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

Hello, and welcome to the Vicat 2024 Half Year results conference call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Hugues Chomel, Deputy CEO and CFO of Vicat Group; and Pierre Pedrosa, Head of Investor Relations, to begin today's conference. Thank you.

Good afternoon, ladies and gentlemen. I am Hugues Chomel, Deputy CEO and Chief Financial Officer of Vicat Group. With me today is Pierre Pedrosa, who is Head of Investor Relations. I will now be presenting to you for 2024 first half year results. Before starting the presentation, please have a look at Slide 2 where you can read our disclaimer regarding forward-looking statements that this presentation may contain. On Slide 3, our presentation will be divided into the following 5 topics. So let's begin with our highlights on Slide 4. Powered by market dynamics in the United States and emerging markets, Vicat grew organically by 4.8% in the first half of 2024. The group's EBITDA advanced twice as fast at plus 12.3% in the first 6 months. leveraging strong performance in the United States, India and Egypt and an improved cost price dynamics across almost all markets. The strong performance led us to narrow the bracket of our 2024 guidance with full year EBITDA now expected to grow between 3% and 8% on the 2023 number. Finally, the first 6 months of 2024 saw us reduce our carbon intensity by 3% year-on-year to 575 kilos of CO2 net per ton of cement equivalent, on our way to our objective of 497-kilo per tonne. On Slide 5, we've compiled the group growth rate of the past quarters, but illustrate Vicat sustained supply of performance when compared to its industry peers. This advantage is the result of 3 key factors: our sustained growth investment strategy that led to the recent successes in U.S. and Brazil, our exposure to emerging markets and finally, our strong pricing discipline. Moving to Slide 6. You have regional performances that contribute to the like-for-like 4.8% sales growth, thanks to robust growth in Americas, Asia and Mediterranean region over the first half. As previously stated, the main outlier to our growth trajectory was the slowdown in France that stemmed from a weakening residential market and a more adverse environment in Africa. 19% of group sales are now generated in the United States. It's 3 percentage points, sorry, increase when compared to June 2023. On Slide 7, we've mapped out the evolution of our EBITDA margin over the past 3 years. Despite the considerable progress recorded over the period, our EBITDA margin remains below that of 2021. Our objective is still to restore EBITDA margin to above the 2021 level. Let's move to Slide 8, which shows the main drivers of EBITDA growth between H1 2023 and H1 2024. The main positive contribution to the like-for-like variation is the price component that more than offset the impact of persistent increase in costs and lower volumes. Looking at costs on Slide 9, we've laid out the evolution by semester of our main cost items over the last 4 years in relation to sales. This shows the considerable and persistent impact of inflation. On the left, you can see the downward trend in variable energy costs, which are nevertheless still well above precrisis levels. On the right, you can see the evolution of fixed costs linked to personnel and maintenance, which have increased by EUR 90 million of over last 3 years on a half year basis. On Slide 10, we present our performance by region, beginning with France. In France, revenue was again impacted by the weak volumes caused by the contraction in residential market. The project to build the Lyon-Turin rail link that began in late 2023 is, however, expected to progressively to curb the effect of the slowdown from now on. Hikes in cement prices at the beginning of the year made a positive contribution over the period. Despite both weak market conditions, the French business recorded resilient results. On Slide 11, you have a snapshot of a residential market in France, where the housing starts and permits have been consistently decreasing since the recent return of inflation to reach historically low levels today. This evolution is in stark contrast with a tremendous level of French housing needs, estimated at around 0.5 million units per year. Population growth, societal trends, reindustrialization and climate rationals all contribute to make the case for a return to growth in this market. When this cycle begins, we will be ready to leverage our positioning in a dynamic territory with residential needs that are superior to the national average. On Slide 12, you have the focus on Europe. Switzerland was again impacted by the weakness of the residential market and by delays on major projects, especially in the public works sector as volume declined in the first half. Even so, 2 large infrastructure projects should support activity levels in the second half. EBITDA held up well, benefiting from positive contribution of our waste processing activity as well as strong price hikes introduced in the first quarter. Moving to Slide 13 with our performance in the Americas. I'll begin with the United States, that continued to perform well in the first half while enjoying a favorable base of comparison and a positive pricing environment, especially in California. Volumes in the Southeast rose significantly and cash cost improved at Ragland substantially as fossil fuel price moved lower and usage of alternative fuels grew substantially. EBITDA reached EUR 80 million in United States in H1 2024. It's 42% more than last year. In Brazil, cement business volume declined and prices moved slightly lower in the first half as a result of fiercer competition. EBITDA decreased with lower energy cost and industrial performance, partially offsetting activity slowdown. Concrete and Aggregates business showed resilience with aggregates and concrete volume dropping slightly, but selling pricing moving higher. On Slide 14, you have our performance in Asia. Beginning with India, as volume grew significantly despite the slowdown in construction activity in Q2, because of a general election campaign. The improvement in the price cost differential that began in the second half of 2023, has boosted competitiveness while selling prices move lower, especially in Southern states. Sales in Kazakhstan expanded in the first half as a result of a favorable base of comparison and the group's exposure to dynamic catchment areas. Even so, price fell over the period amid fierce competition and were coupled to higher logistics and energy costs. On Slide 15, you have our performance in the Mediterranean. After a dynamic first quarter performance, the cement business in Turkey was impacted by a volume contraction in the second quarter as a result of calendar effect and the slowdown in construction activity during the election period. Selling prices were raised significantly in the first half even as the price hikes only partially offset the effects of inflation on production costs. Concrete and Aggregates business expanded in the first half as a result of the strong growth in concrete volumes especially in the first quarter and higher selling prices that also partially offset the effect of cost inflation. Cement business in Egypt benefited from strong cement and [ kiln ] volumes for export to the Mediterranean and Africa regions. In the sluggish domestic market, prices rose during the first half, reflecting the impact of imported inflation in a market regulated by the authorities. Overall, EBITDA rose strongly. Turning to Slide 16 regarding Africa. Even if production will remain constrained until the commissioning of a new account, Senegal showed resilience with volume and pricing falling only slightly in the first half. Government decision to scrap the levy and cement to increase hold spending power from July 1, had a negative impact on the consumption during June. In this context, EBITDA grew well, benefiting from falling energy costs, the rise in alternative fuel utilization rate and the improvement to improve industrial performance. In Mali, the power supply issues that seriously affected production in the first quarter have been resolved, while Mauritania's EBITDA grew 45% as a result of an improvement in input costs. On Slide 17, we've outlined the cash generation trends. In H1 2024, our capital expenditures was EUR 186 million compared with EUR 143 million in H1 '23. The strong seasonality of outlay linked to the group's strategic investment, including the new Kiln in Senegal, accounted for a significant portion of this. Group is reiterating its capital expenditure target of disbursing EUR 325 million in 2024. Free cash flow amounted to minus EUR 23 million in the semester versus EUR 61 million in the first half of 2023. This deterioration in free cash flow derived from seasonal fluctuations in the working capital requirement and in capital expenditures. Change in the working capital requirement is expected to make a positive contribution in the second half. On Slide 18, we've mapped out on deleveraging road map as we stay committed to reach our leverage target of 1.3 in 2025 with the introduction of a year-end target of below 1.7x by the end of 2024. Once again, deleveraging is one of the top priorities of the group. Moving to Slide 19 to the group climate performance in H1 2024, we showed progress across all the indicators and most of the group regions. In the United States, the switch to type 1 [indiscernible] cement contributed to the improvement in the clinker factor, alternative fuel rate improved in India and in the United States as a result of Ragland plant ramp-up. On Slide 20, we are presenting to you a rapid focus on where we stand on Vicat low carbon solutions. Today, Vicat offers a comprehensive range of low-carbon products. This includes DECA a branded line of low-carbon solutions and CARAT aligned specifically for cost and ultra-low-carbon products. This range underscores care commitment to providing environmentally friendly building materials that meet diverse construction needs, while significantly reducing the carbon footprint. Today, these products correspond to about 14% of our cement sales in France. That's twice as much as last year. The driver of this growth is twofold. French regulatory framework of 2020 sets clear emission caps for construction measured in CO2 equivalent per square meter, pushing for sustainable development practices across the industry. The other driver is the commitment that our clients have made as part of their 2030 scope 3 targets. The scope 3 correspond to both scope 1 and 2. They understand that Vicat low carbon solution will play a key role in reducing their indirect emissions. Overall, these goals illustrate a clear trend. Major player in the construction industry are moving aggressively to a more sustainable practices with decoupling pivotal role in facilitating this transition. I'll conclude on Slide 21 with the outlook for the current financial year. In 2024, the group expects limited growth in net sales, supported by an increase in the United States and the resilience of emerging markets. Even taking into account the residential sector weakness in Europe. The group has narrowed its full year EBITDA target based on performance in the first half of the year and is now targeting an increase in 2024 EBITDA between 3% and 8% when compared to 2023 number of EUR 740 million. By 2024, the group capital expenditures should reach around EUR 325 million. Finally, as mentioned above, we will maintain our debt reduction path with the aim of reducing our leverage ratio to below 1.7 by year-end and confirmed below 1.3x leverage ratio target by the end of 2025. [ Panaura ], we can now move to questions.

[Operator Instructions] The first line comes from the line of Yassine Touahri calling from On Field Investment Research.

So yes, a couple of questions. My first question would be on the free cash flow generation. So I understand that your net debt target this year would imply a net debt of about EUR 1.3 billion. So is it fair to assume that it implies a free cash flow of a couple of hundred million and then EUR 100 million dividend to reduce the debt by EUR 100 million. And then when I look at your target for 2025, it looks like you would be aiming to reduce the debt by another EUR 200 million. So is it fair to assume that you believe that you could generate EUR 300 million of free cash flow in 2025? Is it the right calculation? And if it is the right calculation, what is your assumption on France in this scenario in a context where there is a little bit of a political uncertainty.

Thank you for your questions. As you know well, free cash flow generation in our industry is rather seasonal, with significantly stronger EBITDA in H2 compared to H1. Working capital requirements increasing in H1 in the Northern Hemisphere and decreasing in H2. For us, we have very specific trend in CapEx spending in H1, considering the state advancement of our CapEx program. We spent EUR 186 million in H1 out of EUR 325 million for the full year. And again, as you know, dividend was EUR 90 million, so -- and it was served in H1. So indeed, we do target about EUR 100 million reduction in the net debt, and this is consistent with what we see in the H2 trends. Looking at 2025. As we have pointed out before, we expect the CapEx to come further down as we finish our strategic investment plans over the last year. And as such, with a resilient operational cash flow generation, we expect to be able to reach this target, and we are dedicated to it.

And when you say -- when you talk about the CapEx reduction, is it a CapEx solution of something like EUR [ 250 million, EUR 260 ] million? Is it something that is achievable next year? Or do you have a range in mind.

It is reasonable order of magnitude.

And then on the situation because I guess there is one element, which is a little bit tricky given the political situation in France is to assess the cash generation? What kind of scenario do you have for France? Do you see a recovery? Or do you believe it's in a situation where it might be more stable?

Well, as you know, situation is changing every day, and today is giving us new examples and predictability -- as we pointed out, the residential downturn has been skipped. And as we go into H2, we probably have a more favorable base of comparison. But still, we are still in a decreasing phase. We are expecting that if the market will recover sometime in 2025. Obviously, the way the political situation and its economical consequences will have an influence, but I do not have specific elements on that for now.

And the last question would be on the United States. I think a lot of the companies in the U.S. have been impacted by the higher interest rates for longer. The housing starts were a little bit disappointed. The commercial construction is a bit slower than initially expected. I think you've been -- you have not been really impacted so far because you've got your new plant in Ragland. But do you see -- could you comment a little bit about the recent development in July or what you've seen in the past few weeks? Do you see the same trend as in the first half. Do you see an activity being a bit slower. It would be great for you to give just a little bit of an outlook in terms of the U.S. trends most recently.

As you know, the U.S. market is rather unbalanced with unsufficient domestic capacity to serve the market. So expansion has met demand that is there. But it's clearly not growing at a high pace, but it's still relatively strong, especially in the Southeast. We have seen some softness in California in Q2, but it is not overly worrying at this stage.

And would you see [indiscernible] in California continuing in the second part of the year? Or do you think it's just weather related and temporary?

I have not had a specific element on that, yes, sorry.

[Operator Instructions] The next question comes from the line of from [ Ravi ] calling from Citigroup.

Just a follow-up question on Ragland. A lot of your peers operating in Southern U.S. have reported sort of weather-related disruptions to demand in the second quarter. You seem not to have had that. Is that more a function of where your sales mix is? Or is there something special that you have done to kind of mitigate the impact of that? And secondly, in terms of the for future growth after your net debt comes to about 1.3x EBITDA level. Are you kind of looking to invest more in Africa as you have been in the last 3 or 4 years? Or is there other further regions where you're looking to grow?

Thank you for your questions. Regarding Ragland, well, we have not a specific testament in terms of weather. I guess we are getting the same as everyone. We were just and as mentioned before, to the question of Yassine, we are inserting the market needs in the context that local capacity was insufficient to face demand. And as a reminder, together with the plant, we have set up new railway terminals to enlarge our catchment area that help us to place more new capacity. So we have been facing the same elements as others. Regarding the -- we have post '25 capital allocation, it's probably too early to be very specific on that. We would like to reiterate that our priority is to deleverage, and we will stick to that. As you know, we are entering a phase where the decarbonization will require some flexibility. So we are happy to enter this phase with a flexible balance sheet. Beyond that, of course, the group has a long-term strategy that associates acquisition and brownfield expansions. We will be, as usually going at all pace, looking at accretive movements.

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