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

Hello, and welcome to the Vicat Half Year 2021 Results Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this event is being recorded. [Operator Instructions] And I will now hand you over to your host, Mr. Hugues Chomel, Vicat's Deputy CEO and CFO to begin today's conference.

Good afternoon, ladies and gentlemen, and welcome to our 2021 half year results conference call. It's Chomel speaking. I am today with Stephane Bisseuil, our Investment Relations Director. 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 first half on Slide 4. In line with the trends seen in the second half of 2020, the group activity continued to move in the right direction over the first half of this year. Leveraging the dynamism of these markets, Vicat's financial results continued their progression as H1 sales grew to over EUR 1.5 billion. EBITDA reached EUR 300 million, which marks a 48% increase in last year's figure. To note, it also represents a marked progression on 2019 EBITDA level that stood at EUR 228 million. Over the first 6 months, EBIT grew 137% and as a result of the strong increase in operating profitability, cash flow reached EUR 240 million, up 44% on a like-for-like basis. For more than a year now, the group has demonstrated its responsiveness and ability to adapt, thus validating the relevance of its commercial and industrial strategy. Looking ahead, the Vicat Group continues to focus on its carbon reduction targets, accelerating the commercialization of its low-carbon product lines adapted to the global climate challenge. Starting on Slide 6, we will move on to the presentation of the half year 2021 results. Slide 6 presents our income statement. As I pointed out, our business grew well in this semester with sales reaching EUR 1.56 billion marked by organic sales growth of 26% driven by strong market in all the group's region and a favorable basis of comparison. A negative currency effect of minus 7% corresponding to a reduction in reported sales of EUR 89 million over the first half due to the appreciation of euro, and lastly, a positive scope effect of plus 0.3%. However, 6 months EBITDA margin was 290 basis points higher than last year, reaching 19.2%. Finally, net income, group share was EUR 94 million, an increase of EUR 67 million. On Slide 7, you have the EBITDA bridge by factor. You can clearly see the strong volume effect driven by the dynamic business momentum across all markets. The widespread poor movement in selling prices, which offset cost inflation. Of course, this evolution also reflect a favorable basis of comparison given the public health situation in the first half of 2020. To note, the currency headwinds on EBITDA amounted to EUR 16 million this half. On Slide 8, you have year-on-year variation in EBITDA by geographical zone. As you can see, all zones contributed positively to the increase in EBITDA this semester with the exception of Europe. The progression in contribution was particularly strong in France and Asia, with both zones benefiting most from the positive base effect. I will now be commenting our performance by geographical zones. I'll start with France on Slide 10. Over the first 6 months of the year, in line with the dynamic market trend seen in the second half of 2020 and given a highly favorable basis of comparison, the group's performance in France improved strongly. During the period, government measures along with steps taken by the group, allowed it to seize growth opportunity and report a strong performance across all business areas. EBITDA grew strongly throughout the period, driven by positive volume and price effect, this despite a slight increase in energy costs. Let us now move to Europe on Slide 11. The Swiss business, which was only slightly affected by the pandemic during the first half of 2020 saw a modest growth in the first half of the current year at plus 4%. The EBITDA margin this semester was down 80 basis points at 19.5%, impacted by nonrecurring elements. Also in Switzerland, the group completed on June 30, 2021, the disposal of Creabeton Materiaux specialized in lightweight precast products. The company had posted sales of CHF91 million in 2020. In Italy, given the shutdown of the business for 30 days in the first half of 2020, consolidated sales rose 37% over the period. EBITDA grew by 44%. You may now turn to Slide 12, for our performance in the Americas. In the United States, the macroeconomic and sector environment remained favorable in the first half. Sales in U.S. grew by 11%, taking them to EUR238 million. EBITDA was EUR 46 million, an increase of 21%. It should be noted that in California the second quarter was affected by an unfavorable basis of comparison given the record level of delivery volumes in this period in 2020, particularly in May and June. The construction of the 5,000 tonnes per day kiln line at Ragland, Alabama continued. This new facility will come into service in the first quarter of 2022. It will increase the plant's capacity, thus helping to meet strong market demand, significantly reduce production cost and make an active contribution to the group's target in terms of reducing CO2 footprint. In Brazil, consolidated sales were EUR 81 million, an increase of 53%. Market growth trends were especially dynamic despite continued concern over the health situation. EBITDA grew solidly over the first half, reaching EUR 24 million from EUR 15 million in the same period of 2020. The EBITDA margin improved by 660 basis points. Let us now move to Slide 13 for our performance in Asia. Unlike in the first half of 2020, when both the group plant had to shut down completely for a month, the measures taken by the Indian government to counter the situation has enabled the group to continue operating. In light of this, and given the favorable basis of comparison from the first half of 2020, activity in India saw strong growth in the first half on the back of a strong demand and effect of the government recovery programs. Prices have remained strong over the period. First, the group posted consolidated sales of EUR 177 million in the first half of 2021, an increase of plus 61%. EBITDA was EUR 49 million, an increase of 88%. EBITDA margin and consolidated sales rose 400 basis points to 27.6%. In Kazakhstan, the group posted consolidated sales of EUR 30 million, an increase of 14%. This reflected further growth for the group in the domestic market, which offset the fall in exports. EBITDA was 2.7% higher at constant scope and exchange rates at EUR9 million. Please now move to Slide 14 for our results in the Mediterranean region. In Turkey, while the ongoing depreciation of the Turkish lira since August 2018 and the pandemic crisis continued to affect macroeconomic and sector environment, recovery in the construction market remain on track. Consolidated sales were EUR 69 million, an increase of 71%. EBITDA improved over the first half, reaching EUR 2 million, having posted a small loss in the first half of 2020. In Egypt, consolidated sales came to EUR34 million, up 73%. EBITDA remained negative at minus EUR 8 million over the first half of 2021 from minus EUR 9 million in the first half of 2020. It should be noted that the first half of 2021 brought the conclusion of the market regulation agreement between the Egyptian government and all domestic cement producers. This agreement, which came into force in July 2021, was approved by the Competition Authority and aims to create a more rational framework for the various market participants by limiting sales from old factories into the domestic market for a period of 1 year. Finally, on Slide 15, for our performance in Africa. In Africa, the group continues to benefit from a favorable sector environment. In the Cement business, operational sales grew 20% with a boost provided by the dynamic trends in the West African market, especially in Senegal and the ramp-up of the new grinding station in Mali. Selling prices in Senegal were lower than in the first half of 2020, even with the introduction of a new tax on cement in May 2020. EBITDA generated by this business rose 10%. In Senegal, the Aggregates business posted consolidated sales of EUR 15 million in the first half of 2021, an increase of 17%, driven by the gradual resumption of major government projects against the background of the favorable pricing trends. As a result of these factors, EBITDA margin rose. I will now look at the balance sheet and cash flow on Slide 17. At June 2021, the group had a solid financial structure with substantial equity and well-controlled borrowing. Net debt was EUR 1.3 billion at the end of June 2021, up from EUR 1.2 billion at the end of December 2020. The variation is the result of an increase in the working capital requirement, resulting from the strong growth in the group activities. Shareholders' equity was EUR 2.46 billion. On this basis, the group's leverage ratio was 2.05, down from 2.49x at the end of June 2020. On Slide 18, you have our financial position in terms of cash flow. Cash flow came to EUR 240 million this semester, up 44% as a result of the strong growth in EBITDA of other semester. In the first half, capital expenditure stood at EUR 170 million and was for a large part related to the continued construction of a new kiln line in Ragland in the United States. Finally, free cash flow for the first half stood at minus EUR 52 million. I will now conclude on Page 20 on our outlook for 2021. You have the detailed group perspective for 2021 in our press release, and I will be outlining here the main points. The group expects an increase in EBITDA over the full year despite unfavorable exchange rate trends, rise in energy costs expected to increase by around 9% in 2021, negative impact exclusively felt in H2. Unfavorable base of comparison in the third quarter of 2021 and to a lesser extent, the fourth quarter of the year. The group is keeping up Its investment drive focusing chiefly on the construction of the new kiln line at the Ragland plant in the United States, a drive to incrementally boost capacity at production facilities in India and U.S. and to invest in new terminals to expand its market and lower logistic costs. And lastly, the ramp-up in project to meet the carbon footprint reduction targets. Accordingly, industrial capital expenditures is expected to be at around EUR 385 million. So this concludes today's presentation. Courtney, can we now move on to questions, please?

[Operator Instructions] And our first question comes in from the line of Yassine Touahri calling from On Field Investment Research.

We have 3 questions. First, you're talking about the energy inflation in the full year of 9%. Could you tell us what was energy cost inflation in H1, and how much cost inflation do you expect in H2? That would be my first question. And then my second question would be on the Ragland plant. How much savings do you expect when the plant is fully ramp-up, maybe you can quantify the savings in dollar per tonne? And then my last question would be on CO2. Have you reviewed the impact of the proposed change in the allocation of free CO2 allowance and also the implementation of a carbon border adjustment mechanism on your business model? What's your view on this proposal? And could it accelerate your decision to invest into projects that reduce your carbon footprint? And in this respect, I know it might be a little bit early, but do you have an idea of what could be your CapEx in 2022?

Thank you for your questions. On the energy bill, so the energy inflation, including FX effect was close to zero in H1 globally with some countries up, some countries still down, but globally close to zero. And as outlined in the press release, we expect the full year impact close to 9%, but will be felt in H2.

So does it imply an energy cost inflation of close to 20% in H2, or is it lower than that?

Actually, I don't give you mix per semester of volumes, but I will let you do the math, I'm sure you can do that.

Perfect.

Savings on Ragland as communicated earlier, I believe, we are aiming to reduce the production cash cost by about up to $215 per tonne given the incremental energy efficiency as well as the increased use of substitute fuels on a stabilized basis.

And in this respect, when could we expect a stabilized basis, the ramp-up will be fully effective, I can imagine after 6 months? Or do you expect the ramp-up to be quicker?

It is probably a little early to be precise on that. We expect, I mean, the project is going on pretty well. We expect to commission it as early as we can in the year in Q1 in order to have already a significant benefit in the year. Regarding your third question, regarding the potential effect of Fit for 55 proposal that was disclosed last week. Globally, we believe we welcome the whole package. I mean, it is setting an adequate time frame for the industry to adapt and give the visibility on the steps. As you rightly point out, this is an initial incentive for the industry to accelerate its carbon effort. We have already shared our objectives. We are not changing them because this regulation came out. We are working on them permanently. We surely will be happy to welcome you at the Capital Market Day on November 16 to share the detail of our climate roadmap and our strategy to achieve the carbon reduction. And as much as possible, we will share figures on the CapEx at this time.

The next question comes in from the line of Paul Roger calling from Exane BNP.

I'd also have 3 questions then. The first one, given what you're saying about energy inflation in the second half, do you still think you can have a stable margin in H2 compared to last year in that context? The second question is about U.S. cement prices. We've heard a number of companies talking about a second increase. Now I appreciate they mostly talk about Texas, where obviously, you're not present. But do you think that could also be possible in some of your markets like California? And then thirdly, in Egypt, you highlighted this new 1-year agreement. What impact do you think that could actually have? I mean clearly, there's still a lot of oversupply in the market. So do you really think that could be quite meaningful or not?

Yes. Regarding H2 margin, I would like to give you a few elements of appreciation. First, I want to insist and in fact we did upgrade our guidance from growth in EBITDA on a like-for-like basis to a growth in EBITDA on a reported basis. And as you have seen in our comments, the fixed effect just for H1 was EUR16 million. So this is not a small difference. Short-term trends are positives in all markets. I mean, demand is still strong in all of the markets. Pricing dynamic is still good everywhere and allows us to mitigate energy inflation. But as pointed out, energy inflation will be much stronger in H2. Lastly, on a year-on-year basis, the base of comparison of last year's was a record level, and as such, it will be challenging. On your second question regarding price increases in U.S., we did pass a first price increase in April of $5 in both regions, and this was accepted by the market a little bit bigger in California than in the Southeast. And we will probably implement a second price increase in both regions in September, indeed. And we believe probably stronger in California, given the market balance that is prevailing there. Regarding Egypt, this mechanism, as you may have heard, is aiming at limiting the capacity of all market players at 65% of their nominal capacity, and we do believe that this will have a substantial effect. Now the timing and the magnitude of the effect is yet to be determined.

And do you think, I mean, obviously, it's a 1-year agreement, but even the fact it was possible in the first place is good news after it's had a difficult few years. Do you think any relief will be temporary? Or is this the type of thing that could become a bit more permanent?

Well, it's too early to tell whether it will be renewed or not, but we have, at the same time, it probably gives time as well for the market to set to a more economic pattern only, already a good sign is that the market grew in H1 almost 5% from what we can measure, which is a new element for a long time as well. So this temporary period could at least help the market to be set on a more economical path. But I believe that the renewal could be considered. But obviously...

The next question comes in from the line of Yuri Serov calling from Redburn.

I have 2 questions, please. So one is on energy again. You're giving us the guidance for this year of plus 9%. Do you already have a view of what's going to happen next year? The energy cost inflation is obviously going to carry over into 2022. I wonder whether you have an assessment as to what it's likely to look like for next year? And then the second question is regarding CO2, it's probably a bit bigger, so let me just explain what I'm trying to find out here. There was an announcement that Vicat is going to implement a project in calcined clay on an industrial scale that came out of FLSmidth. I just wanted to ask for a bit more details behind that. What are you trying to achieve? What sort of volume are you expecting to produce from that facility? And also on the scale of CO2 reduction, the press release from FLS said 16%, which doesn't sound extremely high. I don't want to compare you to others, but Holcim today was talking about selling their ECOPact cement, which promises a reduction of 30%, and it also has some element of calcine clay there. So I wonder whether you can comment on that and whether you see more potential there?

Thank you for your question. Obviously, the evolution of energy this year will have impact on next year, but it's a little too early for us to give guidance on 2022 numbers at this stage. Regarding the activated clay project, it is run at one of our plants in the Eastern part of France. It is aiming at producing 150,000 tonnes per year. And indeed, it is meant to bring a substantial reduction in the CO2 footprint. So this site was chosen because we have ample clay reserve in the quarry of the plant. So it's immediately available with the right chemistry. And we are very happy to have this at an industrial scale, which is, as we know the first thing in Europe. The reduction that we are aiming is indeed more in the magnitude of 30%.

Around 30% Okay. And just talking about that plant, you said 150,000 tonnes per year. What is the size of the plant? I mean, how big is the portion that you're dedicating to this type of cement?

I don't have exact production in mind. Give me one minute. We will come back to you with an answer on that.

Well, I understand. But order of magnitude, is it the full plant, 50% of the plant or 10% of the plant, what is more likely?

So this will help a large part of the production of the plant. But I mean the magnitude of the plant production is 500,000 tonnes, basically. So I mean, it's not the exact figure, but it's the order of magnitude. So it's a very substantial part of the shipments that will be concerned.

And sorry, just a technical detail. So you're talking about 30% of the plant output being in calcine clay. How are you planning to do it? Will you run it a portion of the time ordinary cement and a portion of the time this kind of cement? Or is this going to be a separate line? How is it going to be organized?

It's probably a little early to give you those details. But in most of our plants, we have different grinding equipment, and we can prefer to dedicate part of them to do one type of cement and another workshop to another type. So this is not really a challenge in my view. But surely, when we will come in November, we'll be able to have the guys to give you precise answers on that.

The next question comes from the line of Jean-Christophe calling from CIC.

I have 3 questions. First, your excess CO2 emission rights is close to 5.2 million tonnes. Is that fully rotated in France, or do you have also excess CO2 rights in Switzerland? That's my first question. Secondly, I understood that Aggregate volumes are now above the 2019 levels. Is that also the case for Ready-Mixed Concretes and Cement or not? And third, a follow-up question on U.S., you mentioned April and May. Can you repeat what you tell us?

Yes. Regarding CO2 excess, indeed at the beginning of the year, we had 5.2 million excess at the border of the group, immense majority of it being in France and a small excess in Switzerland. Your question regarding last year's volume, I mean, this is volume compared to 2019. Basically, we have all activities in all regions well above 2019 with the exception of Aggregates in Senegal, which has a very specific situation with a sudden stop of public projects. But globally, we are well above 2019 in all business units.

Also cement in France?

Indeed.

Okay, it's very probable because of the mark, it is probably weaker related figures because in the market Aggregates you are right, but I think Concrete and Cement may be slightly below?

Well, I can speak about all figures, Jean-Christophe.

Okay. It's very clear. There was a follow-up question, was June in France also good despite the comparison base?

Actually, it was a good month. Regarding U.S., just to probably clarify the point, last year we had very high volumes in Q2, specifically in May and June using clinker inventories that were accumulated. And as we did consume them last year, it's difficult to do that again this year. That's a simple comment.

The next question comes in from the line of Ebrahim Homani calling from CIC.

I have 2 questions, if I may. The first one is about your clients. Are they comfortable with your price increase? Did you face some issue with them or is it generally accepted by them? The second question is about your business in France and to have maybe more detail about the construction market based on your day-to-day business. Do you expect any change, any major change in the construction business in the next months?

Well, price increases that we mentioned in this communication are, of course, accepted, the one that have been invoiced. I think everybody understands that there is cost inflation and that is included in the market dynamic. An additional comment that we can do regarding the CO2 is that I believe it's a well-perceived objective collectively that we need to reduce the carbon footprint. Now, not everybody has yet understood all the implications. Fit for 55 is paving the way. To match this, it will need CapEx. To finance CapEx, we will need to raise prices. So those objectives are clear. We are having those conversations with customers, and with time, I'm sure prices will go through. Regarding the recent trends on construction markets, we do not see substantial changes in the coming months. Nevertheless, the year-on-year evolution will not be the same knowing that we had a strong rebound in H2 last year. So the base of comparison is different, but the sequential evolution, it is still a strong demand and positive oriented market.

The next question comes in from the line of Pierre Rousseau calling from Barclays.

First question, there is a level of non-operating income, about EUR 18 million that you report between the EBIT and operating income, that's a little bit higher than what we had pre-COVID. So I was wondering what's in that number, if you still have any kind of specific COVID-19 related expenses and if you could provide a view as to how this charge could move over the full year? And then the second question would be a bit more specifically on India, please. Could you give us some elements there? Clearly, the margin is much above what it has been historically. Do you think it could continue at that level? Is this a country in which we are seeing a lot of energy cost inflation into the second half?

Thank you for your questions. Non-operating level, it is mostly, I mean, it is a nonrecurring item. As I think, disclosed in the press release, it is mostly related to a write-down of the debt we have linked to our investments in EBIT for EUR 11 million. So this is not expected to be recurring. Regarding India, obviously, the Indian market has gone through difficult times in terms of health situation, but the business trend has been very strong, the demand is still very strong. The price trend in H1 was particularly solid. Nevertheless, as you know, India is a volatile environment historically. So we always need to be driven to adapt. But as we see it from today, there is a strong demand.

And cost wise, is there a lot of pressure there in H2?

India is one of the countries where we do feel a strong inflation on energy. But we have, as you know, we have quite efficient tools, and we work on substitution. And again, we are working on passing on those costs to the market. And so far, we have been successful doing so.

There are currently no further questions in the queue. [Operator Instructions] Thank you. And the final question comes in from the line of Tobias Woerner calling from Stifel.

I mean, Vicat is a group which has been around for a very long time. I may test your historical knowledge of the company. But you haven't seen high inflationary periods for a long time in mature economies. But that is a potential or a risk or opportunity, whatever way you want to look at it now on the horizon. Do you have a sense of how your business performs in inflationary periods as they happened in the mid-70s, '80s, early '80s, what's your pricing power looked like back then relative to the general inflationary pressures which were seen? That's the first question. And the second question relates to your African businesses. How do you feel about Africa, West Africa at this point in time? It seems that West Africa has done relatively well. Obviously, Africa is a huge continent, but there were more mixed markets generally. Do you feel that Africa could provide us with some surprise or upside into next year?

Thank you for your questions. On the first one, obviously, the market structure and the market framework has changed a lot in the last 50 years, mostly in mature countries. But by this time, we were at least in France, in a controlled price environment. So I don't think that we can really draw experience from there. And though I was not in the business, I was not in the business at the time. What we can feel in our view is that the construction, I mean, the building material industry and specifically cement has built a quite strong pricing power, especially if you look back in the recent years. We don't have the experience of high inflation in mature countries. We do have it from time to time in emerging countries, and we know how to manage it in those environments. So we believe this could apply. And despite any recovery in the general inflation, probably the CO2 equation will have to push us to a substantial price increase as well. Regarding your second point, regarding West Africa, and your comment is perfectly good. I mean, I'm speaking only regarding the 3 countries where we are not globally, Africa. What we can observe on a long period, is a very dynamic market. I mean, this market has been growing from 5% to 7% per year for the last at least 30 years, probably more. So I mean, the demography is dynamic. The economic development is picking up. So the growth prospects are substantial. So we believe we will be a promising business there as we are experiencing it for more than 20 years now. So this is an environment we don't expect surprise in the short-term. We do expect strong growth prospect long-term.

Maybe one quick question, a follow-up question on the previous Egyptian situation. Thank you for highlighting this in your report. When I look at some up-to-date cement prices in Egypt and now get indications of anywhere around EGP870 to almost EGP900 per tonne, let's us say, EGP875. That is quite a bit more than before. So it seems we are already seeing this in the markets in quite a marked manner. Is that a fair observation? Or are you seeing different developments?

Yes. We are seeing some movement that started to anticipate this mechanism in Q2, but in a limited manner, and we started to see price increases now. The figures you mentioned are perfectly possible. It could come higher as well. Those are market price. We have to monitor as well how all of this translate into ex-works price, which is always a question in Egypt.

And I understand that this agreement has been struck. So prices are driven by that at the end of the day. But can you just remind us where the overall capacity utilization is in Egypt?

I don't have in top of my mind. I think it's somewhere around where it has been set by the regulation. I mean, it's around 60%. The important element of it is that everybody is blithe. So nobody goes above 65%, because obviously, the imbalance of the market came from utilization of its program by the army.

Do you see the opportunity for some plants to be shut down? Or given that this should be normally a high-growth market, they are just being mothballed?

I mean there has been a couple of announcements last year from old plants. So I think those are done. It could be one or two more, but globally, the capacity will stay there, because as we are, most players are convinced that there is substantial long-term growth prospects.

Thank you. That was the final question in the queue. So I shall hand the call back across to yourself, Mr. Chomel for any concluding remarks.

Thank you, Courtney. This concludes today's call. I would like to thank you for your interest in the Vicat Group, and remind you that we will be publishing our third quarter sales figure on November 3. In the meantime, I wish each and all of you a great summer break.

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