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

Hello, and welcome to the Vicat H1 2022 Results Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] And I will now hand you over to your host, Mr. Hugues Chomel, Deputy CEO and Chief Financial Officer, to begin today's conference. Thank you.

Good afternoon, ladies and gentlemen. I am Hugues Chomel, Deputy CEO and Chief Financial Officer of the Vicat Group, speaking out of Birmingham, Alabama today. With me is Stéphane Bisseuil, our Investor Relations Director, connected out of Paris. I will be presenting to you our 2022 first half results. 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, our presentation will be divided into 6 points. I will start by presenting the highlights of the first half of 2022, then we'll analyze our performance by region and focus on our main balance sheet and cash flow items. I will then review the latest developments within the group before concluding with the expected trends for the end of the year. Let us now move to Slide 3 -- to Slide 4, with the key points at the end of June 2022. Vicat grew well this semester with consolidated sales topping EUR 1.75 billion with resilient volumes in all markets except for Mali and Turkey. In an environment characterized by strong energy cost inflation, major price increases were introduced across all the countries where we operate. For the time being, the progressive impact has almost fully compensated the effects of cost inflation. EBITDA was impacted by nonrecurring industrial cost of EUR 25 million in the United States, France and India. All in all, EBITDA decreased by almost 10% this semester to EUR 269 million compared to a record high level in H1 2021, a figure that, nevertheless, sits well above its pre-pandemic level of EUR 229 million in the first half of 2019. Finally, the group continued to generate solid level of gross cash flow, but faced inflated increase in working capital requirements. I will now move on to Slide 6 with a detailed analysis of our performance. Slide 6 shows the condensed income statement for the half year. Overall, the group consolidated sales totaled EUR 1.75 billion, up from EUR 1.56 billion in the 6 months of 2021, representing a 12.5% rise in a reported basis and a 14.5% increase at constant scope and exchange rates. The trend in consolidated sales on a reported basis reflects a scope effect of minus 1.4%, negative impact of minus EUR 25 million, resulting from the sale of the lightweight precast business in Switzerland, which was finalized on June 30, 2021. An unfavorable currency effect of minus 0.4% and a strong organic growth of 14.5%, an effect of plus EUR 227 million driven by increase in selling prices across the regions. EBITDA came to EUR 269 million in the first half of 2022. The EBITDA margin was 15.3%, down 390 points from the unfavorably high basis of comparison of the first half of '21. To note, the macroeconomic and inflationary situation in Turkey meets the criteria set out by IAS 29 for application of accounting arrangements for hyperinflationary economies. Application of the standard has prompted reevaluation of opening balance sheet at January 1, 2022, leading to a plus EUR 85 million impact on the group share of equity and an impact on the first half '22 income statement of minus EUR 4.3 million in the net financial expense. Net income group share fell at 22.7% at constant scope and exchange rates and minus 16.8% on a reported basis to EUR 78 million. You have on Slide 7 now, the EBITDA bridge from 2021 to 2022 detailing the various factors at work in this variation. Firstly, you can see there was a slight decrease in volumes that resulted in a negative impact of EUR 11 million. You can also clearly see how the strong price increases that were passed in each of our markets have almost fully offset the unprecedented inflation in costs we've seen this semester. This bearing in mind that at this stage we have not benefited from the full effect of price increases implemented recently, notably in France, Switzerland and the United States. The other key factor to note in the reevaluation is the impact of nonrecurring costs we incurred this half. These include several nonrecurring industrial operations amounting to minus EUR 25 million, but held back performance in the period, including the start-up of Ragland plant new kiln in the United States, exceptional maintenance operation of the Montalieu plant after 2 pandemic-blighted years and the preparation for capacity increase at the Kalburgi Cement plant for debottlenecking investments. Let us now move on the analysis by market, starting with France on Slide 9. During the first semester of 2022, the group sales in France moved higher by 5% with a slight volume decrease but supported by strong price increases. In the Cement business, operational sales rose 7%. The series of price increases introduced at the beginning of the year and late in the second quarter have for the time being offset only partially the very strong rise in energy costs, especially the cost of electricity. One-off maintenance operation carried out in a period of high activity levels after 2-year-long COVID-19 pandemic incurred nonrecurring costs. The EBITDA generated by the cement business declined by 26% over the period. Operational sales recorded by Concrete & Aggregate rose 6% with further expansion in concrete and in aggregate as well as a significant improvement in selling prices during the semester. Nevertheless, EBITDA generated by the business fell 25%. Other Products & Services operational sales advanced 8%. Please turn to Slide 10 to -- on Europe. In Switzerland, the group's consolidated sales climbed 4% and EBITDA moved up 2%. In the Cement business, operational sales rose 3% with a contraction in demand during the first half, largely offset by a solid increase in selling prices. EBITDA grew by 7%. In the Concrete & Aggregates, operational sales declined 1% with higher prices but lower volume in concrete. EBITDA grew down 12%. In Other Products & Services, operational sales rose by 1% and EBITDA was up 32%. In Italy, consolidated sales grew by 39%. Demand and selling prices strengthened significantly throughout the period with EBITDA climbing 110% in the first half. You may now turn Slide 11 for our performance in the Americas. In the United States, the sector environment remain favorable. Note that Q2's performance was adversely affected by the start-up of Ragland plant new kiln in Alabama, which reduced production capacity and deliveries in the region for several weeks. Ramp-up will accelerate throughout H2 of this year. Despite this nonrecurring factor, consolidated sales came to EUR 273 million, up 4%, and EBITDA totaled EUR 35 million, down 31%, although progressing by 30% in California. In Cement, operational sales in the region grew 5%, reflecting the strength of the construction market in the regions in which the group operates and a significant increase in selling prices. EBITDA was down 26%. Concrete operational sales rose 4% with further positive market trends and significantly higher selling prices. Nonetheless, EBITDA fell 47.6% due to higher costs. In Brazil, consolidated sales totaled EUR 128 million, up 35%. EBITDA was down 29% to EUR 20 million. Despite an unfavorable basis for comparison, higher interest rates and strong inflation in the country, demand remained supportive in the group market. However, the hike in prices has to date only partially offset the rise in production costs. The Cement business operational sales were up 30% and EBITDA fell 41%. In Concrete, sales were up 54% and EBITDA rose 70% on the back of a positive market trend and higher prices. Let us now move to Slide 12 for our performance in Asia. Beginning with sales in India that grew to EUR 214 million, up 14%. This performance was supported by consistently solid demand over the period. Higher selling prices only partially made up for the very strong inflation in energy costs. In addition, preparation for debottlenecking at the Kalburgi Cement remained -- amid high activity level give rise to nonrecurring operating expenses. As a result, EBITDA fell 27%. Consolidated sales in Kazakhstan came to EUR 35 million, up 14%. This performance was achieved through a significant increase in selling prices, which largely offset the decline in volume delivered over the period and cost inflation. EBITDA rose 55% to EUR 15 million. Please turn to Slide 13 to the Mediterranean region. Turkey sales totaled EUR 91 million versus EUR 69 million in the first half of 2021 on the back of exceptionally strong price increases. As a result, EBITDA was EUR 15 million, up from EUR 2 million in the first half of 2021. In Cement, operational sales climbed 135% to EUR 65 million and EBITDA to EUR 10 million versus just under EUR 2 million in the first half of 2021, with volume decline and cost inflation being largely compensated by very substantial price hikes. In Concrete & Aggregates, operational sales rose 164% to EUR 45 million, driven by strong progression in prices. As a result, first half EBITDA came to EUR 4 million compared to with breakeven EBITDA over the same period of 2021. In Egypt, consolidated sales totaled EUR 54 million, up 60%. Following market regulation, selling prices in the domestic market continued to improve during the first half, in line with the trends since seen the second -- in the second half of 2021, first half EBITDA generated in Egypt topped EUR 1 million versus a loss of EUR 8 million in the same period of 2021. Finally, on Slide 14, for performance in Africa, while the group continues to benefit from a dynamic sector environment despite the knock-on effect of the geopolitical crisis in Mali. Cement operational sales fell 4%. Overall, selling prices rose throughout the region, but in Senegal, the increase was significantly restricted by the authorities in the context of election periods. Given the very strong inflation in production costs, EBITDA declined by 38%. Senegal, the aggregate business recorded operational sales of EUR 18 million, up 19.5%. Selling prices moved lower due to an unfavorable product and customer mix. EBITDA decreased by 7%. I now propose to move on to the balance sheet and cash flow items. On Slide 16, at June 30, 2022, the group financial structure remains solid with a large rise in equity and net debt under control. Consolidated equity totaled EUR 2.9 billion. Net financial debt stood at EUR 1.67 billion with a strong rise in working capital requirements. The sharp increase in the working capital requirement stems from both growth in sales, but also from the impact of inflation on inventories. Working capital requirements stood at EUR 594 million at the end of June 2022 compared to EUR 390 million at the end of June 2021. Moving on to CapEx and free cash flows on Slide 17. Disbursed industrial CapEx totaled EUR 178 million in the first 6 months of 2022, with the new kiln at the Ragland plant accounting for a significant portion of that amount. Free cash flow was minus EUR 203 million versus minus EUR 52 million in the first half of 2021. Strong reduction stems from the large increase in working capital requirement attributable to energy cost inflation. A quick look at the recent events that have marked the group semester. On Slide 19, you can see Ragland's new kiln. Construction of a new 5,000 tonnes per day kiln at the Ragland plant in Alabama, which began in 2019, was completed in the second quarter of this year. The commissioning of this new production facility required a period of fine-tuning and adjustment that came to an end in early July, paving the way for a gradual ramp-up in production in H2. In Senegal, in line with the goal of higher capacity in growing market, improved operational performance and contribution to meeting the group's carbon emission targets, Vicat launched at end '21 a EUR 240 million investment plan to build a new kiln line. This production facility is scheduled for commissioning in 2024. On Slide 20, a word on CARAT, the group's first zero carbon binder. This innovation will enrich Vicat's DECA range of low-carbon solutions, raising the prospect of very low carbon concrete with a reduction of close to 90% in the carbon footprint per cubic meter of concrete. It is a very practical response to the new RE2020 regulation in France. CARAT will be produced at the Montalieu plant in France. The ATEx, which is the technical trial assessments, are currently in progress with permits expected to be issued during 2023. Eventually, Vicat plans to manufacture it at other group facilities to meet demand across other markets. I now propose that we move on to the outlook for 2022. On Slide 22, we've laid out our unchanged outlook for the year. In '22, the group anticipates the strong increase in its sales underpinned by an increase in its activity level and a sharp progression in selling prices. EBITDA generated by the group in 2022 is likely to grow, but not as much as in 2021. In light of these factors, the group expects erosion in its EBITDA margin in 2022. We've laid -- we've also laid out on Slide 23, and in order to provide you with visibility on our actions, the different trends and investment items that will contribute to shaping the second half of the year. These elements complement the outlook you already have for each of our markets, but can also be found in yesterday's press release on our website. Courtney, can we move to questions?

[Operator Instructions] And our first question comes in from the line of Paul Roger or from BNP Paribas Exane.

This is Robert Whitworth on for Paul Roger. I just had a few questions that I wanted to follow up with. So the first one really is actually just more around the gas situation in Europe. And I appreciate you don't use gas in Europe, but what indirect effect does European gas shortages have on Vicat, either in terms of demand or supply chain? I can ask my second question after that.

Thank you very much. Yes, indeed, as you rightly pointed out, we are not using gas in Europe. We are using gas only in U.S. as a complement to substitute fuels. Obviously, as you very well know, the impact of gas is -- can be substantial on the price of electricity mostly, so that could affect us that way. Otherwise, I mean, the generic effect of potential gas shortage and activity could have an indirect impact, but we don't see that affecting more markets this year.

Great. And I guess the next one really is just on hedging. So how hedged is the group for energy? And what magnitude of cost inflation are you expecting in the second half? I mean, obviously, you got some margin pressure in the year overall, but will the squeeze in H2 be less than H1? Just kind of trying to get your views around that.

As we have communicated previously, the hedging strategy has been constant, trying to hedge our fuel forward for 6 to 12 months period. So we continue to do so and trying to optimize it on a plant-by-plant basis and trying to any way to minimize fossil fuel consumption by constantly raising our substitution rate. Nevertheless, so basically, the fossil fuel inflation is fairly known for the year now. And we expect, as communicated previously, comparable inflation -- comparable prices across the year with a basis of comparison that will be more favorable on H2 since H2 '21 did account a substantial rise already. On electricity, there is some part of the consumption, but we are not able to hedge a limited part and on which we still have an exposure to spot prices.

Are you able to quantify that at all? Or...

It's a limited part of the consumption in France and Switzerland.

Okay. No problem.

The next question comes in from the line of David Mann calling from Enfield Investment Research.

I would like to have some questions. The first one is, are your industrial issues in the U.S. front and India continue to impact the second semester? And the second is related to -- you mentioned today that they see a 17% decline in the market for new housing built by real estate developers in 2022 as inflation starts to hit activity. But are you hearing of a similar slowdown when you discuss with your clients exposed to the French housing market?

David, so regarding the nonrecurring industrial items, I mean, these are 2 -- 3 specific situation where we have been, I would say, preparing for the future, but that did impact current -- the H1 performance. So the main one is the start-up cost of our kiln here in Alabama that has -- that took a little less than 2 months basically -- and so we're in a dynamic market environment. We had both cost and shortage to supply the market. So this is behind us now and the facility is now ramping up, and we will certainly go to the nominal performance in the coming -- short coming months. So this -- and this will obviously give us the expected additional capacity in a market that is for the time being short of supply and still very dynamic. In France, we had some, I would say, exceptional maintenance operation in Montalieu. This was, I would say, a nonrecurring cost. The plant has now come back to its best performance and is able to increase substitution to very high level as well. So that will deliver a nice industrial performance going forward. And lastly, in India, our Kalburgi plant was running at full capacity with a demand of -- especially the Maharashtra, that is very strong. And we have planned a debottlenecking investment, and we had to prepare for that stoppage that was between end of June and end of July. And we had to -- we did some cost supplying the market with both [indiscernible]. So this is behind us. Kalburgi has an additional capacity of about 10% now. And I think this will help in the current market environment. And I'm sorry, I'm not sure I did understand your second question totally, so could you summarize it for me?

Yes, sure. So as I was saying, [indiscernible] mentioned that they see a 17% decline in the market for new housing build by real estate developers in 2022 as inflation starts to hit activity. But are you hearing of a similar slowdown when you discuss with your clients exposed to French housing market?

We don't see a slowdown in the [ housing ] starts, I would say. I think we may see, obviously, the residential market may be more exposed to the, I would say, the headwinds of higher interest rates and rising cost of construction, but the current backlogs and activity levels of our customers let us think that this will not have a substantial impact in 2022. It could be an effect going forward in '23. It's too early to [indiscernible].

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

Ebrahim and Jean-Christophe in line. The first question is about the pricing policy and your pricing is -- the price hike in the U.S. and France. Do you plan to increase the prices in the H2? That's the first question. And the second question is about the free cash flow with what we expect in terms of free cash flow in 2022 given the decrease of the EBITDA and the increase in working capital.

Thank you, Ebrahim, for these good questions. So on pricing, we are quite, I would say, satisfied with what the way the year has been proceeding. So we have been able to, as you have seen in the EBITDA bridge, to almost fully compensate the impact of inflation in H1, although the impact of different price increases is coming in gradually. We had in all the, I would say, developed countries markets, 2 rounds of price increases, one at the beginning of the year, that is we have almost the full effect of it in H1. And the second round that did for France and Switzerland came in late in Q2, so where we expect an increased effect in H2. And another one, a substantial $10 in U.S. that was applicable July 1, so where we have no effect on H1. So we do expect to have an increased impact of price increases in H2. And that at the current -- in the current situation would be enough to offset the cost inflation. Nevertheless, if inflation goes further up, we will readjust our prices as need be. And this has been made clear to the market already. In emerging markets, we have been able to raise prices regularly with different situations. Obviously, India has been more difficult, and we believe there [ will ] still be probably some difference between cost and price inflation in India. In Senegal, authorities has restricted a lot price increases. We continue to communicate with them to let them understand the impact on inflation on the sector, and we are quite confident that at some point they will let us readjust with very substantial price increases there, hopefully during Q3. On free cash flow, as you -- I would remind you that our guidance for the full year is an increase of EBITDA, but less than last year's increase, but an increase in EBITDA. So we don't expect to have the same effect that is in H1. We have, as you have witnessed, a strong increase in working capital requirement at the end of June. This is -- there is a usual peak of working capital at the end of June. This one has been further pushed up by 2 elements. The main one is inflation that is impacting both fossil fuels, inventories and clinker and cement costs. The second one that has -- is still a little bit present at the end of June was the -- versus the, I would say, the additional inventories that we had to take in some places to make sure that we have all the supply we need in the different markets as we have now more visibility on the impact of the Ukrainian situation on supply was, I would say, security inventories should fade away. Nevertheless, the effect of inflation will stay, so we will have working capital increase on the full year basis. We will -- we are very much focused on limiting it as much as possible to maximize the free cash flow. So I would not expect an effect as negative as we have seen in H1.

And just maybe a detail about the first question. Maybe you have noticed that one of your competitors has already announced a price increase in September in France.

We will -- obviously, offsetting cost is only a first step. We need to protect our margins as well. So we will surely adjust our price to the situation and make sure we can contribute to the group profitability.

Question comes in from the line of Pierre Rousseau calling from Barclays.

Yes. First one would be a clarification on one-offs. First of all, can you confirm that the guidance includes them for the full year. The release also mentioned extra one-offs possibly in H2 relating to the U.S. capacity again. So do you have a quantification for this in H2? And lastly, for the EUR 25 million in H1, could you give a rough idea of the split between France, the U.S. and India? And the second question would be on capital allocation. I think you've always made clear that CapEx was conditional on cash generation and leverage. I see that the envelope for the full year is maintained. So do you feel -- how do you feel about [indiscernible] for the full year? And in the next few years, is it fair to expect that you will focus on deleveraging a little bit more? And maybe just a quick last one regarding the capacity increase in Senegal. Will we see in the future the same kind of one-offs as the ones we saw in the U.S.? Or operationally, is it going to be a smoother process?

Thank you, Pierre, for your questions. First of all, on your first question on one-offs. Indeed, the impact of H1 one-offs is included in the full year guidance. This is absolutely clear. I'm not sure we -- we have pointed out 2 additional one-offs on H2. We have pointed out that this new facility will ramp up and this will produce gradually the additional capacity and the cost savings. We do expect, as I speak, I was in the plant yesterday. As I speak, this kiln is already running at a higher level than the previous one, and it has not reached yet its nominal capacity, but we do expect this to happen shortly. So it will contribute positively. There is no new one-offs identified as of today. As of the split, obviously, we do not communicate on the full detail. I can give you a rough idea. I would say U.S. is basically a little bit more than half of global amount and France is a substantial part and the remaining is in India. On capital allocation, we have currently -- we have maintained our full year guidance because it includes, well, as usually, our maintenance CapEx that we maintain in all situations. It does include the 2 projects of kiln upgrades, I mean, kiln construction that are going on. One is almost finished, but it's continuing. And the other one is in full speed of construction. And once those projects are started. We have our best interest is to finish them as quickly as possible. Nevertheless, we do appreciate that we -- deleveraging is a priority objective for the group. And we will going forward, especially in 2023, we will be very selective on new investment and will surely make a priority to bring the debt down somewhat, but an important element of this is as well the action on working capital, although the inflation part is difficult to avoid. So yes, I confirm deleveraging will be a priority going forward.

We currently have no further questions coming through. [Operator Instructions].

Sorry, Pierre, maybe I missed one part of your question and sorry for that. In -- the nonrecurring -- the potential of nonrecurring cost for the start-up of Senegal, the situation is rather different in Ragland, so you understand maybe a little bit more. In Ragland, we have built a new kiln line, but keeping the upstream of the line and the downstream of it. So we had to stop the existing line and reconnect to the current installation with only the grinding being able to operate. In Senegal, we have 3 existing kilns, and we -- that we'll continue to operate, and we are building a completely new line that is separate from the existing one, and that will connect to the existing grinders. So we are in a situation to continue to serve the market. There is always start-up costs, but not the same -- we do not expect the same kind of situation as we had in Ragland where we had limited supply. Okay. We don't have other question. I would conclude this call for today. I'd like to thank you all for your interest in Vicat, and I hope to -- I look forward to see you again after a restful summer for all of you. Have a good day.

Thank you for joining today's call. You may now disconnect your handsets.