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

Hello. Welcome to the Vicat's Third Quarter 2024 Presentation. My name is Caroline, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions]. I will now hand over the call 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 Hugues Chomel, Deputy CEO and Chief Financial Officer of the Vicat Group. With me today is Pierre Pedrosa, our Head of Investor Relations. I will now be presenting to you our Q3 revenue 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. On Slide 3, our presentation will be divided into the following 5 topics. So, let's begin with our highlights on Slide 4. The first key point is the organic sales growth of plus 3.3% over 9 months, a solid performance achieved despite the historically low level of residential sector in Europe. Another main highlight was the strong U.S. sales performance, growing at over double digit year-to-date, powered by the Ragland plant ramp-up. This rate of increase largely outpaces the U.S. cement industry. This confirms our 2024 guidance of EBITDA growth comprised between 3% and 8%, and our debt reduction to a leverage ratio of below 1.7 at year-end. Finally, we also moved ahead this quarter with a strategic venture between VPI and Cermix, creating a new leader in the construction chemical sector in France. We will return to this. Moving to Slide 5. You have the regional performances in Q3 that contribute to the like-for-like plus 0.7% sales growth this quarter despite a high base of comparison. The main outliers were the slowdown in France that stemmed from a weakening residential market, and the Asian region that was down double digit in large part due to a slowing down of the Indian market and our price over volume strategy in a tough competitive environment. 19% of group sales are now generated in the U.S. It's a 1.3 percentage point increase on the same period of last year. Let's now turn to Slide 6, where you have the revenue bridge for the third quarter. The negative volume effect was offset by the price hikes this quarter. However, it's important to note the substantial impact of the negative currency effect at minus EUR 73 million. On Slide 7, you have the revenue bridge on a year-to-date basis. Over the first 9 months, the positive price effect very largely offset the effect of lower volumes, even as the unfavorable currency and scope impact remains significant. On Slide 8, we present our performance by region, beginning with France. Here, the cement business was a volume decline despite a sequential improvement in Q3 as price levels remain resilient. Also, during the quarter, construction sites for Lyon-Turin rail link began gradually to contribute to the business over the past quarter. On Slide 9, a quick word on the recent strategic combination of our construction chemical activities in France with those of the Belgian group Koramic. By integrating VPI and Cermix, we are creating a French leader in construction chemicals with close to EUR 200 million in annual sales. The entity operates in a growing market, driven by increasing demand for renovation by residential construction and low-carbon product demand. The combined entity will be 60% owned by Vicat and consolidated and operated by the Vicat Group. On Slide 10, we've outlined the key benefits of the operation. The 2 companies form a good fit in terms of their industrial geographical coverage, product offering and customer base. The linkup will give rise to an extended network of 7 industrial sites in France with a combined production capacity of 800,000 tons. We will be leveraging both brands in the French market while unlocking production, R&D and logistics synergies. To note, this transaction will have no impact on the group net financial debt. On Slide 11, you have the focus on Europe. Let's begin with Switzerland. Cement business continues to be affected by the weakness of residential market with volumes down slightly over the quarter and pricing is remaining stable. Major infrastructure projects should, however, support business over the coming months. Italy recorded 12% sales growth with increases in volumes and average selling prices. Moving to Slide 12 with our performance in the Americas. I'll begin with the United States, where the cement business continued to grow in Q3. Volumes rose slightly despite a downturn in activity in September. Indeed, Hurricane Helene severely disrupted business in the southeast of the country in that month. This one-off situation has since returned to normal, and we have seen a catch-up effect in October. In California, however, volumes were down slightly over the quarter due to weak residential demand even as the pricing environment remains favorable. We expect the downward trend in interest rate to fuel a rebound in the year ahead. In Brazil, the cement business saw a smaller contraction in volumes than in the first half with volume rebounding in September. In an unfavorable competitive environment, the group is deploying its price over volume strategy. On Slide 13, you have our performance in Asia. Beginning with India, where business was impacted by the monsoon and an unfavorable basis for comparison. The post-election context is also weighing on construction activity with temporary weakness in public spending, particularly in the State of Andhra Pradesh. In a competitive environment, selling prices moved slightly lower over the period despite a slight uptick in September. Business in Kazakhstan was marked by a fall in volumes due to an unfavorable basis for comparison. Prices rebounded in Q3. On Slide 14, you have our performance in the Mediterranean. In a persistently hyperinflationary macroeconomic environment in Turkey, cement volumes fell in Q3 due to an economic slowdown, accentuated by a sluggish public construction market following the municipal election of last spring. Price rose at the same pace as in the first half of the year to offset the impact of inflation on production costs. The cement business in Egypt was marked by a contraction in domestic volumes which was more than offset by the growth in cement and clinker export volumes to the Mediterranean and African zones. Prices rose sharply on the domestic market, while export prices denominated in dollars remained higher. Turning to Slide 15 regarding Africa. The cement business in Senegal grew in Q3 with slightly higher volumes in the context of stable prices. Aggregates in Senegal grew strongly, driven by the improved volumes and prices in Q3. On Slide 16, you have the slide that compiles the benefits of the new kiln investment in Senegal. The priority remains the commissioning of Kiln 6, which should occur in the first half of 2025 with a contribution to EBITDA expected in the second half of 2025. Moving to Slide 17, where as part of our climate ambition, we wanted to focus on our commitment to a circular economy. This slide showcases our circular strategy, which reduces the consumption of natural raw materials and fossil fuels, thereby limiting our environmental footprint. In 2023, Vicat utilized 4.5 million tons of recycled materials, which marks a 25% increase compared to 2021. There are 2 substitution levers. The first is raw material substitution. The second lever is energy substitution. Focusing now on raw material substitution. Vicat actively recycles raw materials such as contaminated soils and ash from fuels instead of relying solely on natural mineral resources for clinker production. This concerns 2 million tons a year. Another component of this material substitution is derived from recycled additives that are byproducts from various industries. These materials help reduce the clinker rate in cement production, further lowering our carbon footprint. This concerns 1.7 million tons a year. Finally, the third component of this substitution revolves around aggregates for concrete and roads. These aggregates are repurposed from demolished structures and other construction waste, thereby reducing the need for virgin aggregates. This concerns 0.8 million tonnes a year. The second lever of our circularity strategy concerns energy substitution. In 2023, Vicat consumed 1.6 million tonnes of waste as alternative fuel sources in our kilns, representing a 32% rate of substitution. Today, that rates 36%. By leveraging our own ecosystem for local sourcing and treatment of alternative fuels, we not only reduce dependency on traditional fossil fuels, but also manage waste more effectively through dedicated units in France, Switzerland and Turkey today. Our local circular economy not only conserve natural resources, but also contribute to our bottom line. Finally, on Slide 19, you have an outlook for 2024. In a tough sector environment in many of our markets, our EBITDA and leverage guidance remains unchanged, and we've updated the top line guidance to account for continued weakening of emerging currencies. I will conclude on Slide 20 that sums the 3 priorities of the Vicat Group for the coming months and years. The first is restoring our margin to pre-crisis levels. The second is deleveraging to reach a leverage ratio of below 1.3 at the end of 2025. And finally, executing our climate road map and promoting our low-carbon offering. Going forward, we are confident these levers are core to creating value for all our shareholders and remain fully focused on delivering on these objectives. Caroline, we can move to questions, please.

[Operator Instructions] We will take the first question from line Ebrahim Homani from CIC.

I have 3, if I may. The first question is about your new top line guidance. Does this guidance imply a decrease in organic growth in Q4? And is an EBITDA margin in 2024 very close to the 2021 level reachable? My second question is about Senegal. You expect it to be -- the kiln was expected to be operational in H2 2024, if I'm not wrong. Are you now more confident with the new date you provide? And could you maybe remind us what will be the substitution rate in the Senegal kiln? And the third question is about your last partnership with Cermix, what is the strategy behind this operation? Is it opportunistic? Or maybe you plan to become bigger maybe by integrating other small companies to this partnership?

Thank you for the questions. Regarding the first one, the new guidance on the top line is really to account for the Q3 numbers mostly as well as for the FX prospect as we can anticipate them today. Just as a reminder, in a rather difficult market environment in some of our markets, we do deliver record high operational profitability and promoting a positive price/cost variance. Nevertheless, we confirm our EBITDA bracket, knowing that we indeed are still facing short-term variances that are typical in our industry, weather in Q4 and the FX movements. As you probably realize, both of these movements can add up positively or negatively, or offset each other. That's why we have maintained an EBITDA bracket. Second question is related to the Senegal project. Indeed, as you know, building a full production line in cement is a rather complex project, specifically in an emerging market environment. So, we have slightly updated start-up date to reflect, I would say, typical events that we can face in this kind of projects, namely logistic bottlenecks, subcontracting management and so on. So, we are now confident that we will start up in H1 2025 and reap the benefit of cost reduction as the kiln ramp-ups in H2. To specify your more specific question on the targeted fossil fuels on this production line, it will be able to go up to 70% of alternative fuel -- sorry, once it is fully operational, and we have set up the sourcing accordingly. On VPI, your last question, as a reminder, we have been present in building chemicals for a very long time, almost forever. And we have seized this opportunity to consolidate our position in France. We have no global plans to expand in this industry outside of France. We nevertheless, we'll look at opportunities if some arise, keep in mind, but we still pursue our deleveraging target.

[Operator Instructions] We will take the next question from Tobias Woerner from Stifel Europe.

Two, if I may. Just a clarification on the Koramic transaction. You say you have an ownership of 60/40. Is that also reflected in the economics, i.e., in the revenues? Is that basically what Koramic inserted into your business, i.e., EUR 120 million and EUR 80 million, respectively? And what sort of margin should we assume? And apologies if that was mentioned earlier, I came a bit later on the call. And secondly, again, probably not necessarily for this call, but it'd be interesting to hear your thoughts about 2025, and I wouldn't expect clearly any guidance, but just sort of how things unfold in your mind. We hear from certain of your peers that France is lagging behind and that maybe the recovery may be more second half skewed, but I would appreciate if you could give us a little bit of a flavor.

Thank you, Tobias, for your questions. Regarding the shareholding percentage in the combined operation in construction chemicals. Well, obviously, the shareholdings reflect the respective enterprise values of both businesses that are mostly reflective of volumes indeed. On the margin, well, we don't disclose margin by business lines. This operation will allow us to have more critical size in the French market to have a better geographical coverage and therefore, to leverage some synergies and improve the margin rates as we go forward with time, probably more in '26. So, we do expect further improvement in the margins there. Regarding '25, indeed, it is a little early to give specific guidance with figures, we can nevertheless share a few thoughts on major trends that we can observe in our businesses. Firstly, in U.S., we have not finished the full commercial ramp-up of our operation in the Southeast. And so, we are expecting some further growth potential in '25. And the decrease in interest rate will obviously provide a tailwind to the residential market at some point next year. In Europe, the residential market is indeed at a very low point today. It is still decreasing, but the rate of decrease is improving quarter after quarter. In France, the rate of decrease was half during the last quarter compared to the previous one. So, we expect to see a stabilization of the market at some point in '25. As we are for Vicat, we have highlighted that the TELT project is ramping up gradually. Typically, we would expect that the growth it will contribute to our business is likely to offset the market decline. And finally, the third comment we can share globally is that indeed, with ramp-up of Senegal kiln, we will see some improvement through H2, good performance in Africa. So that's the elements that we can share at this point.

[Operator Instructions] We will take the next question from line Yassine Touahri from On Field Research.

Yassine Touahri from On Field Investment Research. Just first question on your free cash flow generation and your debt leverage on your target. It looks like you're generating more than EUR 200 million of free cash flow per year. Do you have a view on your CapEx expectations for 2025? And the question, I think, is that could you generate more than EUR 200 million of free cash flow? Could you generate something closer to EUR 300 million? And then the question is that what do you think is the market missing? Because if you're generating a free cash flow of between EUR 200 million and EUR 300 million, it means that you're trading at a free cash flow yield of between-- of close to 15%, 20%, which is highest in the whole sector. What do you think the market is missing?

Thank you for the question. Obviously, as we disclosed before, we are finishing up a period of relatively high CapEx, and we do expect CapEx to come down further in 2025, significantly below EUR 300 million. We will give a more precise guidance with full year results. Nevertheless, it will come down substantially compared to this year. It is too early to give guidance on free cash flow next year, but your figures make sense. Regarding the market expectations, well, I'm not sure the market has yet fully valued the mechanical effect of leveraging only nor give us credit for the upcoming effect of Senegal. So, we are focused on our priorities to restore margin levels, implement our CapEx and generate the ROCE that we are committed. As a reminder, we are targeting 18% ROCE on the Senegal project as well and continue to deleverage. And I'm sure that at some point, market will realize those elements are creating value.

And maybe a question more about the long-term, if the market -- assuming that the market does not realize that the value is not changing, would you find it attractive to buy your own shares after you've reached a leverage ratio that you find attractive? And what would be the next step, let's say, if you manage to the leverage target by 2025, how do you think about the development of the group for the next cycle? Where would you want to invest your cash? Would you consider share buyback? Would you look at green CapEx? Would you look at acquisition?

It's probably a little early to go in a granular detail on this subject. I can nevertheless share a few thoughts. First of all, we will continue to deleverage to make sure we enter into the next phase of decarbonization with financial flexibility until we have a clear view on the cost of technologies and the public support that is available. Secondly, we value shareholder return. We believe that in all situation, dividend is the right instrument to do so, and we have increased dividend already and have a pretty high -- one of the highest shareholder return rate in the industry this year. Beyond '25, while, obviously, the group has always -- beyond the green CapEx that will be needed, the group has always combined a view of bolt-on acquisition to strengthen its market position as well as brownfield CapEx that are accretive. So, we will look at this, but we still have quite some time and need to deliver the deleveraging first.

And maybe 2 follow-up questions. You mentioned that Senegal -- your Senegal investment is not necessarily recognized by the market, but we've seen quite a bit of political tension in West Africa. Is it something that could impact the return on your investment? Or do you feel it's not impacting the cement industry? And then the second question, which is a bit more about 2025. Have you already started to think about sending letter to your clients for price increase in the U.S., in France and in Switzerland? And how confident are you in your ability to at least offset cost inflation in those regions?

Two comments. On Senegal, I mean, there has been tensions in West Africa. Senegal specifically has this year a peaceful and democratic change. And I think it's a pretty good news. This has not prompted any disruption. It may generate changes in the regulatory environment, but as in many other countries. And so far, it has not disrupted. Secondly, the main driver of the return of our project is cost reduction. So, it's in our hands rather than in anybody's hands. So, I think it's on us to commission the facility and ramp it up to reduce our production costs. On prices, well, obviously, we will give the priority to our customers before announcing it here. We are still -- as mentioned, we are targeting to restore margin to pre-crisis level. We are getting close to that objective, but not yet, and we want to do that in each of our markets. So, we will continue to raise prices. Obviously, inflation is coming down to a slower pace, but there will be price increases in most of the markets, knowing that in the European space, even if CO2 is relatively low at the moment, the general pace is pointing to being a support to price increases. So, we are indeed targeting to increase prices at the beginning of next year in most of our developed markets. In emerging markets, it's more of a regular daily adjustment.

It appears no further question at this time. I'll hand it back over to your host for closing remarks.

Thank you. This concludes our call for today. Thank you for your interest in Vicat. Our 2024 full year results will be published on February 18 next year. Until then, à bientôt.

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