This means concrete, where we strive try to reduce the level of cement in the concrete. Then comes design and engineering where we have the opportunity with our partners to reduce the quantity of materials that is actually used with a notable contribution of the science, value [indiscernible] and functionalization of structures. Therefore, our focus at making structures active through inclusion of photovoltaics or energy storage technology. We move now to construction. What we aim is to reduce the amount of concrete in the construction that's reduction in the building of CO2 footprint. In terms of the use phase, which involves increasing the time the structure stays in use, the [indiscernible] for 120 years. The contract structure of the [indiscernible] will be kept and the new structure built on top of it and we hence plan for at least an extra 50 years. Infrastructures can be used in several ways as they go through time. When you think about it from the outset, it changes everything. After the use phase, to get to the moment of its demolition. And as you know, concrete naturally capture CO2 during up to 25% of the CO2 emitted through recarbonation. Our focus is on enhancing this natural recommendation process and then to reach up to 50% of the CO2 initially emitted by the deconstructed materials. And finally, life after use, where we aim to recycle our materials and reintegrate them to the chain. Be it raw materials of cement component or anything else, whether they are recarbonated or not in concrete, it is still an exploratory field, but we have been working on this for several years with significant advances. Across the board, in ocean of emissions related to transport distribution are key as well. And we are working on the low carbon mobility with our partners. As you know, we're using the biogas [indiscernible] approach and the largest electric truck in the world in a plant in Switzerland, and we have substantial orders for hydrogen products. Finally, our activity is very local. In concrete, we operate at 30 kilometers around the plant. In cement, it's 150 kilometers around the factory. We integrate our activities in the [indiscernible] territories in which we operate and work hand in hand with the committees. We kept our preserve need to produce low-carbon energy for the region and by deploying hydrogen productions on the site and developing recycling. We're developing a whole secular economies. All this constitutes a multitude of initiatives to achieve carbon neutrality all along value chain, but clearly, it is the only approach that truly makes sense. For those who want to know more, you will find in the annex details on some of the various projects we have already put in place. I will now conclude on Page 24 on our outlook for 2021. You have on this slide the detailed group perspective for 2021. And I remind you that we have provided you in our press release with the outlooks for every country in which we operate. On Slide 25 and to conclude on 2021, the group expects its EBITDA to rise on the like-for-like basis over the full year, not only is the expectation is we would like to change during the year depending on the pandemic-related developments and the impact on the macroeconomic industry environment in the countries in which the group operates. I remind you that the full press release is available on our website. So this concludes today's presentation. Jess, can we now move on to the questions?

[Operator Instructions] And the first question comes from the line of Jean-Christophe Lefèvre-Moulenq from CIC. As there's no answer, we will go to the next question. This comes from the line of Yassine Touahri from On Field Research.

So a couple of questions for me. Could you give us any indication of the energy cost increase that you would expect in 2021 based on the current price of power and fuel. One of your competitors mentioned a 10% increase in energy cost for 2021, but I understand that you might have a different hedging strategy. So it would be great if you could give us some color there. That would be my first question.

Yes. Thank you, Yassine. Energy cost in 2021 should increase when compared to 2020, all in all around plus 5% for the full year, and the impact should be stronger in the second half.

And then could you give us some color on the price increase that you have announced in France, Switzerland, California and the Southeast of the U.S. where you are funding reserve to clients? If you could give us an order of magnitude, that would be very useful.

Yes, of course. And in France, when there's the stronger rise than usually, but it's bit too early to define impact. In the U.S., we announced USD 5 increase in both regions we operate, I mean, California and the Southeast applicable at beginning April. And in Switzerland, we expect a normal price increase as every year.

When you're mentioning the stronger price increase than usual, is it related to the fact that the CO2 prices are higher and that you have to make some investment? Does it mean a price increase of, let's say, EUR 5 to EUR 10 or is it something that you can't quantify?

The CO2 is the back of bill, but we don't quantify. It's too early to quantify it.

And this would be implemented in April or in January?

No, 1st of January. It's very simple in France.

1st of January in Switzerland. Okay. And my latest question would be, could you give us a little bit of color, if you can, on the trading activity in the first 6 weeks of 2021. I understand the weather has been relatively cold in Europe. We understand that in the U.S. as well, but at the same time, some of the construction companies are mentioning that the volumes are good. So any color that you could give us would be very useful.

Yes. In fact, we see no break in previous trends, apart from the tractional weather impact to be expected at this time of the year. I would emphasize that the first few months of the year are not representative of the year to come.

? So there is no major change versus what we have seen in the past quarters?

No break in previous trends.

Your next question comes from the line of Paul Roger from Exane BNP Paribas.

Congratulations on the strong results in obviously quite difficult circumstances. So I'll also have 2 questions then. First of all, can you provide a more detailed breakdown of the EUR 365 million CapEx between the different buckets? And maybe limit to that also comment how you see CO2 related spending evolving in the medium term.

Yes. Thank you. Thank you, Paul, for your nice word. The CapEx, around EUR 365 million, in fact, we -- compared with the run rate of around EUR 130 million in maintenance CapEx year after year over the same. The investment in U.S.A. that will happen for EUR 100 million is a project we have had for 20 years, and we do it now. The balance is dedicated to clinker ratio reduction, energy efficiency substitution and total mixing to increase capacity in India and California. Second question is what's your share, very clear, of carbon investments. And I would say that every investment we make is made bearing in mind the effect on our carbon footprint.

I guess -- sorry.

Go ahead, please.

I guess the reason for the question is, obviously, one of your competitors has mentioned the need for a substantial increase in sustainability CapEx ultimately, obviously, because of carbon capture, but even before carbon capture, clearly, it's all getting a lot more expensive. And I just wonder what your view is of that or whether this is something that will just be manageable in the overall CapEx booklet.

In fact, our 2030 objective is based on existing and well-mastered technologies. And today, we have overall series of decarbonization process -- projects that are active in this field. I discussed before the presentation, we have already been doing for a while this increased energy situation, reduced clinker rate, and this project are often included in multi-purpose investments, such as Ragland that will increase capacity, reduce cash flows and drastically improve overall carbon footprint. It's important we note all of these investments improve our cash cost. And I will -- we have a few examples of what is still under the R&D program in the annex of the presentation. And as soon as we'll be able to meet in person, we will probably schedule an Investor Day in one of our plants in close to New York, and we'll detail you what we are doing and what we plan to do with the engineers and every people that involve in this program.

Yes, that will be great. I hope that's not 2023, Guy, but...

Or have to -- we should schedule a vaccination program linked with us. We are ready to do everything to save you guys.