Earnings Call: Q3 2022

Nov 8, 2022

Welcome to today's Vica's Q3 Sales 2022 with Guy Sidos, Chairman and CEO and Luc Schomel, CFO. Today's call is being recorded. I will now hand over to Guy Sidoti. Please go ahead. Thank you, Diana. Good morning, ladies and gentlemen. I'm Guy Sidos, Chairman and CEO of Surbica Group. With me today are Hugues Schoemel, Deputy CEO and Chief Financial Officer and Stephane Bissari, our Investor Relations Director. I will be presenting to you our 2022 9 months sales 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. Let us begin with the highlights of this period on Slide 3. Firstly, Vika's 9 month sales performance reflects the resilience of its market as consolidated sales came in at just under €2,700,000,000 for the 9 months to end September 2022, up plus 16% on a like for like basis. Secondly, despite a high basis of comparison in 2021 and against the backdrop of very high inflation, the group sales posted a solid increase compared with the same period of 2021, supported by strong growth in selling prices across all its regions. Indeed, in this new environment, we have been successful in swiftly adapting our pricing to adjust to conditions in our markets. There may sometimes be a delay before the price hikes ticking and the makeup for such is totally total increases in energy cost as the one we have recently endured in France and Switzerland. But overall, demand is resilient in our markets, and we are pleased with the state of our pricing power. Finally, in a global environment that provides little short term visibility, especially as regards energy costs, we are executing our strategy to improve our industrial performance, make greater use of secondary fuels, reduce our carbon footprint and implement a pricing policy tailored to these new conditions. I will now hand over to Luc Chamel, who will outline the performance by region, and I will return for the conclusion. Thank you, Mr. President. Let's move to France on Slide 4. During the 1st 9 months of 2022, the group sales in France moved higher, supported by a strong growth in selling prices across the group businesses in an environment characterized by an unfavorable basis of comparison and macroeconomic and industry conditions affected by the strong inflation in cost and higher interest rates. In the 3rd quarter, consolidated sales in France increased by 5.1%. Investment Business, operational sales moved rose 9%. Given the unfavorable basis of comparison, this increase reflects a slight fall in demand and a sharp rise in selling prices. The trend continued into the 3rd quarter with operational sales recording a significant increase of 13%. Operational sales recorded by Concrete and Aggregates business rose 4%. This performance reflects a further increase in demand in Concrete, but a fall in Aggregates. Selling prices recorded a significant improvement. In the overall product and services business, operational sales rose 8%. Please turn to Slide 5 for performance in Europe. In Switzerland, the group consolidated sales were stable at constant scope and exchange rates over the period as a whole. In the Q3, consolidated sales declined by 6.1%. Investment Business, operational sales moved up 3%. This performance reflects a fall in demand during the period, largely offset by a solid increase in selling prices. In the Concrete and Aggregates business, operational sales declined 5%, with the increase in selling prices not fully making up for the significant decline in both concrete and aggregates volumes. In the Other Products and Services business, operational sales fell 2%. In Italy, consolidated sales grew by 43% over the 9 month period and by 50% in the 3rd quarter alone. Both volumes and selling prices recorded a significant improvement. Moving now to the Americas on Slide 6. In the United States, the macroeconomic and sector environment remained favorable throughout the period. Consolidated sales rose 4% at constant scope and exchange rates. The construction of a new kiln line at Raglan plant in Alabama, which began in 2019 was completed in the Q2 of 2022. The new facility started up gradually during the Q3 of 2022. As a result, production capacity and deliveries in the region were temporarily curtailed. Taking these factors into account, the group consolidated 3rd quarter sales rose 4.5%. In the segment business, operational sales grew 4% during the 1st 9 months of the year, reflecting the momentum of construction markets in the regions in which the group operates and the introduction of significant price increases. The impact of the start up of the new raglan kiln was felt in the 2nd and third quarters and was offset only partially by the strong increase in deliveries in California. In the Concrete business, operational sales moved up 4.5%, supported by the increase in selling prices, which largely offset a small drop in sales volumes. In Brazil, consolidated sales totaled €210,000,000 up 32% at constant scope and exchange rates. Against a backdrop of rapid inflation and despite higher interest rates and an unfavorable basis of comparison, demand remained strong in the group markets. In the Q3, consolidated sales rose 29% at constant scope and exchange rates. In the Cement Business, operational sales were €165,000,000 an increase of 28%. In a dynamic market environment, selling prices posted a significant increase. In Concrete and Aggregates Business, operational sales were €68,000,000 an increase of 51%, in line with the trends seen in the Cement business. The steady improvement in market condition was coupled with to a rise in prices, both in concrete and aggregates. On Slide 7, we can examine performance in Asia. Sales in India rose throughout the period, moving up 12% at constant scope and exchange rates to reach €320,000,000 Against the backdrop of high inflation, demand remained solid and price increases were introduced. The trend carried through into the Q3 with sales in India rising 7% at constant scope and exchange rates to reach €106,000,000 The bottlenecking operations at the Kalbogie plant in India increased the plant's capacity to over 10,000 tons of cement per day, temporarily weighing on the plant's capacity during the Q3, but enabling it to capitalize fully on the market dynamism going forward. Consolidated sales in Kazakhstan came to €56,000,000 at 4% at constant scope and exchange rates. This performance reflect a significant increase in selling prices, which largely offset a fall in volumes delivered against a very high basis of comparison. In the 3rd quarter, consolidated sales fell 10% due to lower volumes delivered given the logistic issues affecting the entire market, with this impact only partially offset by higher selling prices. On Slide 8, you have our performance in the Mediterranean. In Turkey, in a declining market, the group continued to pursue its strategy of optimizing its production facilities, limiting volume sold and prioritizing higher selling prices in an hyper inflationary environment. Against this backdrop, consolidated sales in the 9 months to 30 September 2022 totaled €175,000,000 representing an increase of 168 percent at constant scope and exchange rates. During the Q3, consolidated sales were up 2 11%. In the Cement business, the group has limited the use of its least energy efficient manufacturing facilities to lower the impact of higher costs in an hyperinflationary environment. As a result, volumes were much lower during the period. Decline was offset by to a very large extent by very substantial price hikes. As a result, operational sales in the business climbed 169 percent to €129,000,000 In the Concrete and Aggregate business, operational sales rose 173% at constant scope and exchange rate to €80,000,000 thanks to record price high increases in both concrete and aggregates. With the tough weather conditions that affected the beginning of the year, concrete deliveries declined over the 9 1st 9 months of 2022. However, aggregate volumes moved higher. In Egypt, consolidated sales totaled €85,000,000 up 64% at constant scope and exchange rates. Following the market regulation agreement renewal between the Egyptian government and oil producers, selling prices in the domestic market continued to improve during the 1st 9 months of the year, supported by a solid increase in demand. Finally, on Slide 9, you have the numbers for Africa. In this region, the group continued to benefit of a dynamic sector environment despite the political crisis in Mali. During the Q3, consolidated sales were stable at constant scope and exchange rates. Investment Business, operational sales in the region fell 6%, while business trends were virtually stable in Senegal, the sharp contraction in Mali market as a result of a geopolitical environment was not fully offset by growth in Mauritania. Selling prices rose in both these markets. In Senegal, another increase was introduced towards the end of the period, but had only a small impact by September 30, following on from a long period during which increases had been severely curbed by the authorities. In the Q3, operational sales declined 10%. Amid very strong cost inflation, the group adopted a commercial optimization strategy prioritizing increases in selling prices. Lastly, the wintering season was less favorable than during the Q3 of 2021. In Senegal, the aggregate business recorded operational sales of €26,000,000 up 26% supported by private sector demand. On Slide 10, I'll turn to the changes in the group financial position at the end of September 2022. Group shareholders' equity was €2,900,000,000 up from €2,500,000,000 at September 30, 2021. Net debt stood at €1,700,000,000 up from €1,300,000,000 as of September 30, 2021. Given the significant increase of the net working capital requirement with the growth in sales and the impact of inflation on inventories, as well as a high level of CapEx with 2 strategic value creation projects currently underway in the U. S. And in Senegal. Both these projects are expected to deliver ROCE of between 15% 18%. On Slide 11, we've given you an update on our energy cost. Energy cost totaled around €400,000,000 in 2021, €57,000,000 of which were related to the use of fuel. The group hedging policy provides a degree of visibility on its energy cost over the short term. Since the beginning of the year, the very sudden surge in energy prices, especially electricity prices, has gained pace. By September 30, energy costs were up 87%, including a rise of 100 and 3% in fuel prices and 66% in electricity prices. During the 3rd quarter, a very strong increase in electricity prices in France and Switzerland reached record high. In the October 11 update of its outlook for 2022, the group announced further significant price increases of more than CHF 20 in France and CHF30 in Switzerland to respond to the new environment in these two markets and offset the impact of electricity price increases. On Slide 12, you have the latest in the ramp up of our new kiln and the Raglan plant in the United States. Construction of this new kiln line began in 2019 and was completed in the Q2 of 2022. However, the gradual start up process wait on performance in the Q3 of 2022. The issue has since been resolved and the new installation is now working very well. I will now hand back to Mr. Sidos for the conclusion. Thank you, Hugues. Finally, on Slide 13, we have highlighted the outlook for 2022 that we updated on 11 October this year. For 2022, the group's EBITDA is now expected to be lower than in 2021 and to be at least equal to that generated in 2020. Even if the expected level of EBITDA is lower than our initial group is taking the necessary measures to adapt to the new environment and remains firmly focused on its strategic objectives. 1st, leveraging with significant reduction of the CapEx through 2023 2024. 2nd, margin restoration with a change in policy when it comes to sales pricing in order to adapt to energy price volatility, particularly in mature markets. 3rd, acceleration of the ecological transition with a faster ramp up of the use of secondary fuels and the decrease in the clinker rate with the objective of reducing cost per ton of cement produced and improving climate performance. This concludes our presentation. Diana, can we move to questions? Certainly. Thank you. From Ebrahim Omani with Seys. Hello. Thank you for taking my question. I have 3 questions, if I may. The first one is about Raglan in H1. It had caused an exceptional charge of €25,000,000 What should we expect in the full year? And which CapEx do you will stop in priority? My second question is about energy costs in France. You are covered at 60% by the R and D system for the electricity costs. So how much are you covered for 2022 at the group level? And other similar systems in other countries, other systems similar than the R1 system? And maybe the last question about the power plants. You have, if I'm not wrong, independent power plants in Switzerland. Do you have any elsewhere in Europe? Thank you. Good afternoon. Thank you for your question, Ibrahim. On Avian, actually, we disclosed that we had nonrecurring industrial cost in H 1 of €25,000,000 which was related to 3 different situations, the largest one being Raglan. This continued into the Q3, mostly in Raglan. And to a lesser extent, as we pointed out, with the limitation of capacity of Calbogui linked to the debottlenecking. We have not shared evaluation of this impact. Is mostly related to reduced deliveries. Yes. About your 2 and 3rd questions, all about energy costs and especially power costs. We are in 12 countries. Each country has its own dynamic. It's our own way of setting power price. So France is a very special situation. We cover all needs in electricity via framework, AREN contract for about around 65% of our needs. And for the balance, we cover our needs with acquisitions at spot price or acquisition of future prices. As is precisely this brutal and sudden increase in electricity electricity spot price that impacted us. And the way electricity price is set up in France is driven by the cost of the last megawatt hour. So it creates some kind of uncertainty. Schulde alone is a little bit different, and we are covered to 85% for next year, and we generate part of our own hydroelectricity there. Each country has its own dynamic. And in some countries, we didn't even see the price hike in Power. So it's very different in the remaining countries, but you have also numbers for 2022 at the end of September in our press release. As you know, we have some hydroelectricity for our country in Switzerland. We have a small one in France for the paper mill. We develop a few capacity over the world and the latest one is in Turkey, where we are we will start WHRS more than 10 megawatt in Baxtash in Ankara. So the situation is very different when it comes to compare countries, and we adjust our policy with the local situation. Quite complicated. Thank you very much. Our next question comes from Yassine Tuari with On Field Investment. Yes, good morning, gentlemen. So couple of questions. I understand that you're currently passing a price increase of €20 in France. Could you give us an update on how this price increase is developing? What kind of a discussion do you have with your clients? How confident are you in this €20 price increase sticking to Euro EBITDA as a view of the percentage of the price increase that could remain in a couple of months? Then same question for Switzerland, where I understand that you've got the price increase of Swiss francs in a couple of months as you started to discuss with clients. And then in the U. S, have you already sent a letter for clients for a price increase in early 2023? And have you did something like $10, dollars 20 as your competitor? Yes. Thank you, Yacine. So a good price increases, of course, it's a negotiation and then discussed with clients. With good understanding of the reason why we do it, good level of acceptance. And we increased prices and in France, Switzerland and the U. S. At a time consumption is low because of weather. So it will definitely help this materialization of price increase, because whatever is negotiated, we will have the same between now and January, we'll have almost the same impact on the balance sheet. So we feel very confident in France, Switzerland and the U. S. About these price increases that will compensate the balance the cost hikes. And in the U. S, that is a little bit of price increase that's given up in dollar So Jatin, Stefan speaking. Do you mean historically, I mean, for the 1st 9 months of the year or No. What is the price increase that you have announced for early 2023 in the U. S? $16, $20, $15 per That's a 2 digit number with very local markets, but that's a 2 digit numbers on both markets. And then the last question. Based on the current energy price that you see in your market, do you believe that you could have a positive price growth dynamic in the 1st part of 2023? And do you believe you could recover what you've lost the 7th part of 2,000 century? We will not comment too much on 23, but you can as we mentioned already, there is always a time lag between increasing cost and increasing prices and we will have a full year effect of all the price increases implemented so far. Maybe a very If energy price in Europe, in France and Switzerland normalized downward, Do you believe you would have to reduce prices? No. And how confident are you in the fact that your competitor will not do anything that clients will not push back? Is it because you're providing more services? Is it because of the need to invest in green CapEx? Or what is what would be the commercial decision? Well, we do not we at first, we do not talk to competitors, but it's everybody's interest to keep that. No, I believe I have no real worrying about that once the price increase is there. We will now take the next question from Sven Adolphe with ODDO. Yes, good morning. Thank you for taking my question. I believe there has been a ministerial decrease to lower cement prices in Senegal. Can you give us a sense of the potential effect on your cement prices for Q4 and potentially for next year? Second question, can you give us a sense of what is your net debt to EBITDA you would be comfortable with? Yes, these are my 2 questions. Good morning, Sven. Thank you for your question. I'm not sure I did really understand your question related to Senegal. You mentioned a decrease reducing prices? To reduce prices, yes. Okay. The one I have seen is increasing prices actually by a little bit more than 10% at the end of September. So we are raising prices currently. On your second point, as you I mean, financial strategy has not changed from what it is historically. So we aim to bring back the leverage level below 2. We will now take the next question from Pierre Rousseau with Barclays. Yes, good morning, gentlemen. Thank you for taking my question. Shifting back to power costs, do you think you would have to change your strategy a little bit in the next few years? And into 2023? Are you fixing more costs now? And any thoughts on what you could be doing mid term would be helpful. Then the second question would be about the Cara product, and the carbon negative products that you are introducing in France. What is the process currently? And could you share some basics in terms of the business plan in the next few years for this product category? Thank you. Good morning, Pierre. Thank you for your questions. I'm not quite sure I didn't understand your first question properly, but I will try to answer and you'll revert if it does not match. As we spotted out in our communication, we are adapting to the new environment created by the energy prices. As such, we are adapting our prices a lot more proactively than we did historically in mature market. And we in the current environment, we have somewhat shorter hedges considering the high volatility. Going forward longer forward is difficult in the current uncertainty, and we will certainly adapt as time goes. Yes. So about your second question, which is more technical about Cara, Cara, which is our last carbon negative binder. So we launched it in December. We are now under the process of normalization in France, which can be quite long. We started a few we did a few projects with that to get some experience and it worked very well. And but as far as far as not fully normalized, we don't expect a major impact on our P and L. It will take some time and we don't this is not in today in our hands. And from there, we'll follow demand. And demand for low carbon product is still very low in France. And we will now take the next question from Manish Bedi with Societe Generale. Yes, hi. So the first question is on the energy cost. So last year, I mean, the energy cost was €400,000,000 So you are suggesting this year it will double, so maybe like €800,000,000 So my question is next year if the energy stays at the spot, so where this 800,000,000 moves to like €1,200,000,000 1.5, so maybe a magnitude or some direction there will be very helpful. Good morning, Manish. Thank you for your question. As suggested, we expect a very strong increase in the energy build this year, roughly in line with that observed at the end of September, so which is somewhat below 90% increase, which suggests something around €750,000,000 rather than €800,000,000 Regarding 2023, it is too early for us to give precise guidance, sorry. Okay. So my second question is on the demand outlook for the next year. So maybe if you can provide an outlook by region, Europe, U. S, emerging market, maybe also comment on the end market like how do you see the residential, non residential, also the intra market in Europe as well as the U. S? So just give me an overall picture on the demand outlook by region as well as the end market. Hello, Manish, Stephane speaking. It's a good try. But as you know, we cannot make any comments on 2023 at this stage. It was not on the press release, and it will be communicated February 14 at the time of the full year publication. It's way too early at this stage. But how is your order book right now? So just taking your order book, I mean, still good? So what sort of visibility you have or how far you have, yes? Yes. Manish, once again, everything that has been communicated in the press release is we said that the markets were resilient for the end of the year. That's it. Regarding 2023, once again, we will communicate it later on. So maybe the last one. So you said you will look at lowering your CapEx next year. So just trying to see where which projects you are going to, I mean, not continue in that sense? Well, this is speaking. We'll continue CapEx we started, but we'll not launch new CapEx other than the keep our Softgel in a good shape. Okay. Thank you. You're welcome. And we will now take the next question from Prishe Thier with Ashok Desai. Hi, good morning. I have 3. The first one is on the demand environment. I appreciate you are not ready to kind of take a stab at 2023. But looking at Q3, could you give us a little more color about how the end markets are behaving, I. E, residential, nonresidential infrastructure? How they have behaved? And whether you have seen any acceleration of the decline over the period or it's kind of a more of in the same pace as it was at the start of the Q3? Yes. Good morning. Thank you for your question. As we highlighted, we see overall very resilient markets with 2 exceptions that are very local. 1 is the geopolitical situation in Mali and the other one is the situation in Turkey with hyperinflation situation. Everywhere else we see either stable or very limited decline in demand. So in 2022, we see a global resilient picture. Okay. And then possibly the next one is on the outlook for 2022. So as we stand now with the energy prices, how it's moving, any staggered how where you are kind of if the energy prices stay at this level, is it more likely that you will be closer to 2021? If the energy prices spike off, then your the chances are that you will be much closer to 2020. Is that how we should read it? Yes. I think we said whatever we could in our guidance. So it will be above 2020. Okay. Finally, on the CapEx part, I understand you are planning to reduce the CapEx and not starting any new one. How does that CapEx reduction plan impacts your sustainability journey? We as stated in the press release, we will maintain our effort on the our climate plan and we are not considering to delay it or jeopardize it. We may just reprioritize some projects, but that's it. And we will now take the next question from Tobias Werners with Stifel. Yes, good morning, gentlemen. Apologies, I've come late to the call. So in case some questions have been asked, apologies in advance. With regard to the hedging policy, you write in your summary here that you've got a degree of visibility over the next 6 to 9 months. Could we dig a little bit into that and get a sense of what percentage of your exposure is open spot prices as of now or the end of September, both in solid fuels as well as electricity? And the second question, just to get a sense, and I'm sure I can pick it up from your sustainability reports, but if you could just remind us quickly what your old alternative fuel rate is in Europe as a whole in terms of your substitution of solid fuels? Thank you. Yes. Good morning. Thank you for your question. As far as the hedging policy, it's quite difficult to give you a global answer since we have a very different situation from plant to plant depending on the extent of substitution and the presence or not of regulated electricity price and the different types of combustible available for each plant. So to try to give you the general guidelines on which we operate. First of all, I will respond to your second question and come back to the first one in a minute. So our global substitution rate last year was 26%. It was close to 100% in Switzerland and between 50% 60% in France. And it is improving this year. So obviously, depending on that, we have very different hedging policies in different countries. We try to hedge coal and pet coke when we consume some between 3 9 months depending on the local situations. On electricity, there is quite a large part of our countries where we have regulated prices. In France, as stated by Mr. Sidos a few minutes back, we are protected between 60% 65% by regulated iron tariff. And beyond that, we are exposed to spot prices. In Switzerland, we are globally exposed to spot prices, but we have a forward hedging policy that we build gradually with time. So that's about what I can share with you at this point. Can you say whether this is below or above the French exposure in Switzerland? It is for 23, it's below. So your spot exposure is no more than 35% to 40 percent? Right. Very helpful. And maybe on a more general topic, circular economy, what is your percentage of materials recycled so far in the use of your production facilities at this point in time? Do you have a sense of that? Not as a global number. No, I have not I'm not able to share with you a global number. We are globally trying to develop as much as possible circular economy as we believe it is very coherent with our local business model. And obviously, this is very much linked to the regulatory environment. So it enables us to develop it more swiftly in France and Switzerland. We are already generating significant business in both of these countries, but I'm not able to share a global number with you. Okay. Thank you very much. You're welcome. And we will now take the next question from Jean Christophe Leperto with CICE. Jean Christophe Lepergault, Moulin, Cathie. Good morning, everyone. I have two questions. The first one, follow-up question regarding the price hike in France, €20, is that announced in November and applicable next year? Or is the application on an immediate effect? 1st, this afternoon, there is at Elysee, Palais de Elysee meeting with Polluting Industries. Are you invited? Many thanks. Ongoing and will be effective December 1 and depending on the sector at a minimum of €20 per tonne. So it's well done. But I don't like your word predicting. In fact, we will be part of this meeting at Elysee this afternoon. That's the reason why we had to change the time for coal. But it's not probably about pollution, it's about take up on issue. It's about cooperating with government bodies for bringing the industry and among which the cement industry to a new standard. And we have a few programs that are supported by the government and you know them. And the will of our President and the government is to speed up these projects. So it's a very positive and constructive meeting. Okay. Just a detail, Guy. Regarding this price hike, does this price hike include or not includes the energy of such trade as it is the case in Germany? And next year, will you implement a further price increase in the beginning of January March maybe? Thanks. Well, if we do one step at a time, This increase is a firm one. It's not linked with any so far with any kind of index. And we will keep following the trend in our cost to start a new one or not. It's too early to give you definitive idea about that. But what is coming now looks strong. And it seems there are no further questions. So I will turn the call back over to Bjorn Sidos for the closing remarks. Thank you, Diana. This concludes our call for today. I'd like to thank you all for your interest in Vika. We'll be publishing our full year results on 14 February of next year. Until then,