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

Hello, and welcome to the Vicat Full Year Results 2023 Call. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Guy Sidos, Chairman and CEO of Vicat Group, joined by Mr. Hugues Chomel, Deputy CEO and CFO of the Vicat Group, to begin today's conference. Thank you.

Thank you, Francois. Welcome to the Vicat Group's 2023 Annual Results Presentation Meeting. I'm Guy Sidos, Chairman and CEO of Vicat Group. I'd like to introduce Hugues Chomel, Deputy CEO and the Group Chief Financial Officer; and Pierre Pedrosa, who has joined us as the Director of Financial Communications and Investor Relations. Page 2 contains a preliminary disclaimer. The purpose of this document is to draw your attention to the fact that the information presented here for the 2024 financial year is an assessment of expected trends in the group's various markets and should under no circumstances be considered as a forecast. On Page 3 now. Our presentation will focus on 5 points. I'd like to start by reviewing the key events of 2023 and then come back to the key points of our development model. Hugues Chomel will then analyze the group's overall and regional financial performance as well as the main balance sheet and cash flow items. I will then talk about our climate action plan before concluding with a look at the expected trends for the current financial year. Please switch to Page 4, and let's start with the highlights of the year on Slide 5. The success of 2023 and the prospects it opens up confirms the relevance of the Vicat Group's development model. It was a year in which our initial ambitions turned to fruition with organic growth of nearly plus 20%, benefiting from the contribution for all our regions. This growth is a result of the commercial and industrial efficiency of all our teams in various markets. I would like to congratulate them once again on their commitment and their contribution to this fine 2023 performance. This dynamism is reflected in a record EBITDA of EUR 740 million for the year, which was in particular by a strong performance in the U.S., more on this later. The group is also continuing to reduce its debt with financial leverage of 1.92x at the end of 2023. Finally, the group is continuing to implement its decarbonization road map. On to Slide 6 now. 2023 was a remarkable year. Sales almost reached EUR 4 billion and have risen by almost 10% a year over the last 5 years. EBITDA rose by almost 30% to EUR 740 million with annual growth of 9% over the last few years. ROCE continues to rise, reaching 8% this year. Lastly, financial leverage fell below 2x, the lowest level in recent years. I'd like to come back on Slide 7, to the fundamentals of the Vicat Group's development model. Focus on cement, our core business, Vicat's resilience lies in the group's geographical diversification, 12 countries by the end of 2023, countries where we produce locally for local needs using local labor. On the right are the components of our geographical mix, which breaks down sales and EBITDA between developed markets, which generate cash, and emerging markets, which concentrate growth opportunities. The second reason for our resilience comes from the regular modernization of our equipment. In 2023, the new Ragland kiln in the U.S. will strengthen Vicat's significant presence in the U.S. by doubling our production capacity and reducing the plant's production costs and carbon footprint with a target reduction of 30%. In 2024, our plant in Rufisque, Senegal, will follow suit. The third reason for this resilience comes from the effectiveness of our applied research. Innovation is at the very heart of Vicat DNA. The launch of DECA, a low-carbon concrete, the marketing of CARAT; the cement with a negative carbon footprint; Lithosys, a revolutionary 3D concrete printing solution; the VITO floor washing range, et cetera. These are examples of practical developments in research that concerns not only products but also manufacturing processes as demonstrated by the development of clay activation technologies for the Argilor project or the incorporation of raw clay in collaboration with a startup, Materrup, or our partnership with a start-up Carbon8 to recycle dust to produce high-performance aggregates. The final reason for this resilience is the most important, the commitment of our teams. Across 4 continents, our people have shown exceptional dedication and skills, enabling us to improve our industrial operating parameters and the efficiency of our logistics and sales in 2023. This commitment mirrors the family commitment to long-term industrial strategy. And in 2023, a representative of the 8th generation of the Vicat family took up an operational role in the company. Finally, on Slide 8. I'd like to present an analysis of our investment cycle over the last 10 years. There is a clear first phase between 2013 and 2018 with stable investment and substantial cash generation. Then from 2019 onwards, we chose to accelerate our investments at a time when financing conditions were very advantageous. We acquired Ciplan in Brazil and began investing in Ragland and Senegal. We are already seeing the fruits of these investments with a marked improvement in our cash flow generation. I will now hand over to Hugues Chomel for a more in-depth analysis of our financial performance.

Thank you, Mr. Chairman and CEO. Let me start on Slide 10 with the key figures from our income statement. Strong sales growth in each of our markets has borne fruit with recurring EBIT up organically 68%. The EBIT margin rate reached 11%, up 3.2% but at a level that remains below the pre-crisis level that we aim to restore. Net profit group share rose by almost 85% to EUR 258 million. Slide 11 shows our sales by region. All the regions are growing organically in 2023, particularly Americas, which is up by nearly 16% to account for 1/4 of group sales. The United States is the main driver of our performance, accounting for 18% of turnover. Let's move on the next slide, Slide 12, which shows the main drivers of EBITDA growth between 2022 and 2023. The main variation is due to inflation which is reflected in our production cost and which we have managed to pass on in our prices in our various markets. The growth in volumes and the improvement in group industrial performance are making a positive contribution to EBITDA. Note an unfavorable currency effect of EUR 64 million essentially related to the Mediterranean war. Slide 13 shows the evolution of our main cost items over the last 5 years in relation to our sales. This shows the considerable impact of inflation. On the left of the slide, you can see the trend in variable energy costs, which, although down over the last 6 months, are still well above pre-crisis levels. At EUR 656 million, this cost represent 16.7% of our sales, almost 3 percentage points higher from the level of 2021. On the right, you can see the evolution of fixed cost linked to personnel and maintenance, which have also increased by more than 1/3 over the last 5 years. I'd now like to turn on Slide 14 to an analysis by region, starting with France. In France, volumes of cement, concrete and aggregates fell as a result of a slowdown in the residential sector. In terms of prices, the increase in 2022 and 2023 have offset the cumulative rise in energy costs and underlying inflation. At the same time, the ramping up of a major rail infrastructure project in France will help to sustain business over the coming years and act as a buffer against the weakness of the residential sector. Let's turn now to the Europe region on Slide 15 with a review of our performance in Switzerland. In the country, we saw a further decline in volumes due to the weakness of residential and infrastructure markets. Here too in cement, positive price trends offset the cumulative inflation in cost, particularly energy. In Italy, EBITDA rose, thanks to price increases despite stable volumes and higher input energy costs. In the United States, on Slide 16. Cement volumes continue to rise in the second half of the year, thanks to the ramp-up of Ragland plant, which reached nominal capacity in the fourth quarter. Demand in the Southeast of United States remained strong, thanks in particular to the local impact of infrastructure and reindustrialization programs. The opening of new rail terminals in Georgia and Tennessee has increased the catchment area and support Ragland industrial expansion. The strong growth in volumes in the Southeast more than offset the fall in volumes in California due to unfavorable weather conditions in the first half of the year. Prices remain strong in both regions with further rises recorded in late summer. In Brazil, against the backdrop of generally resilient macroeconomic conditions in 2023, the cement business saw an erosion in volumes due to the slowdown in demand. Average prices rose over the year. EBITDA reached a record level in 2023 with a marked increase, thanks to good control of production costs, a sharp acceleration in the use of alternative fuel and the integration of activated clays. On Slide 17, we have highlighted our activities in the United States, where we are leveraging our presence in 2 specific areas, the Southeast and California where we serve the Los Angeles market. In this zone, 2023 was affected by very unfavorable weather condition in the first half of the year which should contribute to a more -- to a favorable base effect for 2024 if the weather is milder. The Ragland plant serves 4 states: Alabama; Georgia, including the Atlanta Metropolitan Area; North Carolina; and now Tennessee from new rail terminals. The plant, which has a capacity of 2 million tons, recorded 68% growth in sales volumes and helped generate EBITDA of EUR 151 million in the United States, more than 20% of the group's EBITDA. In 2024, the Ragland plant will benefit from the full year volume effect. The cement business in India, shown on Slide 18, picked up in the second half of the year with volumes increasing over the year as a whole. Indeed, the market remains dynamic, underpinned by ongoing infrastructure development efforts. Overall sales prices were down slightly over the year due to the competitive environment. The fall in production cost in the second half enabled us to regain competitiveness. In Kazakhstan, business picked up in the second half, thanks to the securing of the fleet of additional wagons. Prices fell slightly over the period in a more competitive environment. On Slide 19, let's start with Turkey. Despite a macroeconomic context marked by hyperinflation, the cement business in Turkey enjoyed solid volume growth throughout the year. EBITDA rose significantly thanks to cost control over the period, particularly in maintenance and the increased use of alternative fuels. The waste heat recovery system commissioned at the Bastas plant during the fourth quarter will contribute to a significant improvement in cash costs going forward. In Egypt, business was marked by a sluggish domestic market with volumes down slightly over the year. Against this backdrop, the group seized the export opportunity in West Africa and the Mediterranean. Benefiting from the capacity regulation agreement, domestic prices have risen sharply, and EBITDA has risen above the threshold of profitability in 2023. Finally, let's move on Slide 20 to the Africa region. The domestic market remains dynamic, underpinned by dynamic residential demand and infrastructure projects. Average prices are also rising. Cement production is expected to remain constrained until the new kiln is commissioned with start up scheduled for late 2024. Aggregate business in Senegal grew in 2023, benefiting from positive price and volume effects. EBITDA was stable. The cement business in Mali is benefiting from the strong recovery in the market following the political crisis, which significantly reduced deliveries in 2022. In Mauritania, sales rose and EBITDA grew strongly. On Slide 21, we set out the details of our investment in Senegal. Group has launched a EUR 260 million investment plan to build a new 2 million tons per year kiln line to achieve the following objective: substitute locally produced clinker for imported clinker; improve industrial performance of all our operations in Senegal; reduce our CO2 emission per ton in particular by making extensive use of alternative fuel. Commissioning is scheduled for late 2024 with contribution expected in 2025. We have a ROCE target of 18% on this project, which is mainly linked to an improvement in production costs. Slide 23 shows the improvement in free cash flow generation. In 2023, our capital expenditures was EUR 329 million, compared with EUR 422 million in 2022. This reduction compared with our initial targets of EUR 350 million is linked to certain capital expenditures on kiln 6 in Senegal, which was not disbursed by the end of 2023 and will be disbursed early in 2024. The group remains committed to its climate investment target of EUR 800 million on 10 years between 2021 and 2030. Free cash flow was EUR 295 million, shows a marked improvement on 2022. Cash conversion to EBITDA is around 40% this year. Slide 24 shows our debt situation at the end of 2023. The group net debt stood at EUR 1.4 billion, giving a leverage ratio of 1.9x, a marked reduction on last year's figures. Our debt has a well-balanced maturity profile over time with an average maturity of over 5 years. Average interest rate is less than 4% across all currencies before hedging. Vicat has a good liquidity with EUR 680 million in available undrawn credit lines renewed at the end of 2023. On Slide 25, you have an overview of our debt reduction trajectory. Our management strategy based on EBITDA growth, tight control of working capital requirements and disciplined investment will enable us to further reduce group net debt. The group has therefore set itself the target of reducing this leverage ratio to below 1.3x by the end of 2025. With this perspective, I'll hand back to Mr. Sidos.

Thank you, Hugues. Let's switch to Slide 27 with an update on our progress on the climate plan. The group's climate performance has improved in 2023 on all indicators in all the group's geographical zones with a notable improvement in Brazil, which has reduced its clinker factor and significantly increased its use of alternative fuels. In 2023, net emissions per ton of cement fell by 3.3% for the group and by 5.5% in Europe. For the record, the Vicat Group's 2030 total target is 497-kilogram net per ton of cement and 430-kilogram net per ton of cement for Europe. This target is based on current proven technologies and does not include breakthrough technologies such as CO2 capture and storage or usage. Emerging from low carbon to zero carbon initiative in 2024, it means that in addition to pushing its policy of modernizing and [ differentiating ] the initial process and bringing sophisticated composite cements to market, the group is looking into ultimate decarbonation projects involving the capture of CO2 for storage or usage in the manufacture of synthetic fuels at the Montalieu plant in France and the Lebec plant in California. These projects require substantial public funding to get off the ground. Finally, our CDP A minus rating was renewed this month. On Slide 28 now, we show the group's stock of European ETS CO2 allowances. It will reach 4.7 million tons at the end of 2023. This will enable us to meet our compliance needs in France and Switzerland until 2032. This stock is not valued in our balance sheet even though it's estimated market value based on year-end prices is around EUR 372 million. This stock is especially valuable to us because it gives the group the flexibility to finance future investments in new CO2 capture and storage or usage technologies whilst supporting our margins. I will conclude now on Slide 30 with the outlook for the current financial year. In 2024, the group expects sales to continue to rise driven by growth in the U.S., the resilience of emerging markets and despite the weakness of the residential sector in Europe. EBITDA should be higher than in 2023. By 2024, the group's capital expenditure should reach around EUR 325 million. Finally, as mentioned above, we'll maintain our debt reduction path with the aim of reducing our leverage ratio to below 1.3x by the end of 2025. Before taking your questions, I will close this presentation on Slide 31 with our proposed dividend. On the basis of the full year results for 2023 and the earnings per share of EUR 5.76 per share, up 65.5% on 2022, I'm confident in the group's ability to continue its profitable growth. The Board of Directors has decided to propose the distribution of a dividend of EUR 2 per share. Ladies and gentlemen, thank you for your attention. Mr. Chomel and I will be happy to answer any questions you may have. Francois, may we move to Q&A?

[Operator Instructions] Our first question comes from the line of Yassine Touahri from On Field.

Congratulation for the fantastic results in the second part of the year. My first question would be on the situation on energy costs. So you had a decline in energy costs in 2023. Do you see a further decline in power costs and fuel costs in 2024? Second question, which is related to this, is could you give us a little bit more color on your hedging strategy. Have you already purchased a lot of your energy needs for 2024? Then third question on pricing. I think you have announced a price increase in January in France, in Switzerland and in some parts of the U.S. Are you -- when you're discussing with customers, do you feel that those price increase will be successful and will stick in 2024? And then the last question, which is on Senegal. The political situation is relatively tense at the moment. Do you see any impact on your operation? And do you have any contingency plan if the situation is running difficult?

Thanks, Yassine. Chomel will answer the 2 first questions, I will answer the 3 and 4.

Okay. Yassine, thank you for the question. Energy costs obviously are coming down in the market. Now as you know, this is -- this has to be appreciated plant by plant whereas each of our plants is multi-combustible and on blended cost after hedging. We aim to hedge forward between 3 to -- 6 to 9 months. So a large part of cost going forward in 2023 -- with 2024 will reflect recent cost by the end of 2023. Now indeed, the spot market price on electricity in Europe, for example, are going down. As you know, it will present only a limited part of our consumption in France. In Switzerland, where we are exposed to full spot market, we have a long-range strategy. So we are -- costs are already largely fixed. On selling prices, indeed, we have announced price increases in all markets. In Europe, we are back to a single-digit price increases as we did traditionally before the inflation cost. It is still early in the year, but they are so far accepted by the market. In United States, we had price increases in September. As you know, it's traditional that price increases take place in April, but we are announcing double-digit dollar increases. It's too early to tell whether they stick or not, but there's no reason to think they should not.

I will complement about the emerging markets. So we increase prices as soon as possible or necessary. And as we speak, trend is up in -- especially in India and Turkey. About your last question about Senegal, where there is political crisis as we speak, it's business as usual, we produce and sell. We don't even have negative signals, even weak ones on social networks. And we have never mentioned that. Of course, we remain vigilant and we have plans if things are getting worse, but it's okay right now. We've been there for 25 years, and we are Senegalese in Senegal. To have a clear idea on what means Senegal to Vicat, right now and before we start our new kiln, that we don't expect any proceeds from this kiln this year. We expect that in 2025. As of now, Senegal is 8% of group sales. It's only 5% of EBITDA. So it's still too low, and that's the reason why we invest there. But again, right now, it's business as usual.

We have no question in queue. [Operator Instructions] Mr. Sidos, Mr. Chomel, there are no further questions. So I hand back to you.

Thank you, Francois, and this concludes our call for today. I'd like to thank all of you again for your interest in Vicat and wish you a very good day. [Foreign Language].

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