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

Hello, and welcome to the Vicat Full Year 2022 Conference Call. My name is Priscilla, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Guy Sidos, Chairman and CEO; Mr. Hugues Chomel, CFO, to begin today's conference. Please go ahead, sir.

Thank you, Priscilla. Good afternoon, ladies and gentlemen. Welcome to the Vicat Group's 2022 Annual Results Presentation Meeting. I'm Guy Sidos, Chairman and CEO of the Vicat Group. At my side, I would like to introduce Hugues Chomel, Deputy Managing Director and Chief Financial Officer of the group. Moving to Slide 2. Also as the preliminary, you'll find a warning on this page. It is intended to draw your attention to the fact that the elements relating to the 2023 financial year, which are presented here of assessment of expected trends in the group's various markets and that should not be considered in any way as forecast. On Slide 3 now. Our presentation will be divided into 6 points. I will start by mentioning the highlights of 2022. Hugues Chomel will then analyze the performance as well as the main balance sheet and cash flow items. I will then review the latest developments in the group before concluding with the outlook for the current year. Moving to Slide 4 with the highlights of 2022. Over the year, Vicat Group demonstrated its resilience in the context of unprecedented inflation, analyzed by an unfavorable basis of comparison linked to the strong rebound in activity in 2021 by a very sharp increase in energy costs, and by nonrecurring industrial costs in the United States, France and India. The group demonstrated this responsiveness by applying sharp increase in sales price in almost all the markets where it operates in order to offset the impact of inflation. As a result, the group's consolidated sales exceeded EUR 3.6 billion, and the group's share of net profit was EUR 156 million for the year. In 2022, the group has also been able to adapt by diversifying its sources of supply and continuing its policy of reducing carbon emissions by relying on existing solutions and investing in technologies that will enable it to achieve its new 2030 objectives. We'll come back to this. On this basis, the Board of Directors has decided to propose that shareholders vote to distribute a dividend of EUR 1.65. I now hand over to Hugues Chomel for a detailed analysis of our performance.

Thank you, Mr. Sidos. Slide 6 shows the group's simplified income statement for the year 2022. Consolidated revenues on a reported basis increased by 17% and resulted from a scope effect of minus 0.3%, mainly related to the disposal of the light precast business in Switzerland finalized on June 30, 2021. An unfavorable currency effect of minus 2.7%, corresponding to a negative impact of EUR 86 million due to the depreciation of euro against other currencies with the exception of the Turkish lira and the Egyptian pound. And finally, and most importantly, an organic growth of plus 19.7% supported by sales price increases in all regions. EBITDA reached EUR 570 million in 2022. Thus, despite cost inflation in an unprecedented scale, operating profitability remained above the 2020 level. The EUR 20 million reduction in the net financial income compared with EUR 21 million comes from -- for EUR 3 million derived from the increase in the group average debt and the increase in interest rates, net of interest rate hedge. EUR 12 million derived from the application of the IAS 29 in Turkey and EUR 7 million resulting from ForEx losses. The situation in Turkey meets the criteria set out under IAS 29 for hyperinflation economies leading to an impact on the '22 income statement of minus EUR 20.8 million of which EUR 12 million were recorded net financial expense. Income tax expense declined by EUR 24 million compared with 2021. The effective tax rate was 28.6% in 2022, below the 2021 rate of 29.2%. Let us now move -- turn to Slide 7 with the factors underlying the change in 2022 EBITDA. We have highlighted the 2021 versus 2020 change in parallel, so you can -- so that we can better visualize the magnitude of certain impact last year. We can clearly see the very strong inflation in production costs and in particular, in other cost observed since the second half of 2021, and which has accelerated significantly in 2022. Over the year as a whole, costs rose by EUR 646 million, a variation greater than last year's EBITDA, offset by the responsiveness of the group team which applied clear increases in selling prices in almost all the markets where the group operates. Price increases had a positive effect of EUR 657 million. It is important to note that in France and Switzerland, only part of the price increases had an impact on 2022, some of which occurred at the end of the year and the full effect of which will be felt from the first quarter of 2023 onwards. Also, nonrecurring industrial costs in the U.S., France and India, should support the expected improvement in 2023. Let's move on to the analysis by market, starting with France on Slide 9. In 2022, the group's activity in France increased despite a slight decrease in volumes given the record levels recorded in 2021. Cement consumption remains at a high level. In the context of high inflation, sales prices are up sharply in all the group activities. EBITDA is down significantly over the period, given the delay between the price increases and the particularly significant increase in operating costs, especially energy that rose 55% and an unfavorable 2021 comparison base. On Slide 10, we move to Europe. In Switzerland, given the unfavorable basis of comparison, volumes were down for the year. The decline in volumes was partially offset by higher prices. In Italy, sales volumes and prices increased significantly. EBITDA in the region as a whole is down due to the significant increase in energy costs in Switzerland, particularly electricity, which accelerated in the second half of 2022. On Slide 11 now, in the Americas as a whole, demand in the construction sector remains strong, despite the high basis of comparison, particularly in Brazil. In the United States, the second and third quarters were impacted in the Southeast by the startup of the new Ragland account, which temporally affected production capacity and deliveries in the area, while at the end of the year was marked by unfavorable weather conditions in this region. Despite these factors, consolidated sales reached EUR 581 million, up 7% at constant scope and exchange rates, thanks to a strong showing in California. Taking these factors into account, EBITDA was EUR 88 million down by 19%. In Brazil, given an unfavorable comparison base, rise in interest rate and inflation in the country, volumes were stable in the group's market. Price increases only partially offset higher production costs. On this basis, consolidated sales rose by 27% to EUR 279 million, and EBITDA fell by 7% to EUR 47 million. Let us now turn to Asia on Slide 12. Business in India was driven by volume growth supported in particular by public demand. In the context of very high inflation, increase in sales prices only partially offset the sharp rise in energy costs. In addition, the increase in capacity of the Kalburgi cement plant in the context of sustained activity generated nonrecurring operating expenses. On this basis, revenue reached EUR 433 million, up 13%, and EBITDA was EUR 73 million, down 31% from the record level reached in 2021. In Kazakhstan, the significant increase in sales prices offset the decline in volume and the impact of cost inflation. On this basis, the group recorded revenues of EUR 67 million, down 1%, and EBITDA for the year was up to EUR 26 million, up 12.5%. Slide 13. In the Mediterranean area, in a context that still lacks visibility, sales grew strongly in both countries, thanks to strong increases in sales price, allowing a significant recovery in operating profitability. In Turkey, the macroeconomic and sector environment is marked by hyperinflation. As a result, consolidated sales amounted to EUR 258 million compared with EUR 150 million in 2021. The group prioritized margins by limiting volumes to use its most efficient industrial tools and maximize selling price evolutions. EBITDA increased significantly over the year to EUR 44 million compared with EUR 13 million in 2021. In Egypt, following the conclusion and renewal of the market regulation agreement between the Egyptian government and oil producers, sales price on the domestic market continue to improve. In this context, consolidated sales were EUR 116 million, up by 62% and EBITDA was balanced against a loss of nearly EUR 10 million in 2021. In Africa, on Slide 14. The market remained resilient despite the effect of inflation and the political crisis in Mali and the region's economy. The Cement business, operating revenues fell by 2% and EBITDA generated by this business fell by 53% over the period. Although business was up in Senegal and stopped sharply in Mauritania, a strong decline in the Malian market, taking into account the political environment could not be fully offset. Sales prices increased in each market, but not enough to compensate for cost inflation as the government restrictions on pricing in Senegal weigh on margins. In Senegal, the aggregates business driven by the gradual resumption of major government project posted operating sales of EUR 38 million, up 28% and EBITDA was up 4%. I now propose to move on to the balance sheet and cash flow items. On Slide 16 you can see the strategic growth CapEx totaled EUR 176 million in 2022 versus EUR 156 million in 2021. A large portion of it reflected the final stages of the construction of the Ragland plant in U.K. and the United States, and the continuing construction of a new kiln in Senegal. Return on capital employed from these 2 projects, which will create a great deal of value is expected to be 18% and should begin to materialize from 2023 on -- in the United States. Lastly, the group's strategic CapEx allocated to reducing the carbon footprint totaled EUR 85 million in 2022 compared with EUR 75 million in 2021, reflecting the advancement of projects launched under the climate strategy. On this basis, free cash flow before strategic CapEx came to EUR 210 million compared to EUR 295 million in 2021. As a result, free cash flow after strategic CapEx amounted to minus EUR 51 million versus plus EUR 63 million in 2021. The reduction in free cash flow stems from the decline in the EBITDA and from the large increase in the working capital requirement attributable to cost inflation. Working capital requirement at the group level increased by 38% in '22 to EUR 472 million versus EUR 342 million at the end of 2021. Slide 17 now. At December 31, 2022, the group financial structure remains solid with a substantial equity base and net debt under control despite higher working capital requirement. Consolidated equity totaled EUR 2,863 million as at that date. Net debt totaled EUR 1,567 million. On this basis, the group's leverage ratio stood at 2.75x versus 2.13x as December 31 2021. On Slide 18, you have the details of all different sources of financing. You can see the breakdown between fixed rate financing, about half and the part that is at variable rate, which is, to a large extent, capital. This diversification in financing has enabled us to maintain the average maturity at around 5 years while containing in the new context of higher rates growth of average interest rate at 40 basis points. On February 9, 2023, the Vicat Group contracted a $242 million financing agreement in Senegal. Given the performance of a project currently under construction, which uses best available technologies to achieve a carbon intensity of 460 kilo per tonne of gross CO2 emission, the portion related to this project qualified as green financing on the basis of the second-party opinion issued by a top-tier agency. The Vicat Group has thus reached another milestone through the alignment of its financing arrangements with its environmental goals.

Thank you, Hugues. I would like to -- now to take a look at the recent events that have marked the group's activity. On this Slide 19, you can see a picture of a new Ragland plant [indiscernible]. Let's begin on Slide 20 with this new 5,000 tonne per day kiln line at the Ragland plant in Alabama, work started in 2019 and was completed in the third quarter of 2022 after a period of adjustments and fine-tuning, which is expected to be 18% on the project, and it will improve the income statement in 2023. This industrial achievement brings an increase in capacity to 1.8 million tonne per year compared to 1.2 million tonnes previously. The reduction in production cost of around 30% per tonne produced and a reduction in CO2 emissions of minus 35% per tonne. In Senegal on Slide 21. The group continued its climate plan by investing EUR 260 million in a new kiln line to double its clinker capacity to improve its industrial performance in Senegal and its cost prices and to reduce its carbon footprint. A new industrial facility is scheduled to come on stream in mid-2024. And the expected ROCE is 18%. Moving to Slide 22 with the update of our climate plan. 2022 was an important year for the Vicat Group, which recorded a significant decline in its own carbon emissions. The group's overall CO2 emissions went down from 624 kilogram per tonne of cement in 2021 to 608 kilogram in 2022, in Europe. So the emissions were cut from 544 kilogram per tonne to 530 kilogram per tonne of cement. This performance was achieved as a result of a significant increase in the proportion of alternative fuels, which rose from 26.2% in 2021 to 28.1% of the fuel mix in 2022, 66% in Europe versus 62.9% in 2021. And a significant decline in the clinker rate in cement to 77.5% in 2022 from 78.9% in '21. Efforts made led to an upgrade in the group's CDP rating to A minus. It was B in 2021. On Slide 23 now, we have laid out the new 2030 targets for reducing the group's CO2 emissions. The revised target for 2030 is now CO2 emissions of 497 kilogram net per tonne of cement equivalent rather than 540 kilogram previously and 430 kilogram in Europe. It represents a decrease of around minus 20% in emissions on the 2019 figure. This new target is based on an increase in the use of alternative fuels to 50% of the group's overall fuel mix versus 40%, previously, and it will be 100% in Europe. Based on a reduction in the clinker rate in cement to 69% versus 75% previously and efficient in CO2. These targets do not take into account the introduction of so-called carbon capture and storage or usage technologies, which the group is working on separately. During 2022, the group stepped up its commitment to its energy transition, but introducing a target of using low emission renewable energies. By 2030, the group aims to increase its use of electricity generated from renewable sources to 40% from 8.5% in 2022 and to generate 20% itself versus 5% in 2022. I now propose to move on to the 2023 outlook. And on Slide 25. In 2023 and 2024, the Group plans to scale back its capital expenditure outlays by strongly limiting its new projects to around EUR 350 million in 2023, followed by another reduction in 2024. Over the period, this capital expenditure will focus on completion of the construction work on the new kiln in Senegal, investment projects to meet the carbon footprint reduction targets and maintenance CapEx. The group does not plan to launch any further strategic growth CapEx projects until the leverage ratio has been brought down below 2. Finally, on Slide 26. In 2023, the Group is targeting further significant sales growth with its market overall expected to display resilience and reflect the full benefit of the price hikes in selling prices introduced in 2022 and the price increases anticipated in 2023. Furthermore, the financial year 2023 will benefit from the full effect of the new Ragland kiln and the disappearance of the non-recurring costs incurred in 2022. Lastly, based on the latest trends observed, energy costs are expected to stabilize positively at levels above those seen in 2022. So taking these factors into account, the group's 2023 EBITDA is expected to rise towards a level at least equivalent to that recorded in 2021. Ladies and gentlemen, thank you for your attention. Priscilla, can we move to questions?

[Operator Instructions] We will take our first question from Mr. Manish Beria from Societe Generale.

So my first question is on the volumes. So I understand you are seeing resilient, but is it plus or minus? So how much is the volume assumption, I mean, for 2023, this is the first. The second is you are suggesting that the energy will see inflation. So do you have -- and budgeting, I mean, how much of the energy inflation will be there in '23. So maybe in '22, it was 60%, 65%. But how much is exactly in '23? Or you are anticipating in '23. This is the second question. The third is, I mean, if you see you have done EBITDA of EUR 570 million, and then there was some one-off. So that will not be there. So it's already like EUR 600 million. So with this assumption, I mean where pricing is very good, energy is low, inflation is low. So do you expect, I mean, the price cost will be very positive, I mean, in '23?

Manish, thank you for your questions. First of all, on volumes, Obviously, this is very dependent on markets. I think you very well know. For now, we see -- I can come back for a short while in 2022. In 2023, including the end of the year, we saw stable or slightly growing trends in most of the markets with a strong exception of Turkey, where we arbitrated for margin and Mali, where we had a strong decrease and to a lesser extent, Kazakhstan, all other markets were quite resilient or ongoing. Going forward, we don't see in the short term any changes in the trends for now. Of course, we can foresee some softness in residential, but in many developed markets we see a strong infra and commercial demand. So all in all, we don't see significant volume decline over the year, even if it can happen some softness in H2 in some markets. On energy inflation, the 55% I mentioned earlier was for France only. Overall, the energy both vestibule and electricity in 2022 was close to 70%. Going forward, and again, with a lot of caution because the situation is specific for combustible and electricity market by market. But overall, we can expect an energy bill inflation that could go up, up to 20%, and we will adjust our pricing strategy accordingly. As -- just to rebound on your comment regarding the EBITDA growth, indeed, we expect the nonrecurring items to be nonrecurring. So we do -- we will enjoy the full effect of our new kiln in the U.S. that will gradually ramp up commercially. And otherwise, we believe that prices will match inflation effect.

So this new kiln in the U.S. is adding how much of your existing capacity in U.S.?

It is taking capacity from 1.2 million to 1.8 million tonnes.

Okay. It's like, okay, 40%, something like that, 40%, 50%. Yes. And then the question on Africa. I mean, so the profitability was significantly impacted. So that's because of one of the country know where, I mean, there is a price gap. So what do you see in '23? I mean that things improving in Africa? I mean, you will be allowed to take more price hike.

So on volume, we see the Mali operation resuming a more normal trend of activity. So we should have growing volumes. Senegal, there is a price regulation implemented by the government, but did allow us to increase prices by about 10% in September. So we expect to have a full year effect of this hike. We do badly need an additional hike, but it is not foreseen for now. And this is indeed putting a lot of pressure on the profitability of our Senegal operation in the context of high energy costs.

So I'm just trying to think, I mean you did EBITDA EUR 570 million, recurring cost was EUR 30 million, so it's already EUR 600 million, then volumes is not going down here. Then you have new kiln that is adding capacity of 50%. So it's already seems like this will be doing more than EUR 620 million, just by doing this simple math. Then you have the price. I mean, pricing element is very good. Energy is not increasing. So price cost is positive or not here? I mean, so if price cost is positive, I mean, we will have like EUR 640 million, EUR 650 million of EBITDA there, no?

It will very much depend on the energy cost inflation, which is obviously difficult to predict on a global scale, the acceptability of further price hikes.

[Operator Instructions] It appears there is no further questions at this time. I'd like to turn the conference back to the host for any additional or closing remarks. Thank you. Sorry, sir. We have one more question that would be from Arnaud Pinatel from On Field Research.

It's Yassine on for Arnaud Pinatel from On Field Research. Just a question on the pricing outlook. Do you -- for 2023. We are quite confident that the industry and Vicat can continue to push prices at the beginning of the year 2023. But we know also that energy is going down. So do you see currently your clients coming back to renegotiate what they have accepted in late 2022 and early 2023? And is there a risk to see erosion in the second part of the year 2023, please?

Prices are still going on in the U.S., in Switzerland and France, and they balance the increase in costs after some kind of delay. Cost increased last year, much faster than selling prices. So we negotiated price hikes with our clients. So it was accepted. And in the developed countries like U.S., Switzerland, France, we worked our talks and our clients agreed with the increases. And nobody is coming back now. In fact, nobody knows exactly what will be -- what will happen with -- actually with energy, so there is no change.

[Operator Instructions] It happens to be no further questions at this time, I'd like to turn the conference back to the host for any additional or closing remarks.

Thank you, Priscilla. So this concludes our call for today. Thank you for your interest in Vicat, and [Foreign Language]

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