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

Hello and welcome to the Vicat Quarter 1 Sales 2022 Call. My name is Judy, and I'll be your coordinator for today's event. Please note that the call is being recorded. [Operator Instructions] I would now like to hand you over to your host, Hugues Chomel, Deputy CEO and CFO, to begin today's conference. Thank you.

Good afternoon, ladies and gentlemen. I'm Hugues Chomel, Deputy CEO and CFO of the Vicat Group. With me today is Stéphane Bisseuil, our Investor Relations Director. I will be presenting to you our 2022 first quarter 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. Let us now move to Slide 3 with the key points of end of March 2022. Vicat quarter sales performance reflects the dynamism of its markets despite a high base of comparison. First quarter 2022 consolidated sales came in at EUR 789 million, up 12.4% at constant scope and exchange rates. Recent political events did not have any direct impact on the group business levels during the first quarter, and we recorded solid growth compared with the same period of 2021. All the regions where we operate posted growth in their sales at constant scope and exchange rates. In the global environment, providing little visibility in the short term, especially regarding energy costs, we are executing our strategy to improve our production performance, make greater use of secondary fuels and implement a pricing policy tailored to this new environment in pursuit of our operational environment and social targets. Let us move to France on Slide 4. During the first quarter of 2022, the group performance in France moved higher, supported by a small improvement in demand compared with 2021, despite a high basis of comparison. In the Cement business, operational sales rose 7%. Given the basis of comparison, resulting from the French market dynamic performance in the same period of last year, this increase reflects a slight pickup in demand and a sharp rise in selling prices at the beginning of the year. The operational sales recorded by the Concrete & Aggregates business rose 6%, with further expansion in concrete and in aggregates as well as a significant improvement in selling prices during the quarter. In the Other Products & Services business, operational sales advanced 8%. The group is expected to complete the capacity increase at the Auneau plant in the Paris region, which specializes in building chemicals. This investment, which is expected to enter service during the first quarter, will increase mortar production capacity by 150,000 tonnes per annum, helping to meet the strong demand in Paris market as well as unlocking reduction in logistic costs. Please turn to Slide 5. In Europe, business trends were positive in the first quarter of 2022, supported by favorable conditions. A decline in sales on a reported basis reflect a scope effect resulting from the sales of Créabéton precast business in Switzerland, which was finalized on June 30, 2021. In Switzerland, the group consolidated sales climbed 8%. In the Cement business, operational sales moved up 4% through stable demand and a solid increase in selling prices. In the Concrete & Aggregates business, operational sales moved up 4% as volume declined in concrete, but moved sharply higher in aggregate. In Other Products & Services business, operational sales rose by 6%, supported by a healthy level of deliveries in the rail sector and favorable product mix. In Italy, consolidated sales rose 36% as business trends and selling prices moved significantly higher. You may now turn to Slide 6 for performance in the Americas. The United States and in Brazil, construction sector trends remain dynamic, supported by higher selling prices. In the United States, the macroeconomic and sector environment remained favorable as consolidated sales rose 13%. In the Cement business, operational sales in the region grew 18%, reflecting the momentum of construction market and the introduction of a substantial price increase. In the Concrete business, operational sales rose 8% as market conditions remained positive, especially in the residential and commercial sectors. Against this backdrop, selling prices moved significantly higher. Construction of the new kiln line at the Ragland plant in Alabama made progress and is due to enter service in the next few weeks. Also, it's worth noting that after an evolution in the regulation, demand for blended cement or limestone cement is emerging across all regions in which the group operates. This major trend is likely to reduce by up to 10% over time the proportion of clinker in the cement that the group delivers, which will result in increasing cement production capacity and carbon emissions per tonne of cement produced. In Brazil, consolidated sales totaled EUR 52 million, up 32% against a backdrop of rapid inflation. Despite higher interest rates, demand remains strong in the group's market in line with the trends seen in the recent quarters. In the Cement business, operational sales were EUR 41 million, an increase of 26%, and in a dynamic market environment where selling prices posted increased significantly. In the Concrete & Aggregates business, operational sales were EUR 17 million, an increase of 54%, in line with the trends seen in the Cement business. The steady improvement in the market condition was accompanied by a rise in prices, both in concrete and aggregates. Let us now move to Slide 7 for our performance in Asia. Business in India grew throughout the period, supported by solid demand, especially in the public sector. The group posted consolidated sales of EUR 100 million in the first quarter of 2022, up 8%. In an inflation environment, price rose significantly, especially at the end of the quarter. Consolidated sales in Kazakhstan came to EUR 12 million, up 8%. This performance was achieved through a significant increase in selling prices, which largely offset a temporary decline in volumes delivered over the winter period. Please turn to Slide 8. In the Mediterranean region, sales moved sharply higher in both countries as a result of contrasting situations. In Turkey, although the macroeconomic and sector environment remains upbeat, the winter conditions significantly affected demand during the first quarter without that representing a change in trends. Overall, first quarter 2022 consolidated sales totaled EUR 27 million, up 68%. In Cement, the far less favorable weather conditions that ran in the first quarter of 2021 impacted business trends. As a result, volumes delivered were much lower during the period, even though demand remains solid. The high inflation environment significant price increase were introduced. As a result, operational sales in the business climbed 47%. In Concrete and Aggregates, operational sales rose 113%. As in the Cement business, there was a significant rise in selling prices even as tough weather conditions at the beginning of the year dragged down Concrete and Aggregates deliveries. In Egypt, consolidated sales totaled EUR 26 million, up 68%. Following the market regulation agreement that entered into force in July 2021 between the Egyptian government and all producers, selling prices in the domestic market continued to improve during the first quarter, supported by a solid increase in demand. Finally, on Slide 9, for performance in Africa. While the group continues to benefit of a dynamic sector environment despite the political crisis in Mali. In Cement, operational sales in the Africa region grew 9%, reflecting the strong momentum of the markets in Senegal and Mauritania, which offset the decline in Mali, while the market was disrupted by policies restricting imports. Selling price rose in both these regions. In Senegal, the Aggregates business supported by the gradual resumption of major government construction projects recorded operational sales of EUR 8 million, up 10%. On Slide 10, I'll turn to the changes in the group financial position at the end of March 2022. At March 31, 2022, the group shareholder equity was EUR 2.6 billion, up from EUR 2.46 billion a year before. The group net debt was EUR 1.5 billion versus EUR 1.27 billion at March 31, 2021, given the significant increase in the working capital requirement. On Slide 11, I'll begin with a focus on the situation caused by the conflict in Ukraine. As a reminder, the Vicat Group does not have any industrial and commercial operations in Ukraine or Russia. As things stand, there has been no impact of the group -- on the group business. That said, the conflict is likely to affect growth in Europe and worldwide and thus, the group's operations in potentially exposed countries. In Egypt, as discussed previously, the implementation in mid-2021 of an industry-wide agreement has enabled to bring EBITDA back to breakeven point in the second half of 2021 and early 2022. There is no visibility on potential renewal of this agreement beyond June 2022. In addition, the group has consolidated its shareholding through a simplified public tender offer, raising its equity interest from 56.2% at December 31, 2021, to 67.2% at April 30, 2022. On Slide 12, you have an update on energy costs. Given its hedging policy, the group estimates, at current energy prices, it would need to raise its selling prices by 15% in its cement activity over the full year to fully cover the increase in its energy costs. As things stands at March 31, 2022, further price hikes are thus needed in France, Switzerland, Senegal and Brazil. All -- to meet these objectives, all other factors remaining equal. Accordingly, the group remains focused and confident on its ability in the current environment to introduce the requisite increase in its selling prices to cover the inflation in its energy costs, situation permitting. Naturally, this estimate is likely to be reviewed in case of no change in our operating environment. To conclude, on Slide 13, you have here the key points of our updated outlook. In 2022, the group anticipates a strong increase in its sales and spend by an increase in its activity levels and a sharp progression in selling prices. EBITDA generated by the group in 2022 is likely to go, but by not as much as in 2021. In light of these elements, the group expect erosion in its EBITDA margin in 2022. Judy, we can move to questions.

[Operator Instructions] The first question is coming from the line of Paul Roger from BNP Paribas.

So maybe we'll start with the comments about further price increases then. You're talking about these in 4 markets. Can you give us some indication of how big they're likely to be? And just so I understand it correctly, you are guiding for margin squeeze this year. Are you implicitly saying that there won't be enough to offset the energy cost? And then the second question, clearly, your pushing for these big price increases. Obviously, the price of everything else is going up as well. So I was just wondering, if you're seeing any signs of demand destruction maybe in terms of project cancellations or delays, anything like that at the minute?

Good afternoon, Paul. Thank you for all these questions. First of all, regarding price increases, what we can say is, price trends are solid at the end of March as you have seen in our reported figures. And we are quite confident in our ability to pass further price as price ags -- sorry for that. We have already announced USD 10 in U.S. on July 1. We are announcing currently EUR 10 in France for Q2 as well as a little bit less than 5% in Switzerland. As a context, I would like to remind you that as you know, cement costs are relatively limited in the total construction bill, and that was -- the inflation of cement is relatively limited as compared to other materials over the recent period. So again, we are quite confident in our ability to reach our target to offset the energy inflation. Just maybe a quick comment on the 4 countries that we have mentioned. This was -- the comment we have made regarding France, Switzerland, Senegal and Brazil was regarding the situation at the end of March, where the price did not yet compensate the cost to date, but we will certainly move our pricing higher in all markets where it is needed on a full year basis.

Okay. And in terms of any sign of demand disruption, are you seeing anything like project cancellations in Europe or elsewhere or not yet?

We don't see any signs yet of cancellation linked to inflation. We do see a few delays in U.S. due to constraint on supply of building materials, cement or steel, but nothing going to inflation at this stage.

Okay. And just -- if I can just sneak in one final one. Just talking a little bit to understand your performance in France because you're saying on the one hand, the volumes are slightly better. You've had significant price increases. And yet, if I'm interpreting the slide correctly, it looks like like-for-like sales were only up 3%. I would have thought, given the dynamics you described, is it -- will be higher than that. So am I missing something? Or is there something else going on?

Just as a reminder, we comment on operational sales for each of the activities and the like-for-like figure is given for the French consolidated sales. So I believe it's just mainly the effect of vertical integration.

And the next question is coming from the line of Yassine Touahri from On Field Investment.

A couple of questions on my side. First, let's -- you were talking about an increase in energy costs estimated at 30% for 2022. Have you assumed - I know you are not quantifying it precisely, but you're mentioning that you need [ 60% ] price increase. Is it fair to assume that you're expecting more energy costs [ position ] in 2022? It seems some of your competitors mentioned that they had a cost inflation of 40%. Is it close to what you're expecting? Or [indiscernible]? I mean then the question on the -- I think definitely [indiscernible] just the logical position that you're expecting for 2022.

Yassine, thank you for your question. The line was not very clear, but I guess I understood the general expectation. At the time of full year 2021 publication, we did [ put ] an increase of 30%. We are now expecting a rise that would be market [indiscernible]. Yassine, can you mute your line, please?

Yes.

Thank you. As you well noticed, we did not give a global estimate. The situation is quite different from one geography to another and even in some cases, from one plant to another based on the energy mix of each plant, the currency situation and so on. So we figured out that it will be easier and clearer for everyone to give you the price increase needed to offset this impact. So as far as we are concerned, we believe that, as mentioned in the press release, 15% price hike in cement globally would be adequate to fully compensate energy inflation. On the basis of the first quarter performance, we have been able to pass on a very solid price increases, and we are confident that the further price hike will stick.

Can you [indiscernible] when you're mentioning that in Q1, I think the like-for-like growth was approximately 12%. Is it fair to assume that most of it is pricing that you have more that you have a double-digit, so a double-digit price increase in the first quarter?

Indeed, as mentioned in the press release, we have a slightly negative volume effect in Q1 globally, and therefore, whole of the increase is selling price.

Just to follow up on the price [ versus ] inflation. The 15% price increase is what you need to just recover the cost? Or will be enough to keep your margins stable?

It is to offset the cost.

If you got price increase of 15%, you're looking at -- everything else being equal, you would fully offset the cost, but margin could be a little bit under pressure?

Exactly.

Is that correct?

Yes, it's correct.

I can imagine that these prices are not yet 15%. You would expect a bigger margin pressure in the first half of 2022 and in the second half of 2022. Is it correct?

Mechanically, but as we have announced, we have already announced significant price increases in France, in U.S., in Switzerland, and we will continue to pass them on as needed.

Yes. Maybe Yassine, just to remember, I think it was something that we've mentioned many times. We -- in H1 this year, we have a high basis of comparison, and we always say that the H1 this year will be tough compared to H1 last year. So your comment is right, taking also into account that the price increases that we've been passing since the beginning of the year and that we're pushing now. We'll have the full effect in H2.

Is it possible to keep your margins stable in H2? Or is it too early to say?

Probably, too early to say. Once again, depending on the evolution of energy cost and how much the price increases will stick and the ability for the customers to fully accept those price increases.

Very last question. Have you quantified the savings that you could generate from your new line in the U.S. in 2022? Or is it too early and the effect will be only next year?

We have, of course, evaluated it, and I think we have shared it with the market together with our full year 2021 results. We expect a 30% saving compared to the 2021 production costs. So this will obviously materialize gradually as the plant is ramping up. Of course, this is bringing 50% additional capacity, and this, again, will ramp up with time. But in the context of the demand, that is today lacking supply. So we'll do our best to ramp up as soon as we can, but always -- we need some time.

[Operator Instructions] The next question is coming from the line of Brijesh Siya from HSBC.

I have 2 as well. So the first one is on volume. You report your volumes -- cement volumes are down close to 5%. But if I look at the commentary, all the countries are kind of saying that it's picking up, except Turkey and Kazakhstan. So if you could kind of quantify how big those declines in Turkey and Kazakhstan so we could just make it out on how the markets also performed? And now on pricing, it's helpful to kind of give a number around how much you require. It's interesting that India is not part of it. Does that mean end of March for the price increase you have done, that's an off at this point in time to fully cover your costs. So if you can give a little more flavor about it. And related to pricing here as well. If you could tell us, as of today, how much of that 15% you have already kind of implemented? And how much more you need to do over the course of Q2 to kind of -- as you stand today, can fully recover that?

Brijesh, thank you for your questions. Regarding volume, as you very rightly spotted, the main market where our volumes have declined is Turkey in a very substantial manner, in the context of a tough winter environment compared to the previous year. So we have almost the whole decrease which is in Turkey, and it is very seasonal, and it does not reflect demand trend in our view. Regarding pricing, indeed, the comment we made regarding some countries is the price effect year-to-date end of March compared to the cost effect year-to-date end of March country by country. And indeed, in India, we had enough price increase to cover the increase of cost, but we will need more coming forward to fully offset the coming increase of costs as well because this really depends on each country's situation in terms of hedges and inventory. So we do expect to have to increase price over, and as you know, there has been price increases in India in April. We are yet to see how much sticks.

And can you comment, how far you have been to that 15% number you gave?

I think the best approximation you can get is from the global commentary we made a few minutes back regarding the global trend, where almost 100% of the consolidated sales growth is price. Again, this needs to be seen on a market-by-market situation to be precise.

And the next question is coming from the line of Ebrahim Homani from CIC.

I have 3 questions, if I may. The first one is about your hedging policy against every -- against energy cost inflation. Could you give us some more detail about it? And the second question is about the price and volume effects influenced by business units, Cement (sic) [ Concrete ] and Aggregates. And the third question is about the inflation in Turkey. How did you deal with it?

Thank you for these questions. Regarding hedging policy of the group, just as a reminder, total energy cost last year was EUR 400 million. 57% of it was fuels. The rest of it was electricity. As a reminder, again, the breakdown of fuel is 46% of the amount is coal, 26% is alternative fuels, 24% is pet coke and gas is only 3%, which actually concern only the U.S. We -- as I mentioned before, the energy mix and the sourcing situation is very different from one plant to another. So we are tailoring our hedging policy on a plant-by-plant basis, and we are usually hedging at 3 to 6 months forward. So obviously, we are continuing to push very hard to improve the energy mix and to continue to increase substitution to decrease our sensitivity to fossil fuel costs. Regarding your second question, we -- I'm not in a situation to share the detail of volume and price evolution per market and activity. I think it's too precise information to be shared. Regarding Turkey, we are indeed facing high inflation environment, which is probably very close to hyperinflation situation if the situation stays as it is. We are adjusting price on very regular basis, several times per month. And we are so far have been successful in adjusting our price to a difficult cost situation because on the general energy cost increase, we had the currency depreciation. So it is never -- ever moving environment, but so far, we have been able to compensate for the landed cost inflation.

And the next question is coming from the line of Michael [ Myszkowski ] from Royce Capital.

My first question is on the debt. If you could just come back on the reasons why the debt is a little bit higher than I think some of us were expecting. And my second question is on Egypt profitability. So it's good to see that you're now breakeven at EBITDA level in Egypt. What are your thoughts as to when Egypt would come back to a double-digit EBITDA margin, if at all possible?

Michael, thank you for your questions. On the debt, there has been the increase in the debt, is fully linked to the increase in working capital, but has been quite significant, both with a strong increase in sales as well as the inflation on raw materials and combustibles on inventory. So we are facing a significant increase in the working capital requirement, and we are obviously working on it. Regarding Egypt...

Can I ask a follow-up on the debt?

Yes, please.

So what do you think is a reasonable estimate for the year-end net debt? Is it -- it's going to be closer to 1.5 or below that?

We have not shared any guidance to the market yet. So I'm afraid I'm not able to comment at this stage. On Egypt, as commented before, we are back to, I would say, breakeven or slightly positive EBITDA level. Obviously, the short-term forecast and situation very much depends on the evolution of market regulation agreement that was passed last year. It is too early to tell today what the situation may be. On the positive background elements, we have seen the consumption in the market recovering since 18 months after COVID basically. So we see, I would say, something around 5% evolution -- positive evolution of consumption, which is positive, but there is still a substantial overcapacity in Egypt. So it will take time before we are able to come back to, I would say, a normalized profitability level. At the same time, we are quite confident in the long-term drivers of this market with strong population and population growth, with natural resources coming on stream. So I would say, the medium-term prospect of the market is positive. I'm not able to give you a date on when we expect a positive -- I mean normalized EBITDA level, considering the situation.

And the next question is coming from the line of Sven Edelfelt from ODDO.

I would have 3. First one, you mentioned for market for additional pricing, but you didn't quantify Senegal or maybe I missed it. I understood -- I mean, U.S., France and Switzerland. Second question, when I look and to come back at Yassine's question. At the operational sales in Cement point out for an increase of energy bill of roughly 70% versus the 30% you are pointing out previously. Is it a fair assessment of the situation? That's the second question. You mentioned some sort of pricing of, let's say, 11% to 12% in Q1. What was the pricing ahead of March so we can have a better view of the trend?

Thanks for your questions. You did not miss Senegal price increase indeed because I did not comment on it yet. We have not announced any price increase yet in Senegal. As you know, Cement is a very visible commodity for end consumer in emerging countries and specifically, in West Africa. So as such, it is very sensitive and the political authorities are paying attention to it. What is very clear and I think it's a shared understanding with all parties is that considering the increase of cost, we need a substantial price increase in Senegal. So we expect it to happen. It is not yet clear on the date. Again, this is under discussion locally. So -- but we are confident we will be able to pass it at some point this year. Yes. On the sequence of price increase, I don't think we -- I mean we are able to give you, I would say, a spot view at the end of the quarter. I think the average indication is already quite substantial. We did as well mentioned that the further increase we are considering in key markets as well as the fact that in quite a few emerging markets, we are able to adapt prices regularly as we go along. So we are -- I reiterate, we are quite confident on our ability to reach the 15% target and to offset the energy gap. Regarding the quantum of energy price increase, well, I see where your figure is coming from. We -- it is a very different situation from one place to another. I mean depending on the percentage of substitution, depending on the source of energy, depending on the currency situation. So we figured out that it would be more meaningful for everyone to express this as the price increase needed to offset the cost rather than continue to have the inflation -- global inflation figure that is made of many very different things. As a reminder though, we do express this as a cement price increase.

Okay. So if I understand correctly, the 70% is not meaningful.

I mean, it's your calculations.

[Operator Instructions] We do have a follow-up question coming from the line of Yassine Touahri from Field Investment.

Just a follow-up question on this 15% increase necessary to offset the energy cost inflation. Is it a 15% increase only enough to offset the energy presentation? Or will be enough to offset for the cost inflation, including other costs such as raw material, labor and...

I believe the guidance we have given is that 15% would offset the energy inflation.

So including -- if we include the labor cost and all the other costs, it will be more than 15% to keep your cash generation stable. Is that fair?

I believe -- I would drive you to look at our global guidance again. If we consider everything, we still believe that we -- our EBITDA will grow to a lesser extent than last year, but this is the same guidance as before. We just would point out that considering the strong increase of sales linked to sharp selling price increases, we do expect an erosion of the EBITDA margin.

The guidance that you guys integrated volume growth? Or is it fair to assume that it will be back to a more moderate volume, to be a lot of volume growth, given what you've [ published ] in the first quarter.?

As you have surely seen, we give elements on a market-by-market basis for the activity levels. And we do point out an increase in the activity level globally, but that is likely to be moderate, but more favorable in H2 than in H1, given the respective basis of comparison.

A very last question on the U.S. Have you seen any bidding activity related to the stimulus program? Do you expect to see any benefit at the end of the year or in early 2023? Or is it too early to assess what will be the timing of these impacted customers in the market to be?

As you know, this stimulus is expected to be substantial. The PCA has pointed out on a very substantial impact on the coming years. We do not expect any significant effect before late this year and most likely next year.

The next question is coming from the line of Harry Goad from Berenberg.

And just one for me, please. And I guess it's circling back just on low carbon products. Back at the time of the full year results, I think it was you talked about a new product you're developing. I think it's the first time you talked about it. Can you please remind me the specifics of that product, how it's progressing and any update on it?

Thank you for your question. Well, obviously, we have not disclosed much detail regarding this product, but I may reiterate what was shared so far. This is a new binder that depending on resistance that are expected different types has a neutral or negative carbon footprint. This contain the elements that are acting as a carbon sink. And so we are now implementing test sites. So we have constructed a few of them so far. And based on this, we will seek a tax authorization to be able to further move to commercial stages later on, probably next year. So it is still early stages of the development, but it is moving forward as expected.

If I can just add one follow-up on that. I mean just to be clear, is this a product that will be made in a traditional cement plant and/or is there anything you can tell us about the raw material mix?

What we are trying to achieve is a cement that has the same properties and behaviors as a traditional cement. As mentioned, this is -- this can be referred to as a binder since it is not a normalized product, but we will certainly try to have it behave as much as possible as a normal cement.

And the final question is coming from the line of Tobias Woerner from Stifel Europe.

Just one, be pleased to hear. You said earlier that in India, you're already overcompensating or compensating the higher energy costs. That actually seems to be quite a surprise to me given the significantly higher coal prices in Asia. Can you shed a little bit more light on this? What sort of level of price increases you've seen in your region? And what your energy costs have increased by?

Yes. Just maybe a little bit more clarity. Obviously, I'm not able to disclose prices level by quarter, by region and so on. But what I would like to point out is that depending on what was the policy -- of hedging policy and what is the inventory situation, the coal price and globally energy price increase is hitting the P&L at different times. So what we have mentioned is just that as of the end of March, the price increases have offset the evolution in cost. This is not -- if you look at the full year guidance, we mentioned that we believe that the energy -- the full year price increase may not be sufficient to fully offset the energy on a full year basis. But we will, of course, do our best to try to compensate it. So this was just end of March situation, which...

I'm a bit confused. You set out in your guidance, now in your statement that 15% should be enough to compensate the higher energy cost. And now you say the opposite.

As a total, but regarding India? India -- so you can look at the detail by country and regarding India. We mentioned the strong rise in energy costs should only be partially compensated.

Which leads into a follow-on question, if I may. What level of your energy costs are hedged at this point in time?

This is very variable from one plant to other. So I'm not able to give you precise of our indication.

There are no further questions in the queue. I would like to hand you back over to Hugues to conclude today's conference.

Thank you. This concludes our call for today. I'd like to thank you all for your interest in Vicat and [ we'll see you ] for Q2 results in end of July.

Thank you so much, everyone, for joining us on today's call. You may now disconnect your handsets.