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

Welcome to the Vicat 2024 Full Year Results Conference Call. My name is Alan, and I'll 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, Guy Sidos, Chairman and CEO, to begin today's conference.

Thanks, Alan. Good morning, ladies and gentlemen. Welcome to the Vicat Group's 2024 annual results presentation meeting. I'm Guy Sidos, Chairman and CEO of Vicat. Joining me are Hugues Chomel, Deputy Managing Director and the Group Chief Financial Officer; and Pierre Pedrosa, Director of Financial Communications and Investor Relations. Slide 2 contains a preliminary disclaimer. It aims to draw your attention to the fact that the elements presented here for fiscal 2025 are assessments of expected trends in the group's various markets and should under no circumstances be considered as forecasts. On Slide 3 now. Our presentation today will be divided into 5 points. I'll start by reviewing the highlights of 2024, the Group's fundamentals and then focus on a number of key points in our business. I will then hand over to Hugues Chomel for an analysis of financial performance and the main balance sheet and cash flow items. I'll then come back to our climate action plan before concluding with a look at expected trends for the current year and our priorities for the future. On Slide 4, let's start with the highlights of the year. Switch to Slide 5. The year 2024 through its success and the prospects it opens confirms the relevance of Vicat's development model. In a historically depressed environment in Europe, the group posted organic growth of plus 2.3% and an EBITDA of EUR 783 million. This is the group's best ever performance. It is a result of commercial and industrial efficiency of all our teams in the various markets, and I would like to congratulate them once again for their commitment and their contribution to this fine performance. Strong growth in the U.S., which now generates EUR 190 million in EBITDA, resilience in Europe and progress in the Mediterranean zone have all contributed to the EBITDA margin returning to above 20%. More on this later. At the same time, the group generated a sharp rise in free cash flow to EUR 373 million and continued to reduce its debt. Financial leverage was 1.58x at the end of '24. Finally, the group is continuing to implement its decarbonization road map with a further reduction in emissions intensity in '24. On Slide 6, a quick overview of our long-term performance. Consolidated sales reached EUR 3.88 billion with average annual growth of 7.2% over the past 5 years. ROCE rose to 8.1%. Finally, our leverage ratio continues to improve from 1.92x in '23 to 1.58x in '24, reinforcing the group's financial strength. These results demonstrate Vicat's ability to combine operational performance and financial discipline in a demanding environment. On Slide 7 now. Vicat's fundamentals are based on 4 pillars; family roots and a long-term vision based on our heritage and it enables us to pursue a current long-term industrial strategy; modern high-performance production facilities to optimize our costs and reduce our environmental footprint. Third pillar is a strong capacity for innovation, which positions us as a key player in the low carbon transition. And fourth pillar is a balanced geographic diversification between developed and emerging markets. This enable us to navigate changing environment with agility and efficiency. On Slide 8, you have before you an analysis of our investment cycle over the past 10 years. The first phase between 2014 and 2018 is that of stable investments 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 investments in Ragland and Senegal. Today, as the cost of financing has risen, we are focusing on reducing our debt by moderating our investments. This phase has enabled us to significantly improve our cash generation. Go to Slide 9, and let's now turn our attention to our worldwide activities. On Slide 10, let's start with an update on the French residential market, which is going through a period of historic slowdown, but which also offers significant prospects of recovery. As you can see from the graph to the right, the French residential market is currently at its lowest level for 25 years. However, this situation creates the potential for recovery. We know that residential needs in France remain high and that latent demand is strong. Several product factors, structural factors underpin this demand. Population growth, which continues to rise, particularly in certain urban and suburban areas. Societal trends, such as the rise in the number of single parent families, reindustrialization and then the impact of the climate because the new homes comply better with environmental standards and are more energy efficient. Vicat, with its regional presence and available production capacity is perfectly positioned to benefit from this upturn when it arrives and in cement, of course, in concrete, in aggregates materials as well as in high value-added construction chemicals. Let's focus on Slide 11 on what we call the TELT, which is the Lyon-Turin tunnel. This project is the largest civil engineering project in Europe. A 57.5 kilometer tunnel in 2 tubes, a commercial project mobilizing large volume of materials. It will generate a significant contribution to Vicat's businesses over more than 7 years. Around 1.3 million tons of cement will be supplied with a gradual ramp-up to peak expected between '27 and '28. Our SATM subsidiary will produce the concrete and use almost 4 million tons of aggregates for the various phases of the project. 24 million tons of material will be excavated for the tunnel, a major challenge for the management and recovery of the extracted materials, which was the subject for contract borne by the consortium led by VINCI and Vicat. The TELT is the large-scale project that will support our activity for years to come. Another focus on Slide 12 that shows the -- our activities in the U.S. where we produce cement and ready-mix concrete locally in the Southeast and in California. The U.S. is now our second largest market. We generated EBITDA of EUR 190 million in '24, up 26% year-on-year, representing 1/4 of the group's operating profitability. The Lebec site in California has the capacity of 1.3 million tons and covers the Los Angeles region from Merced to the Orange County where we also produce decarbonated ready-mix concrete. Our Ragland plant in Alabama serves the Southern United States, in particular, the area of Atlanta and Nashville, thanks to a network efficient rail terminals. These are dynamic states that benefit from considerable public and private investments that we are in position to serve. Now the LNZ project, the Lebec Net Zero project, is the first carbon capture and storage, CCS, project in California. It is based on the capacity to capture 950,000 tons of CO2 per year to completely decarbonize cement produced on this site. Deployment will take place in 4 phases with commissioning scheduled for after 2030, subject to a final investment decision in 2027. The first phase has been validated by the Department of Energy, DOE, while subsequent phases may evolve at our initiative in line with regulatory and technological adjustments. The project benefits from several favorable levers, regulation and discussions are underway with the State of California to secure a favorable framework, including the carbon border adjustment mechanism and CO2 transport logistics. Second lever is financing. We have a commitment of up to EUR 500 million in DOE support as well as eligibility for IRA 45Q with a tax credit of $85 per ton of carbon sequestered over 12 years. Technology is the last lever. We work with proven technologies and partnerships with local engineering specialists. Lebec Net Zero marks a major step forward for Vicat in the U.S. in line with our road map. On Slide 14, we focus on India now. India is a buoyant market, underpinned by a solid economy, dynamic demographics and growing urbanization, generating significant infrastructure needs. In '24, the group has adapted to a complex market while securing its margins and growth prospects. In a fiercely competitive environment in South, sales reached EUR 373 million in '24, down than '23. And faced with this pressure, Vicat has adopted a different -- some kind of a differentiated strategy. In South, we focused on pricing over volume and our logistic capacity to Mumbai was considerably strengthened to supply this growing market. This is the South of Maharashtra. At the same time, we are starting from a competitive cost base and have been working on strict cost control, which has enabled us to improve EBITDA to EUR 75 million, up 5.6% on '23. Of course, lower energy costs contributed directly to this performance, and improving industrial and logistic efficiency strengthened our competitiveness. On Slide 15, we focus on Egypt. Egypt also this other side. It has been a spectacular recovery driven by strong export momentum and improved market conditions. In 2 years, EBITDA rose from negative to EUR 34.1 million in '24 with a sharp increase in margin to 27.7%. This performance is explained by an acceleration in export volumes with an order book secured for 2025 and a gradual convergence of domestic prices towards export prices in the second half of the year, improving profitability on the local market. After a very difficult period, the opportunity for growth in the region has been seized and backed up by our quality assets in the Sinai region, and we are very confident on the year ahead. Another focus on Slide 16 where we outlined our investment in Senegal. The group has launched a EUR 260 million investment plan to build a new 2 million ton kiln line. Commission is scheduled for the second quarter with contribution expected in the second half of '25. We have a ROCE target of 18% on this project, which is mainly linked to an improvement in production costs. I now hand over to Hugues Chomel for a more in-depth analysis of our financial performance. Hugues, the floor is yours.

Thank you, Mr. Chairman and CEO. Let me start with the key figures in our income statement. As presented by Mr. Sidos, the group achieved organic sales growth of 2% in 2024. Organic growth in EBITDA exceeded 10% and was driven by growth in Ragland in U.S., development in Egypt, thanks to exports, a favorable price/cost spread in almost all the markets where we operate and improvement in the group industrial performance overall. EBITDA margin in 2024 was 20.2%, up 140 basis points year-on-year, meeting the group target of a return to the margin level that preceded the inflationary crisis of '22, '23. In the context where almost 40% of the group markets in Europe are at historic lows, this performance demonstrates the solidity of the Vicat model. Net income group share rose to EUR 273 million, almost 12% up on a like-for-like basis. On Slide 19. This slide shows sales trends by geographic area. Most regions reported organic growth in 2024 with the exception of France, marked by the historic slowdown in residential sales and Asia due to India, where the group continued to focus on price over volume strategy. Africa is essentially stable. Of note, the growing contribution of the United States to group sales, up to over 19% in 2024 and the very strong performance of the Mediterranean region, powered by the recovery in Egypt. Let's move to Slide 20, which shows the EBITDA bridge between 2023 and 2024. The main variation is due to price dynamics, which remains solid in most of the group regions. It should be noted, however, that more than half of this favorable price contribution was due to the hyperinflationary environment in Turkey. Coupled with the improvement in the group industrial performance, this growth has enabled us to more than offset lower level -- lower volume effects and the cost inflation. On Slide 21 shows the improvement in the free cash flow generation. In 2024, industrial investments came in as forecasted at EUR 320 million. In this envelope, strategic investments accounted for EUR 188 million, most of which are related to the new kiln project in Senegal. The group remains committed to its climate investment target of EUR 800 million between 2021 and 2030. Free cash flow grew by 26% to EUR 373 million, a strong showing for the second year running. The effective transformation into free cash flow resulted from a growth in EBITDA, a significant reduction in working capital requirement over the period and tight control over capital expenditures. The free cash flow conversion rate reached 48% this year, up 8 percentage points on 2023. On this basis, the group generated free cash flow yield of almost 20%, thus maintaining significant value creation for its shareholders. The next slide, Slide 23, shows our debt situation at the end of 2024. The group net debt stands at EUR 1.2 billion with cash reserve of EUR 536 million. Our debt has a well-balanced maturity profile with an average maturity of over 5 years. The average interest rate is 4.74% for all currencies together before hedging. Vicat has -- at the end of 2024, Vicat has a strong liquidity with around EUR 850 million in available undrawn credit lines. Let's move to Slide 24. Next slide gives an overview of our debt reduction trajectory. Our management strategy of EBITDA growth, tight control of working capital requirement and disciplined capital expenditures has enabled us to further reduce the group net debt. The leverage ratio stood at 1.58x at the end of 2024. And the group has set itself the target of reducing the leverage ratio further to 1.3x by the end of 2025 and below 1x by 2027. With that, I'll hand back the mic to Mr. Sidos.

Thank you, Hugues. So let's switch to Slide 26 where we start with an update on our progress in the climate plan. The group's climate performance continued to improve in '24 on all indicators in all the group's geographic zones with a notable improvement in India, which increased its use of alternative fuels by 13 points to 27% with the commissioning of 2 new facilities in Kalburgi and Bharati. This performance contributed to a 4-point improvement in the group-wide substitution rate. This rate now stands at 36%, well on the way to our target of 50% by 2030. In France, the start-up of the Argilor project at Xeuilley using activated clay as a sustainable substitute to clinker. Let's switch to Slide 26 now -- Slide 27. This slide gives a quick overview of Vicat's low carbon solution in France. Vicat markets a complete range of low-carbon products and service called DECA, including CARAT cement, our ultra-low carbon product. Today, these products accounts for 16% of our cement sales volume in France, double that of '23. The driving force behind this growth is 2-fold. The French regulatory framework sets emission ceilings for construction measured in CO2 equivalents per square meter. And the other driver is the commitment of our customers, commitments as part of their Scope 3 for 2030 and the Scope 3 is the sum of our Scope 1, Scope 2 and Scope 3. They understand that Vicat's zero carbon solutions will play a decisive role in reducing their indirect emissions, those that are not directly controlled by the company but are linked to its activities. Overall, these objectives illustrate a clear trend. Major players in the construction industry are aggressively moving towards a more sustainable practice, which Vicat playing the central role in facilitating this transition. I will conclude with our outlook for the current year and beyond. I'm on Slide 29 now. In 2025, the group has the following objectives; like-for-like sales growth, low single-digit EBITDA growth, net capital expenditure of around EUR 280 million and continued debt reduction with the aim of reducing our financial leverage to 1.3x by the end of '25 and below 1x by 2027. These objectives take into account an acceleration in performance in the second half of the year, thanks in particular to the contribution of Kiln 6 in Senegal and stabilization of energy crisis. On Slide 30, now to the dividend. On the basis of the '24 full year results and confidence in the group's ability to continue its profitable development, the Board of Directors has decided to propose to shareholders the distribution of a dividend of EUR 2 per share equivalent to a yield of around 5%. On Slide 31, Vicat is pursuing a controlled growth trajectory with 3 strategic priorities for the coming years. Firstly, to maintain EBITDA margin of at least 20% over the '25-'27 period by optimizing industrial and commercial performance. Secondly, to continue to reduce debt, as Hugues has already mentioned. Finally, accelerate the climate road map with a strong ambition on reducing CO2 emissions and promoting low carbon footprint products. These 3 pillars structure Vicat's strategy to ensure profitable and sustainable growth. Ladies and gentlemen, thank you for your attention. Mr. Chomel and I will be happy to answer any questions you may have. Alan, up to you.

[Operator Instructions] We will take our first question from Tom Zhang, Barclays.

I've got 2, please. The first one, just around your 2025 to 2027 guidance on keeping EBITDA margins at least equal to 20%. I guess, we've seen a pretty impressive kind of margin improvement over the last 2 years, but now the guidance sounds maybe a little bit more conservative. Are you expecting less in terms of price/cost benefits going forward than you have in the last couple of years in terms of what you're able to hold on to? Are you assuming any kind of volume recovery within that guidance? It just sounds like that the kind of margin progression story is plateauing a little bit. Just curious, any thoughts there?

Your question -- this is Guy Sidos speaking. Yes, we focus on EBITDA margin of over 20% over the next 2 years, thanks to a mix of volume recovery in certain markets and price solidity and cost being lower, thanks to modern equipment. To give you an example, we commissioned our new kiln in Ragland a couple of years ago and the cash costs are in the range of 30% lower than what they were. So new equipment, they bring efficiency because we have less energy consumption. We have higher volume, which reduce the share of fixed cost on every ton. And at the end of the day, we lower our cost in a good market where prices stay good, even if they don't increase, we increase our profitability this way.

Okay. So all of that makes sense. I guess, my question is why is the guidance not that higher, I guess, as a result because you have this organic growth coming from your rail distribution network around Ragland, you have obviously new kiln in Senegal. Yes, I'm just wondering if the guidance maybe is a bit conservative or if there's any other factors that you're thinking of that might be a bit of a headwind in the next 2 or 3 years?

We are in February 2025. So who knows what can happen. So we have already a good objective. We adjust it with facts, but we live in a very complicated world. But even in this complicated world, we forecast the results. This is the objective we set up. Now we are only -- keep in mind, you know that, but we are only in February 2025 and we are talking about objective in '27. So sorry for that.

Fair enough. And then the second question was just around the U.S. I was wondering if you are seeing any indications of kind of growing import pressure? I guess, from some of the data we've seen at the end of last year, we saw pretty sizable uptick in import volumes and quite a decline in import prices per ton as well. So wondering, one, yes, if you're seeing any import pressure? And 2, just any thoughts around your U.S. -- your approach to pricing in the U.S. in trying to place the additional material coming out of Ragland into the distribution network?

So globally, in the U.S., we know that import -- the U.S. relies on imports from Canada and Mexico to adjust the need to the capacity. Right now, Vicat is on one side in California close to the sea and we face some imports, especially from Asia. By the way, yesterday, the PCA sent a letter complaining about dumping of Vietnamese cement in California. So we expect a fast answer from the administration about that. Our second location is focused on the Atlanta market and the Nashville market, far from the coast and much less exposed to imports wherever they come from. So we -- these markets are very dynamic. And we were able to increase our footprint, thanks to good product, good production facility and also a good network of rail terminals. And we started new terminals last year, especially in the South of Nashville and one more in the vicinity southeast of Atlanta. And it brings service. And we sell on availability of cement, of course. We sell on quality on cement. And we totally switched to type 1L. And we, to my knowledge, was the only one in the U.S. to do that. And this is low-carbon cement in the U.S. And we also focus on quality of service. And it helps us to capture the dynamism of the metropolis we are in. So I feel very comfortable.

We will take our next question from Lefevre-Moulenq, Independent Analyst.

I have 2 questions. The first one is a fundamental question. Where do we stand with the CBAM implementation? There are rumors of delay. Can you give some color on this difficult subject? And secondly, the French market, I would like to focus on some number of French market. If I am not wrong, EBITDA margin of France slightly declined in 2024 over 2023. Is that due to the ready-mix concrete operations? As you know, ready-mix concrete operation for each cement player in France were loss-making in 2023. Is that still the case in 2024? Can we also have an order of magnitude of the [Foreign Language] capacities? And last question, outlook for 2025, both in volumes. I think that your competitors have forecasted a slight decline by minus 4%, minus 5% in 2025. And where do we stand with import and export situation globally? I think the export -- the official export numbers of the Vicat [Foreign Language] are underestimated.

Thanks, Jean-Cristophe, for your question. I will answer -- this is Sidos speaking. I will answer to the first one on CBAM and Hugues will talk about the French market and answer your question. The CBAM regulation, we face 2 kinds of CBAM, one in Europe, of course, and we started to declare what is related to CBAM and next year, first taxes, I would say, will be implemented, tax schemes, and we don't know exactly how it will be done and what it will mean for importers. Of course, things are sometimes -- somewhat still fuzzy on the exact CBAM procedure. We have enough tools to deal with this intermediate period. First, we have enough free -- a lot of quotas. We own in France more than 4.5 million tons of CO2 quotas. So it will help us to face unfair competition as far as CBAM is not totally implemented. And we also are in France in a very integrated market, which is not that easy to penetrate deeply. So we believe that CBAM, which we support, will go ahead. Of course, we don't know exactly the agenda of the European Commission about that, but it's coming. We have another expectation of CBAM in California. I talked about it. It's still under progress, but it's a necessity for us once we have additional costs linked with carbon capture and storage. I hand over to Hugues Chomel about your question about the details on the French market.

Yes. Jean-Cristophe, on the French EBITDA during the year, you have to keep in mind that 2024 was a pretty brutal year on the French market with volume decreasing double-digit, low-double-digit, but double-digit in cement. And as you know, our cement operation have a high operational level, therefore, the impact of volume is very significant. So I can tell you, I believe our teams in France did a great job in compensating, to a large extent, the impact of the volume decrease. Going forward, on the outlook, has the trend -- the trend of decrease is still there today. We do not expect the market to rebound this year. So we see a still negative trend of volume in the market. As highlighted by the presentation of Mr. Sidos, we will see the beginning of the ramp-up of the TELT project that will make up some of the market volume decrease, but we don't expect an overall rebound. So we do expect one, but not this year.

Okay. And on the capacity of the 2 grinders?

Well, we don't disclose capacity by equipment, Jean-Cristophe. Good try.

[Operator Instructions] We will take our next question from Ephrem Ravi, Citigroup.

In terms of the Lebec CCS project, can you give us an update in terms of what you're looking for from the government in terms of more clarity on the regulation? And also in terms of funding, will that funding kind of be available? What is the time frame before which that funding has to be taken or can it be extended beyond a certain time frame?

Yes. About this Lebec Net Zero project, deployment will take place in 4 phases with commissioning scheduled for after 2030 and the final investment decision will be taken in '27 and that's in our hand. The first phase has been validated by the Department of Energy. And as I said, while subsequent phases may evolve at our initiative in line with what can change with that. So we started the first phase. We sent our first bill to the DOE. And we are waiting for the payment right now. So it will -- we'll have soon, hopefully, money from the DOE about the first phase of our LNZ project. Basically, first phase is mostly about detailed surveys. And then we'll implement 2 major part of the project, which are aimed to reduce -- before capturing carbon to reduce the carbon footprint per ton of cement. I mean, we will defossilize totally the process with sub-fuels. And I was last week in Switzerland in Zurich and there is a special laboratory about cement there and they were talking about the pistachio cement of Lebec because we burn pistachio shells instead of petroleum coke. And we also have a second lever we will implement before carbon capture. This is linked with what we call LC3. It means calcined clay. We -- that can substitute some percentage of clinker. So it lowers the carbon footprint per ton of cement. And then the remaining carbon we cannot fight, reduce has to be captured and stored. So you see these 3 phases will follow -- each phase will follow the other and the capture will come not before the investment decision will be taken in '27 and it could take 3 years to build it.

That is all the time we have for question and answer session for today. So I will now hand you back to your host for closing remarks.

Thanks, Alan. This concludes our call for today. I'd like to thank you for your interest in Vicat. Our next call is set for the 29th of April with the Q1 '25 sales publication. Of course, it will follow our General Assembly here April 11. Until then [Foreign Language].

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