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

Hello, and welcome to the Vicat First Half Results 2020 Call. My name is Laura. I will be a coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I will now hand you over to your host, Hugues Chomel, Deputy CEO and CFO of Vicat Group to begin today's conference. Thank you.

Good afternoon, ladies and gentlemen. I am Chomel, Deputy CEO and Chief Financial Officer of Vicat Group. With me today is Pierre Perez, who has joined Vicat in June this year as our new Director of Financial Communication and Investor Relations. We've been working closely together over the past few weeks, and he will be -- he will, of course, be reaching out to many of you over the coming months to introduce himself. I will now be presenting to you our 2023 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 topics. I will start by presenting the highlights of first half of 2023 and our results for the period. Then I will analyze our performance by region and focus on the main balance sheet and cash flow items. I will then discuss our climate performance before concluding, we will update the guidance for the end of the year. Let us now move to Slide 4 with the key points at the end of June 2023. The Vicat Group recorded a solid set of results in H1 2023. Organic sales grew year-on-year by 16.5% to EUR 1.9 billion. Cement volumes were resilient in most of our regions. We implemented solid price increases in almost all markets but contributed to offset the cumulative effect of cost inflation, especially higher energy prices. Profitability moved higher in line with our expectations on the back of the ramp-up of the Ragland plant new count in the United States, which will continue during the second half, an improving year-on-year price cost differential and a 4.1 points increase in use of alternative fuel to 31.5%. However, the group has still not yet returned to its price crisis margin rates. As announced at our financial year '22 results, we focus on debt reduction. Our leverage ratio was brought down to 2.6x over the period. The back of the H1 dynamics, full year 2023 EBITDA is now expected to rise toward a level appreciably above that recorded in 2021. Slide 5 shows the condensed income statement for the half year. You can see the solid reported sales growth of 9% achieved this semester despite an unfavorable currency effect of minus 7.5%, representing a negative impact of EUR 131 million over the period. EBITDA settled at EUR 314 million, higher than the EUR 300 million recorded in the first semester of 2021, a year but had benefited from the post-pandemic catch-up. EBITDA margin came in at 16.4%, a 110 basis point improvement versus 2022. However, it's a level that is still lagging behind the 19.2% margin recorded in 2021. Finally, consolidated net income reached EUR 109 million, up 24.5% at reported rates on the back of our improved operating performance. You have on Slide 6 now the EBITDA bridge from 2022 to 2023, detailing the various factors at work in this variation. Firstly, you can see the stable volume effect that shows the overall resilience in our markets. You can also clearly see how the impact of the strong price increases that were passed in each of our markets, increase but have successfully offset by inflation in costs. On to Slide 7, we have our analysis by region, beginning with France. France was characterized by a remarkable resilience in cement volumes and lower concrete and aggregates volume as a result of slowdown in residential construction and road work sectors. In this context, the group raised its selling prices offsetting the cumulative impact of higher production costs, especially those linked to energy price inflation and EBITDA rose 32% in the first half of 2023. Moving to Europe on Slide 8. We're beginning by Switzerland that recorded stable like-for-like sales over the period. In this country, the cement business was marked by a contraction in demand, largely offset by a solid increase in selling prices. In Concrete & Aggregates, the lower demand was coupled to higher prices. These were, however, unable to fully offset the inflationary pressure on cost. In Italy, consolidated sales rose 26%, with higher volume and prices. Let's take a look now at the Americas on Slide 9. Beginning with the United States, where the industry environment remains broadly positive even if performance varied between regional markets. California was affected by heavy rainfall, which had an impact on the construction market for most of the period. Conversely, the Southeast region achieved strong growth as the ramp-up in the Raglan Nuken enabled the group to capitalize on supportive market conditions. Price increases were in full effect in both markets and businesses to offset the effect of inflation. On this basis, EBITDA rose by 59 like-for-like in the U.S. In Brazil, sales were held back by the slowdown in the Brazilian economy, but the hike in prices and the improved industrial performance offset higher production costs and volume contraction. Concrete and Aggregates sales were supported by higher selling prices. On Slide 10, you have our results in Asia. Opening with India, we have a group introduced price increases but only partially offset the still high level of input costs in the first 6 months, especially energy costs. Volumes remained stable over the period. Kazakhstan's performance was marked by a contraction in volume towards the beginning of the year, given the logistic disruption to the Kazakh rail operator and lower selling prices. On Slide 11, moving to the Mediterranean region. Strong depreciation in the Turkish lira against the euro was among the main factors influencing the macroeconomic environment. The Turkish market grew sharply during the first 6 months, thanks to an up big construction sector and milder winter condition at the beginning of the year. The group maintained its strategy of firm support for prices to offset the effect of inflation on production costs. EBITDA came in at EUR 17 million despite a negative FX impact of EUR 11 million. In Egypt as well, the depreciation in the Egyptian pound against the euro had a negative impact. In the domestic market, marked by slight-ish condition, business was, however, boosted by an opportunity to export Tinker. In the domestic market, selling prices continued to improve, which almost completely offset the impact of higher input costs. As a result, EBITDA reached EUR 4 million despite a negative currency impact of 3 million. The final region is Africa on Slide 12. At saw positive sector demand trends, especially with the sharp recovery in the Malian market after the political crisis and the resumption of government projects in Senegal. In Senegal, prices rose with the increase of environment cement price cap in September 22. Aggregate sales were again supported by public work sector as major projects went ahead. In cement, the new count will enable in 2024 to both reduce production costs, reduced carbon footprint and meet growing market demand. Moving now to our financial position on Slide 13, where you can see the lowering of the debt and the leverage ratio over the past 12 months to 2.6 as we pursue our focus on debt reduction. On Slide 14, you can see that our CapEx was EUR 144 million this semester, down from EUR 178 million in H1 2022. This includes amount linked to the group's strategic investments, Ragland Nuken and the new car line in Senegal. Free cash flow amounted to EUR 71 million versus minus EUR 203 million in the first half of 2022. This improvement in free cash flow derived from the increase in EBITDA during the first 6 months of 2023 and normalization in the change in working capital requirements. Turning now to Slide 15, with our updated climate performance at midpoint of 2023. With 591 net CO2 per tonne of cement equivalent this semester. PCA is in line with its 2030 target of 497 kilos. This represents a year-on-year improvement of minus 3.6%. This performance was achieved through the implementation of the group climate road map. Notable achievements include the 4.1 point increase in the use of alternative fuels to 31.5% and 0.5 point reduction in the clinical rate to 77.4%. I will now conclude on Slide 16 with the update to our 2020 full year guidance. with the group now targeting significant sales growth and EBITDA that is expected to rise to a level appreciably above that recorded in 2021. Unchanged however, is our commitment to deleveraging as we don't plan to launch any further strategic growth CapEx project until the leverage ratio has been brought down below 2x. A detailed outlook by country is available in the press release. This concludes my presentation for today. Laura, can we move on to questions, please.

[Operator Instructions] We'll take our first question from Yves Bromehead at Societe Generale.

Just a quick question from me. On the earnings bridge, the EBITDA bridge, sorry, in H1, you're showing a net pricing surprise minus cost of EUR 61 million. I was trying to understand for the second half of the year, how we should think about this given that your cost base is likely to decline, I would imagine a faster rate than the base effect becomes more challenging for your prices. Is that the right way to think about it? Can you help us in quantifying how much we should have in mind? That's my first question. My second one, again, on the earnings bridge, you showed EUR 10 million positive contribution from various and nonrecurring. Can you just elaborate on what that is? And my third question is on prices, generally speaking, especially in the European and well, only the European regs of France, Switzerland and Italy. Are you seeing any signs of rebates or prices in absolute terms starting to come down versus maybe the levels that you've seen in January and February.

Yes. So sorry, for at I will tell on mute. Thank you for the question. So on your first question regarding the bridge, we definitively as we mentioned, we have delivered a strong set of results in H1. We have indeed a positive price/cost differential that makes up for the accumulated inflation from previous years. We, nevertheless, are still below the levels of margin rates we realized before the crisis. We are medium term committed to recover the gross margin rates and as such, we will continue to implement strict price discipline. Regarding the trend in cost, we -- I would like to stress that, indeed, we did contest cost inflation of energy in H1. We do expect to see it to reverse in H2 as we as we now see the price going down, this will mostly materialize in emerging markets as we do have a high level of substitution in developed countries. On the price on your question on pricing, that is related subject. We do not see specific movement of pricing hedging down. I mean, there is as always request from customers to have lower prices, but there is nothing specific in that period. Regarding the question on the positive various and nonrecurring. It is mostly elements of industrial performance and especially the impact of increase in substitute fuels.

We'll move on to our next question from Arnaud Pinatel at CIC.

Welcome to Pierre. We are looking all forward to interact with you. My first question is a follow-up on the one of the. You just said the nonrecurring impact is linked to the impact of the fuel substitute. So I guess, the Internet. Why should it be nonrecurring?

Arnaud, this factor is called various and nonrecurring. It is not all nonrecurring and for sure, we do aim to continue to use alternative fuels and to continue to develop it as we did successfully with Santa. So we do not expect this element to be nonrecurring.

Okay. So that makes more sense for me. The second question I will have is on the outlook for volume. We are going to enter in H2 with probably easier base of comparison versus last year. Or do you look at your top line in H2 regarding volumes -- do you expect a sequential deterioration? Or do you think the base of comparison will help you to keep the volume resilience in percentage in...

As you have noticed, we -- it is very much market driven, and we have shared the market. I mean, elements by market in our press release, a few comments on a global scale. We have already seen effects of a slowdown in residential market in H1. This is the case in Switzerland. This is the case in France, especially in ready-mix concrete and aggregates. This is, to some extent, already the case in U.S. Those movements will continue. We don't foresee at this stage, a substantial deterioration. On the other side, we, as you mentioned, we have a new year comparison base versus Q3 last year. We were in the ramp-up period in Raglan. So we will have a substantial contribution of volume there. We should not in counter weather-related problems we had in California earlier this year, and so we -- I don't feel we should have a substantially different volume trend.

And reading as the line...

Go ahead.

Reading between the lines, it means that you are probably more optimistic on the U.S. side than the European side? -- which means the French side.

We see a rather strong demand trends in U.S. indeed, probably a stronger investor office than in California, but it is still a relatively dynamic market. Okay.

Continuing on the U.S., have you quantified -- and do you share the impact of Ragland? What is the...

No, we did not quantify it.

Okay. So I guess you will not -- indeed. That basis. Then I'll move to Switzerland now I was looking at the trade association figures. In Q2, they were down 8%, I think, for volume for the Swiss market for cement. You are mentioning that you had a small contraction in demand. So it implies that you did better than the market. What is the reason behind that if it's the right conclusion?

It is -- you know very well the cement markets -- you know that it is very local, and it mostly depends on project in the trading zone of factor. So from -- on a short time scale, it is really very much depending on project mix.

Okay. But it means that your -- what you call a small contraction in demand is between 0% and 5%.

I did not quantify it.