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

Welcome to today's Vicat Q3 Sales 2022 with Guy Sidos, Chairman and CEO; and Hugues Chomel, CFO. Today's call is being recorded. I will now hand over to Guy Sidos. Please go ahead.

Thank you, Dana. Good morning, ladies and gentlemen. I'm Guy Sidos, Chairman and CEO of Vicat Group. With me today are Hugues Chomel, Deputy CEO and Chief Financial Officer; and Stéphane Bisseuil, our Investor Relations Director. I will be presenting to you our 2022 9 months 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 begin with the highlights of this period on Slide 3. Firstly, Vicat 9 months sales performance reflects the resilience of its market as consolidated sales came in at just under EUR 2.7 billion for the 9 months to end September 2022, plus 16% on a like-for-like basis. Secondly, despite high basis of comparison in 2021 and against the backdrop of very high inflation, the group sales boasted a solid increase compared with the same period of 2021, is supported by strong growth in selling prices across all regions. Indeed, in this new environment, we've been successful in swiftly adapting our pricing to adjust to conditions in our markets. There may sometimes be a delay before the price hikes kick in and the makeup for such historically brutal increase in average cost, as a one we've recently endured in France and Switzerland. But overall demand is resilient in all markets. And we're pleased with the state of our pricing power. Finally, in the global environment that provides little short-term visibility especially as regards energy cost, we are executing our strategy to improve our industrial performance, make greater use of some of our fuels, reduce our carbon footprint and implement a biking policy tethered to this new conditions. I would now hand over to Hugues Chomel, who will outline the performance by region and I will return for the conclusion.

Thank you, Mr. President. Let's move to France on Slide 4. During the first 9 months of 2022, the good sales in France move higher, supported by a strong growth in selling prices across the good businesses in an environment characterized by an unfavorable basis of comparison and macroeconomic and industry conditions affected by the strong inflation in cost and higher interest rates. In the third quarter, consolidated sales in France increased by 5.1%. Investment business, operational sales moved -- rose 9%. Even unfavorable basis of comparison, this increase reflects a slight fall in demand and a sharp rise in selling prices. The trend continued into the third quarter with operational sales recording a significant increase of 13%. Operational sales recorded by concrete and aggregates business rose 4%. This performance reflects a further increase in demand in concrete, but fall in aggregate. Selling prices recorded a significant improvement. In the other product and services business, operational sales rose 8%. Please turn to Slide 5 for performance in Europe. In Switzerland, the group consolidated sales were stable at constant scope and exchange rates over the period as overall. In the third quarter consolidated sales declined by 6.1%. In the cement business, operational sales moved up 3%. This performance reflects a falling demand during the period, largely offset by solid increase in selling prices. In the concrete and aggregates business, operational sales declined 5% with increase in selling prices, not fully making up for the significant decline in both concrete and aggregates volumes. In the other product and services business operational sales fell 2%. In Italy consolidated sales grew by 43% over the 9 month period and by 50% in the third quarter alone. Both volumes and selling prices recorded a significant improvement. Moving now to the Americas on Slide 6. In the United States, the macroeconomic and sector environment remained favorable for the period. Consolidated sales rose 4% at constant scope and exchange rates. The construction of a nuclear line at Ragland plant in Alabama which began in 2019 was completed in the second quarter of 2022. The new facility started up gradually during the third quarter of 2022. As a result, production capacity and deliveries in the region were temporarily curtailed. Taking these factors into account, the group consolidated third quarter sales rose 4.5%. Investment and business, operational sales grew 4% during the first 9 months of the year, reflecting the momentum of construction markets in the regions in which the group operates and the introduction of significant price increases. The impact of the startup of the new Ragland kiln was felt in the second and third quarters and was offset only partially by the strong increase in deliveries in California. In the concrete business, operational sales moved at 4.5% supported by the increase in selling prices which largely offset a small drop in sales volumes. In Brazil consolidated sales totaled EUR 210 million, up 32% at constant scope and exchange rates. Against a backdrop of rapid inflation and despite higher interest rates and an unfavorable basis of comparison, demand remains strong in the group markets. In the third quarter, consolidated sales rose 29% at constant scope and exchange rates. In the cement business, operational sales were EUR 165 million, an increase of 28%. In a dynamic market environment selling prices posted a significant increase. In concrete and aggregate business, operational sales were up EUR 68 million, an increase of 51% in line with the trends seen in the cement business. The steady improvement in market condition was coupled to a rise in prices both in concrete and aggregates. On Slide 7 we can examine performance in Asia. Sales in India rose throughout the period moving up 12% at constant scope and exchange rates to reach EUR 320 million. Against the backdrop of high inflation, demand remained solid and price increases were introduced. The trend carried forward into the third quarter with sales in India rising 7% at constant scope and exchange rates to reach EUR 106 million. Debottlenecking operations at the Kalburgi plant in India increased the plant capacity to over 10,000 tonnes of cement per day temporarily weighing on the plant capacity during the third quarter, but enabling it to capitalize fully and the market dynamism going forward. Consolidated sales in Kazakhstan came to EUR 56 million, up 4% at constant scope and exchange rates. This performance reflect a significant increase in selling prices which largely offset falling volumes delivered against a very high basis of comparison. In the third quarter, consolidated sales fell 10% due to lower volumes delivered given the logistic issues affecting the entire market with this impact only partially offset by higher selling prices. On Slide 8 you have our performance in the Mediterranean. In Turkey in a declining market, the group continued to pursue its strategy of optimizing its production facilities, limiting volumes sold and prioritizing higher selling prices in an hyperinflationary environment. Against this backdrop, consolidated sales in the 9 months to 30 September '22, totaled EUR 175 million representing an increase of 168% at constant scope and exchange rates. During the third quarter consolidated sales were up 211%. In the cement business, the group has limited the use of its least energy-efficient manufacturing facilities to lower the impact of higher costs in an hyperinflationary environment. As a result, volumes were much lower during the period. Decline was offset by -- to a very large extent by very substantial price hikes. As a result operational sales in the business climbed 169% to EUR 129 million. In the concrete and aggregate business, operational sales rose 173% at constant scope and exchange rate to EUR 80 million, thanks to record price high increases in both concrete and aggregates. With the tough weather conditions that affected the beginning of the year, concrete deliveries declined over the 9 -- first 9 months of 2022. However, aggregate volumes moved higher. In Egypt, consolidated sales totaled EUR 85 million, up 64% at constant scope and exchange rates. Following the market regulation agreement renewal between the Egyptian government and all producers, selling prices in the domestic market continued to improve during the first 9 months of the year, supported by a solid increase in demand. Finally on Slide 9 you have the numbers for Africa. In this region, the good continued to benefit of a dynamic sector environment despite the political crisis in money. During the third quarter, consolidated sales were stable at constant scope and exchange rates. In the cement business, operational sales in the region fell 6%. While business trends were virtually stable in Senegal, the sharp contraction in Mali market as a result of a geopolitical environment was not fully offset by growth in Mauritania. Selling prices rose in both these markets. In Senegal, another increase was introduced towards the end of a period, but had only a small impact by 30th September, following on from a long period during which increases had been severely curbed by the authorities. In the third quarter, operational sales declined 10% amid very strong cost inflation, the group adopted the commercial optimization strategy prioritizing increases in selling prices. Lastly, the wintering season was less favorable than during the third quarter of 2021. In Senegal, the aggregate business recorded operational sales of EUR 26 million, up 26% supported by private sector demand. On Slide 10, I'll turn to the changes in the group financial position at the end of September 2022. Group shareholders' equity was EUR 2.9 billion, up from EUR 2.5 billion at September 30, 2021. Net debt stood at EUR 1.7 billion, up from EUR 1.3 billion as at September 30, 2021. Given the significant increase of a net working capital requirement with the growth in sales and the impact of inflation on inventories as well as a high level of CapEx with 2 strategic value creation project currently underway in the U.S. and in Senegal. Both these projects are expected to deliver ROCE of between 15% and 18%. On Slide 11, we've given you an update on energy cost. Energy costs totaled around EUR 400 million in 2021, EUR 57 million of which were related to the use of fuel. The group hedging policy provides a degree of visibility on its energy cost over the short term. Since the beginning of the year, the very sudden surge in energy prices, especially electricity prices, has gained pace. By September 30 energy cost went up 87%, including a rise of 103% in fuel prices and 66% in electricity prices. During the third quarter, the very strong increase in electricity prices in France and Switzerland reached record high. In the October 11 update of its outlook for 2022, the group announced further significant price increases of more than EUR 20 in France and CHF 30 in Switzerland to respond to the new environment in these 2 markets and offset the impact of electricity price increases. On Slide 12 you have the latest in the ramp-up of our new kiln at the Ragland plant in the United States. Construction of this new kiln line began in 2019 and was completed in the second quarter of 2022. However, the gradual startup process weighed on performance in the third quarter of 2022. The issue has since been resolved and the new installation is now working very well. I will now hand back to Mr. Sidos for the conclusion.

Thank you, Hugues. Finally on Slide 13 we have highlighted the outlook for 2022 that we updated on the 11th of October this year. For 2022, the group's EBITDA is now expected to be lower than in 2021 and to be at least equal to that generated in 2020. Even if the expected level of EBITDA is [indiscernible] initial expectations, it would represent a solid performance in the changing environment. The group is taking the necessary measures to adapt to the new environment and remains firmly focused on its strategic objectives. First, leveraging we see the contradiction of the CapEx scope 2023 and 2024 to go on margin restoration with a change in policy when it comes to sales pricing in order to adapt to industry price volatility particularly in metro markets. Third, acceleration of the ecological condition with a faster ramp-up of the use of secondary fuels and the decrease in the clinker rate with the objective of reducing cost per tonne of cement produced and improving climate performance. This concludes our presentation. Dana, can we move to questions?

Certainly. [Operator Instructions] We will take our first question from Ebrahim Homani with CIC.

I had 3 questions, if I may. The first one is about Ragland. Each one had caused an exceptional charge of EUR 25 million. What should we expect in the full year and which CapEx do you restock in priority? My second question is about energy costs in France. You are covered at 60% by the RN system for the electricity costs. So how much are you covered for 2022 at the group level? And other similar systems in other countries, other system similar than the RN system? And maybe the last question about the power plants you have, if I'm not wrong independent power plants in Switzerland. Do you have any elsewhere in Europe?

Thank you for your question, Ebrahim. On our ground, actually we disclosed that we had a nonrecurring industrial cost in each one of EUR 25 million which was related to 3 different situations, the largest one being Ragland. This continued into the third quarter mostly in Ragland and to a lesser extent, as we pointed out with the limitation of capacity of Kalburgi linked to the debottlenecking. We have not shared evaluation of this impact. It is mostly related to reduced deliveries.

Yes, about your second and third questions, all about energy cost and especially power cost. We're in 12 countries, each country has its own dynamic, its own way of setting power price. So France is a very special situation. We cover our needs in electricity via framework as in contracts for about -- around 65% of our needs. And for the balance, we provide our needs with acquisitions at spot price or acquisition of future prices as precisely these brutal and sudden increase in electricity spot price that impacted us. And the way electricity prices set up in France is driven by the cost of the last megawatt hour. So it creates some kind of uncertainty. In Switzerland, it's a little bit different and we are covered to 85% for next year and we generate part of our own electricity there. Each country has its own dynamic. And in some countries we didn't even see the price hike in power. So it's very different countries. But you have all the numbers for 2022 at the end of September in our press release. As you know, we have some hydroelectricity power plant in Switzerland. We have a small one in France for a paper mill. We develop fuel capacity over the world and the latest one is in Turkey where we are -- we will start WHRS, more than 10 megawatt in Bastas in Ankara. So situation is very different when it comes to compare countries and we adjust our policy with the local situation. Quite complicated.

Our next question comes from Yassine Touahri with On Field Investment.

Couple of questions. I understand that you're currently passing a price increase of EUR 20 in France. Could you give us an update on how this price increase is developing, what kind of discussion do you have with your clients? How confident are you in this EUR 20 price increase sticking? Do you already have a view of the percentage of the price increase that would remain in a couple of months? Then same question for Switzerland where I understand that you've got a price increase of Swiss francs in a couple of months as you started to discuss with clients. And then in the U.S. as you already [indiscernible] for France over price increase in early 2023 and have you [indiscernible] as your competitor?

Yes. Thank you, Yassine. So a good price increase, of course, it's a negotiation and then discussed with clients. We with a good understanding of the reason why we do it, good level of acceptance. And we increased prices and in France, Switzerland and the U.S. at a time consumption is low because of the weather. So the -- it will definitively added the -- this materialization of price increase because whatever is negotiated, we will have the same between now and January, we'll have almost the same impact on the balance sheet. So we feel very confident in France, Switzerland and the U.S. about these price increases that will compensate to balance the cost hike.

And in the U.S., what is the level of price increase that you have announced [indiscernible]?

So Yassine, Stephane speaking. Do you mean historically, I mean, for the first 9 months of the year or...

No. What is the price increase that you have announced for early 2023 in the U.S.? Is it $10, $20, $15, Stephane?

It will -- it's up to 2-digit number. With very local markets, but are the 2-digit numbers on both markets.

And then the last question, based on the current energy price that you see in your market, do you believe that you could have a positive price dynamics in the first half of 2023 and do you believe they could recover what you lost in the second half of 2022?

We will not comment too much on '23, but you can -- as we mentioned already, there is always a time lag between increasing cost and increase in prices and we will have a full year effect of all the price increases implemented so far.

Maybe a very last question. And so energy price in Europe, in France and Switzerland, normalized onward, do you believe you will have to review prices?

No.

And how confident are you in the fact that your competitor will not doing it and that client will not push back or is it because you're providing more services, is it because of -- to invest in green CapEx, or what would be the commercial discussion?

Well, we do not -- we -- at first we do not talk to competitors. But it's -- if everybody is interest to keep that. No, I believe I know he worrying about that once the price increases. Yes.

We will now take the next question from Sven Edelfelt with ODDO.

I believe there has been a ministerial decree to lower cement prices in Senegal. Can you give us a sense of the potential effect on your cement prices for Q4 and potentially for next year? Second question, can you give us a sense of what is your net debt to EBITDA you would be comfortable with? Yes, these are my 2 questions.

Thank you for your question. I'm not sure I did really understand your question related to Senegal. You mentioned the decree reducing prices?

To reduce prices, yes.

Okay. The one I have seen is increasing prices actually by a little bit more than 10% at the end of September. So we are raising prices currently. On your second point as you -- I mean, financial strategy has not changed from what it is historically. So we aim to bring back the leverage level below 2.

We will now take the next question from Pierre Rousseau with Barclays.

Checking back to power costs. Do you think you would have to change your strategy a little bit in the next few years? And into 2023 are you fixing more costs now? Any thoughts on what you could be doing midterm would be helpful. And then the second question will be about the CARAT product, the carbon-negative products that you are introducing in France. Where is the process currently and could you share some basics in terms of the business plan in the next few years for this product category?

Thank you for your questions. I'm not quite sure I did understand your first question properly, but I will try to answer and you'll revert if it does not match. As we spotted out in our communication, we are adapting to the new environment created by the energy prices. As such, we are adapting our prices a lot more proactively than we did historically in metro market. And we -- in the current environment we have somewhat shorter hedges considering the high volatility going for longer forward is difficult in the current uncertainty and we will certainly adapt as time goes.

Yes, about your second question which is more technical about CARAT, which is our last carbon-negative binder. So we launched it in December. We are now under the process of normalization in France which can be quite long. We started a few -- we did a few projects with that to get some experience in the [indiscernible]. And -- but as far as not fully normalized, we don't expect a major impact on our P&L. It will take some time and we don't see not in total in our hands. And from there we'll follow demand. And the demand for low carbon product is still very low in France.

And we will now take the next question from Manish Beria with Societe Generale.

Yes. So the first question is on the energy cost. So last year, I mean, the energy cost was EUR 400 million. So you are suggesting this year it will double, so maybe like EUR 800 million. So my question is, next year if the energy stays at the spot, so where this EUR 800 million moves to like 1.2, 1.5, so maybe a magnitude or some direction there will be very helpful?

Thank you for your question. As suggested, we expect a very strong increase in the energy bill this year roughly in line with what observed at the end of September. So which is somewhat below a 90% increase, which suggests the -- something around EUR 750 million rather than EUR 800 million. Regarding 2023 it is too early for us to give a precise guidance, sorry.

Okay. So my second question is on the demand outlook for the next year. So maybe if you can provide an outlook by region, Europe, U.S., emerging markets, maybe also comment on the end market. Like how do you see the residential, nonresidential also the infra market in Europe as well as the U.S. So just given an overall picture on the demand outlook by region as well as end market.

Hello Manish, Stephane speaking. It's a good try. But as you know we cannot make any comments on 2023 at this stage. Was not on the press release and it will be communicated February 14th at the time of the full year publication. It's way too early at this stage.

But how is your order book right now? So just taking your order book, I mean, still good. So what sort of visibility you have or how far you have? Yes.

Yes, Manish, once again everything that has been communicated in the press release is -- we've said that the markets were resilient for the end of the year. That's it. Regarding 2023, once again we will communicate it later on.

So maybe the last one. So you said you will look at lowering your CapEx next year. So just trying to see where -- which projects you are going to, I mean, not continue in that sense?

Well, Guy Sidos speaking. We'll continue CapEx we started, but will not launch new CapEx. [indiscernible] in good shape.

And we will now take the next question from Brijesh Siya with HSBC.

I have 3. The first one is on the demand environment. I appreciate you are not ready to kind of take a stab at '23. But looking at Q3, could you give us a little more color about how the end markets are behaving, i.e., residential, nonresidential, infrastructure, how they have behaved and whether you have seen any acceleration of the decline over the period? Or it's kind of more of in the same pace as it was at the start of the Q3?

Thank you for your question. As we highlighted, we see overall very resilient markets with 2 exceptions that are very local. One is the geopolitical situation in Mali and the other one is the situation in Turkey with hyperinflation situation. Everywhere else we see either stable or very limited decline in demand. So in '22 we see a global resilient picture.

Okay. And then possibly the next one is on the outlook for 2022. So as we stand now with the energy prices, how it's moving, any stage of how -- where you are kind of -- if the energy prices stay at this level, is it more likely that you will be closer to 2021 if the energy prices spike off, then you are -- the chances are that you will be much closer to 2020? Is that how we should read it?

Yes. I think we said whatever we could in our guidance. So it will be above 2020.

Okay. And -- okay. Finally, on the CapEx part. I understand you're planning to reduce the CapEx and not starting any new one. How does the CapEx reduction plan impact your sustainability journey?

We -- as stated in the press release, we will maintain our effort on the climate plan and we are not considering to delay it or jeopardize it. We may just reprioritize some projects, but that's it.

And we will now take the next question from Tobias Woerner with Stifel.

Apologies, I've come late to the call. So in case some questions have been asked, apologies in advance. With regard to the hedging policy, you're right in your summary here that you've got a degree of visibility over the next 6 to 9 months. Could we dig a little bit into that and get a sense of what percentage of your exposure is open spot prices as of now or the end of September, both in solid fuels as well as electricity? And the second question just to get a sense and so I can figure up from your sustainability reports. But if you could just remind us quickly what your alternative fuel rate is in Europe as a whole in terms of -- yes, your substitution of solid fuels.

Thank you for your question. As far as the hedging policy, it's quite difficult to give you a global answer since we have a very different situation from plant to plant, depending on the extent of substitution and the presence or not of a regulated electricity price and different types of combustible available for each plant. So to try to give you the general guidelines on which we operate, first of all, I will respond to your second question and come back to the first one in a minute. So our global substitution rate last year was 26%. It was close to 100% in Switzerland and between 50% and 60% in France. And it is improving this year. So obviously depending on that, we have very different hedging policies in different countries. We try to hedge coal and pet coke when we consume some between 3 and 9 months depending on the local situations. On electricity, there is quite a large part of all countries where we have regulated prices. In France as stated by Mr. Sidos a few minutes back, we are protected between 60% and 65% by regulated iron tariff and beyond that we are exposed to spot prices. In Switzerland, we are globally exposed to spot prices, but we have a forward hedging policy that we build gradually with time. So that's about what I can share with you at this point.

Can you say whether this is below or above the French exposure, Mr. Chomel?

It is -- for '23 it's below.

So your spot exposure is no more…

Yes.

More than 35% to 40%.

Right.

Very helpful. And maybe on a more general topic, circular economy. What is your percentage of materials recycled so far in the use of your production facilities at this point in time? Do you have a sense of that?

Not as a global number. Obviously -- no, I have not -- I'm not able to share with you a global number. We are globally trying to develop as much as possible circular economy as we believe it is very coherent with our local business model. And obviously, this is very much linked to the regulatory environment. So it enables us to develop it more swiftly in France and Switzerland. We are already generating significant business in both of these countries, but I'm not able to share a global number with you.

And we will now take the next question from Jean-Christophe Lefèvre with CIC.

I have 2 questions. The first one, follow-up question regarding the price hike in France, EUR 20. Is that announced in November and applicable next year? Or is the application on an immediate effect? First, in this afternoon there is at [indiscernible] meeting with polluting industries. Are you invited?

[Foreign Language] If I talk in France, our ongoing and will be effective December 1 and depending on sector at a minimum of EUR 20 per tonne, so it's well done. But I don't like your word polluting. In fact, it's -- we will be part of this meeting at this afternoon. That's the reason why we had to change the time for call. But it's not pollution. It's about decarbonization. It's about cooperating with government bodies for bringing the industry and among which cement industry to a new standard. And we have a few programs that are supported by the government and you know them. And the will of operations in terms of government is to speed up these projects. So it's a very positive and constructive meeting.

Okay. Just a detail, Guy, regarding this price hike. Does this price hike include or not include the energy of [indiscernible] as it is the case in Germany? And next year will you implement further price increase in the beginning of January, March, maybe?

Well, we do one step at a time. This increase is a firm one. It's not linked with any -- so far with any kind of index and we will keep following the trend in our cost to start a new one or not. It's too early to give you a definitive idea with that. But what is coming now looks strong.

And we have no further questions in the queue. [Operator Instructions] And it seems there are no further questions, so I will turn the call back over to Guy Sidos for the closing remarks.

Thank you, Dana. This concludes our call for today. I'd like to thank you all for your interest in Vicat. We'll be publishing our full year results on 14 February of next year. Until then [Foreign Language]

Goodbye.

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