Earnings Call: H1 2021

Jul 28, 2021

Hello, and welcome to the VCAT Half Year twenty twenty one Results Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this event is being recorded. And for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. And I will now hand you over to your host, Mr. Hugo Chamelle, RECAT's Deputy CEO and CFO to begin today's conference. Thank you. Good afternoon, ladies and gentlemen, and welcome to our 2021 half year results conference call. Shamal speaking. I am today with Stephane Bisset, our Investment Relations Director. 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, you have the main points we will be addressing today, and I will begin with the highlights of the first half on Slide 4. In line with the trends seen in the second half of twenty twenty, the group activity continued to move in the right direction over the first half of this year. Leveraging the dynamism of these markets, Fikar's financial results continued their progression as H1 sales grew to over €1,500,000,000 EBITDA reached €300,000,000 which marks a 48% increase on last year's figure. To note, it also represents a marked progression on 2019 EBITDA level that stood at €228,000,000 Over the 1st 6 months, EBIT grew 137 percent. And as a result of this strong increase in operating profitability, cash flow reached €240,000,000 up 44% on a like for like basis. For more than a year now, the group has demonstrated its responsiveness and ability to adapt, thus validating the relevance of its commercial and industrial strategy. Looking ahead, the Vicar Group continues to focus on its carbon reduction targets, accelerating the commercialization of its low carbon product lines adapted to the global climate challenge. Starting on Slide 6, we will move on to the presentation of the half year twenty twenty one results. Slide 6 presents our income statement. As I pointed out, our business grew well in the first in this semester with sales reaching €1,560,000,000 marked by organic sales growth of 26%, driven by strong market in all the group's regions and a favorable basis of comparison. The negative currency effect of minus 7%, corresponding to a reduction in reported sales of €89,000,000 over the first half due to the appreciation of the euro and lastly, a positive scope effect of plus 0 0.3%. Over the 6 months, EBITDA margin was 2.90 basis points higher than last year, reaching 19.2%. Finally, net income group share was 90 €4,000,000 an increase of €67,000,000 On slide 7, you have the EBITDA bridge by a factor. You can clearly see the strong volume effect driven by the dynamic business momentum across all markets. The widespread, the poor movement in selling prices, which offset cost inflation. Of course, these evolutions also reflect a favorable base series of comparison given the public health situation in the first half of twenty twenty. To note, the currency headwinds on EBITDA amounted to €16,000,000 this half. On Slide 8, you have a year on year variation in EBITDA by geographical zone. As you can see, all zone contributed positively to the increase in EBITDA this semester with the exception of Europe. The progression contribution was particularly strong in France and Asia, with both zones benefiting most from the positive base effect. I will now be commenting on performance by geographical zones. I start with France on Slide 10. Over the 1st 6 months of the year, in line with our dynamic market trend seen in the second half of twenty twenty and given a highly favorable basis of comparison, the group's performance in France improved strongly. During the period, government measures, along with steps taken by the group, allowed it to seize growth opportunity and report a strong performance across all business area. EBITDA grew strongly throughout the period, driven by positive volume and price effect, this despite a slight increase in energy costs. Let us now move to Europe on Slide 11. The Swiss business, which was only slightly affected by the pandemic during the first half of twenty twenty, saw modest growth in the first half of the current year at plus 4%. The EBITDA margin this semester was down 80 basis points at 19.5% impacted by non recurring element. Also in Switzerland, the group completed on June 30, 2021, the disposal of Clerbeton Materio specialized in lightweight precast products. The company had posted sales of CHF 91,000,000 in 2020. In Italy, given the shutdown of the business for 30 days in the first half of twenty twenty, consolidated sales rose 37% over the period, EBITDA grew by 44%. You may now turn to slide 12 for our performance in the Americas. In the United States, the macroeconomic and sector environment remained favorable in the first half. Sales in U. S. Grew by 11%, taking them to €238,000,000 EBITDA was €46,000,000 an increase of 21%. It should be noted that California but in California, the Q2 was affected by an unfavorable basis of comparison, even the record level of delivery volumes in this period in 2020, particularly in May June. The construction of 5,000 tonnes per day kiln line at Raglan, Alabama continued. This new facility will come into service in the Q1 of 2022. It will increase the plant's capacity, thus helping to meet strong market demand, significantly reduce production cost and make an active contribution to the group's target in terms of reducing CO2 footprint. In Brazil, consolidated sales were €81,000,000 an increase of 53%. Market growth trends were especially dynamic despite continued concern over the health situation. EBITDA grew solidly over the first half, reaching €24,000,000 from €15,000,000 in the same period of 2020. The EBITDA margin improved by 660 basis points. Let us now move to Slide 13 for our performance in Asia. Unlike in the first half of twenty twenty when both the group plant had to shut down completely for a month, the measures taken by the Indian government to counter the situation has enabled the group to continue operating. In light of this and given the favorable basis of comparison from the first half of twenty twenty, activity in India saw strong growth in the first half on the back of a strong demand and effect of the government recovery programs. Prices have remained strong over the period. First, the group posted consolidated sales of €177,000,000 in the first half of twenty twenty one, an increase of plus 61%. EBITDA was €49,000,000 an increase of 88%. EBITDA margin and consolidated sales rose 400 basis points to 27.6%. In Kazakhstan, the group posted consolidated sales of €30,000,000 an increase of 14%. This reflected further growth for the group in the domestic market, which offset the fall in exports. EBITDA was 2.7% higher at constant scope and exchange rates at €9,000,000 Please now move to Slide 14 for our results in the Mediterranean region. In Turkey, while the ongoing depreciation of the Turkish lira since August 2018 and the pandemic crisis continued to affect macroeconomic and sector environment, the recovery in the construction market remained on track. Consolidated sales were €69,000,000 an increase of 71%. EBITDA improved over the first half, reaching €2,000,000 having posted a small loss in the first half of twenty twenty. In Egypt, consolidated sales came to €34,000,000 up 73%. EBITDA remained negative at minus €8,000,000 over the first half of twenty twenty one from minus €9,000,000 in the first half of twenty twenty. It should be noted that the first half of twenty twenty one both the conclusion of a market regulation agreement between the Egyptian government and all domestic cement producers. This agreement, which came into force in July 2021, was approved by the Competition Authority and aims to create a more rational framework for the various market participants by limiting sales from all factories into the domestic period market for a period of 1 year. Finally, on Slide 15, our performance in Africa. In Africa, the group continues to benefit from a favorable sector environment. In the Cement business, operational sales grew 20% with a boost provided by the dynamic trends in the West African market, especially in Senegal and the ramp up of a new grinding station in Mali. Selling prices in Senegal were lower than in the first half of twenty twenty, even the introduction of a new tax on cement in May 2020. EBITDA generated by this business rose 10%. In Senegal, the aggregate business posted consolidated sales of €15,000,000 in the first half of twenty twenty one, an increase of 17%, driven by the gradual resumption of major government projects against the background of the favorable pricing trends. As a result of these factors, EBITDA margin rose. I will now look at the balance sheet and cash flow on Slide 17. In June 2021, the group had a solid financial structure with substantial equity and well controlled borrowings. Net debt was €1,300,000,000 at the end of June 2021, up from €1,200,000,000 at the end of December 2020. The variation is the result of an increase in the working capital requirement, resulting from the strong growth in the group activities. Cardholder's equity was 2,460,000,000 euros On this basis, the group's leverage ratio was 2.05, down from 2.49 times on at the end of June 2020. On Slide 18, you have our financial position in terms of cash flow. Cash flow came to €240,000,000 this semester, up 44% as a result of a strong growth in EBITDA over the semester. In the first half, capital expenditure stood at €170,000,000 and was for a large part related to the continued first half stood at minus €52,000,000 I will now conclude on Page 20 on our outlook for 2021. You have a detailed group perspective for 2021 in our press release, and I will be outlining here the main points. The group expects an increase in EBITDA over the full year despite unfavorable exchange rate trends, rise in energy costs expected to increase by around 9% in 2021, negative impact exclusively felt in H2, unfavorable base of comparison in the Q3 of 2021 and to a lesser extent the Q4 of the year. The group is keeping up its investment drive focusing chiefly on the construction of a new kiln line at the Raglan plant in the United States, a drive to incrementally boost capacity at production facilities in India and U. S. And to invest in new terminals to expand its market and lower logistic costs and lastly, the ramp up in project to meet the carbon footprint reduction targets. Accordingly, industrial capital expenditures is expected to be at around €385,000,000 So this concludes today's presentation. Courtenay, can we now move on to questions please? And our first question comes in from the line of Yassim Touari calling from On Field Investment Research. Please go ahead. Good afternoon. We have three questions. First, you're talking about an energy inflation in the full year of 9%. Could you tell us what was energy cost inflation in H1? And how much cost inflation do you expect in H2? That would be my first question. And then my second question would be on the ag line of the plants. How much savings do you expect when the plant is fully ramped up? Maybe you can quantify the savings in dollar per ton? And then my last question would be on CO2. As you reviewed the impact of the proposed change in the allocation of free CO2 allowance and also the implementation of carbon border adjustment mechanism on your business model? What's your view on this proposal? And could it accelerate your decision to invest into projects that reduce your carbon footprint? And in this respect, I know it might be a little bit early, but do you have an idea of what could be your CapEx in 2022? Good afternoon. No, Njassin, thank you for your questions. On the energy bill, so the energy inflation, including FX effect, was close to 0 in H1 globally with some countries up, some countries still down, but globally close to 0. And as outlined in the press release, we expect a full year impact close to 9%, that will be felt in H2. So does it imply a cost inflation an energy cost inflation of close to 20% in H2? Or is it lower than that? Actually, I don't give you the mix per semester of volumes, but I will let you do the math. I'm sure you can do that. Savings on Raglan, as communicated earlier, I believe, we are aiming to reduce production cash cost by about up to $15 per ton given the incremental energy efficiency as well as the increased use of substitute fuels on a stabilized basis. And the ramp on this respect, when could we expect to stabilize the basis? The ramp up will be fully effective, I can imagine, after 6 months? Or do you expect a ramp up to be quicker? It's probably a little early to be precise on that. We expect I mean, the project is going on pretty well. We expect to commission it as early as we can in the year in Q1 in order to have already significant benefit in the year. Thank you. Regarding your third question, regarding the potential effect of the P450 5 proposal that was disclosed last week. Globally, we believe we welcome the gold package. I mean, it is setting an adequate time frame for the industry to adapt and gives visibility on the steps. As you rightly point out, this is an initial incentive for the industry to accelerate this carbon effort. We have already shared more objectives. We are not changing them because this regulation came out. We are working on them permanently. We surely will be happy to welcome you at Capital Market Day on November 16 to share the detail of our climate roadmap and our strategy to achieve the carbon reduction. And as much as possible, we will share figures on the CapEx at this time. Thank you very much. The next question comes in from the line of Paul Roger calling from Exane BNP. Please go ahead. Yes. Good afternoon, gentlemen. Hope you're both well and please excuse any background noise. I'd also have 3 questions then. The first one, given what you're saying about energy inflation in the second half, do you still think you can have a stable margin in H2 compared to last year in that context? The second question is about U. S. Cement prices. We've heard a number of companies talking about a second increase. Now I appreciate it mostly talking about Texas. Well, obviously, you're not present. But do you think that could also be possible in some of your markets like California? And then thirdly, in Egypt, you highlighted this new 1 year agreement. What impact do you think that could actually have? I mean, clearly, there's still a lot of oversupply in the market. So do you really think that could be quite meaningful or not? Good afternoon, Paul. Thank you for your question. Regarding H2 margin, I would like to give you a few elements of appreciation. First, I want to insist on the fact we did upgrade our guidance from the growth in EBITDA on a like for like basis to a growth in EBITDA on a reported basis. And as you have seen in our comments, the FX effect just for H1 was €16,000,000 So this is not a small difference. Short term trends are positives in all markets. I mean demand is still strong in all of the markets. Pricing dynamic is still good everywhere and allows us to mitigate energy inflation. But as pointed out, energy inflation will be much stronger in H2. Lastly, on a year on year basis, the base of comparison of last year's was a record level and as such it will be challenging. On your second question regarding price increases in U. S. We did pass a first price increase in April of $5 in both region and this was accepted by the market a little bit bigger in California than in the southeast. And we will probably implement a second price increase in both regions in September indeed. And we believe probably stronger in California given the market balance that is prevailing there. Regarding Egypt, this mechanism, as you may have heard, is aiming at limiting the capacity of all market players at 65% of their nominal capacity. And we do believe that this will have a substantial effect. Now the timing and the magnitude of the effect is yet to be determined. And do you think I mean, obviously, it's a 1 year agreement, but even the fact it was possible in the first place is good news after we've had difficult few years. Do you think any relief will be temporary? Or is this the type of thing that could become a bit more permanent? Well, it's too early to tell whether it will be renewed or not. But we have at the same time, it probably gives time as well for the market to set to a more economic pattern. Only already a good sign is that the market grew in H1, almost 5% from what we can measure, which is a new element for a long time as well. So this temporary period could at least help the market to be set on a more economical path. But I believe that it could the renewal could be considered, but obviously, yes. Perfect. Thank you very much. The next question comes in from the line of Yuri Sorov calling from Redburn. Please go ahead. Hi. Sorry, yes, good afternoon. I have two questions, please. So one is on energy again. You're giving us the guidance for this year of plus 9%. Do you already have a view of what's going to happen next year? The energy cost inflation is obviously going to carry over into 2022. I wonder whether you have an assessment as to what it's likely to look like for next year. And then the second question is regarding CO2, it's probably a bit bigger. So let me just explain what I'm trying to find out here. There was an announcement that VCAT is going to implement a project in Kalfan clays on an industrial scale that came out of FLSmidths. I just wanted to ask for a bit more details behind that. What are you trying to achieve? What sort of volume are you expecting to produce from that facility? And also on the scale of CO2 reduction, the press release from FLS said 16%, which doesn't sound extremely high. I don't want to compare you to others, but Holcim today was talking about selling their EcoPact cement, which promises a reduction of 30% and it also has some element of calcined clays there. So I wonder whether you can comment on that and whether you see more potential there. Thank you. Yes. Good afternoon, Yuri. Thank you for your question. Obviously, the evolution of energy this year will have impact on next years, but it's a little too early for us to give guidance on our 2022 numbers at this stage. Regarding the activated clay project, it is run at one of our plants in the eastern part of France. It is aiming at producing 150,000 tonnes per year. And indeed, it is meant to bring substantial reduction in the CO2 footprint. So this site is was chosen because we have a ample clear reserve in the quarry of the plants. It's immediately available in the right with the right chemistry. And we are very happy to have this at an industrial scale, which is, as we know, the first thing in Europe. The reduction that we are aiming is indeed more in the magnitude 30%. Around 30% you say? Right. Okay. And just talking about that plant, you said 150,000 tons per year. What's the size of the plant? I mean, how big is the portion that you're dedicating to this type of cement? I don't have the exact production in mind. Give me one minute. We will come back to you with an answer on that. No, I understand. But order of magnitude, is it the full plant, 50% of the plant or 10% of the plant? What is more like it? So this is a this will help a large part of the production of the plant. I mean, the magnitude of the plant production is 500,000 tons basically. So I mean, it's not the exact figure, but it's the order of magnitude. So it's a very substantial part of the shipments that will be a concern. Okay. And sorry, just a technical detail. So you're talking about 30% of the plant output being in calcined clays. How are you planning to do it? Will you run it a portion of the time ordinary cement and a portion of the time this kind of cement? Or is this going to be a separate line? How is it going to be organized? It's probably a little early to give you those details. But in most of our plants, we have different grinding equipments and we can further dedicate part of them to do one type of cement and another workshop to another type. So this is not really a challenge in my view. But surely when we welcome you in November, we'll be able to have the guys to give you precise answers on Yes. No, I understand that. Thank you so much. The next question comes in from the line of Jean Christophe calling from CIC. Please go ahead. Good afternoon. I have three questions. First, your excess CO2 emission rights is close to 5,200,000,000 tonnes. Sorry, is that fully located in France? Or do you have also excess CO2 rights in Switzerland? That's my first question. Secondly, I understood that aggregate volumes are now above their 2019 levels. Is that also the case for Radovix Concrete and Cement or not? And third, a follow-up question on U. S. You mentioned April May. Can you repeat what you told us? Many thanks. Yes. Regarding CO2 excess, indeed, at the beginning of the year, we had €5,200,000 excess at the border of the group, the immense majority of it being in France and a small excess in Switzerland. Okay. Regarding your question regarding last year's volume I mean, this year's volume compared to 2019, basically, we have all activities and all regions well above 2019, with the exception of aggregate in Senegal, which has a very specific situation with a sudden stop of public projects. But globally, we are well above 2019 in all business units. Also cement in France? Indeed. Okay. It's very probable because the mark it is probably VICARE related figures because in the market, aggregates you are right, but I think concrete and cement maybe slightly below. Well, but I can speak more about all figures, Jacques. Okay. It's very clear. Was June and then follow-up question. Was June in France also good despite the comparison base? Actually, it was a good month, yes. Excellent. Many thanks. Regarding U. S, just to probably clarify 5 points. Last year, we had very high volumes in Q2, specifically in May June using clean care inventories that were accumulated. And as we did consume them last year, it's difficult to do that again this year. Okay, okay. That's a simple comment. Sorry, clear. Many thanks. The next question comes in from the line of Ibrahim Harmani calling from CIC. Please go ahead. Hello. Congrats for your results. I have 2 questions, if I may. The first one is about your clients. Are they comfortable with your price increase? Did you face some issue with them? Or is it generally accepted by then? The second question is about your business in France and to have maybe more detail about the construction market based on your day to day business? Did you expect do you expect any change, any major change in the construction business in the next months? Yes. Good afternoon. Thank you for your questions. Well, price increases that we mentioned in this communication are, of course, accepted. But the one that has been voiced, I think everybody understands that there is cost inflation and that is included in the market dynamic. An additional comment that we can do regarding the CO2 is that, I believe it's a well perceived objective collectively that we need to reduce the carbon footprint. Now not everybody has yet understood all the implications. The Fit for 55 is paving the way. To match this, it will need CapEx. To finance CapEx, we will need to raise prices. So, those objectives are clear. We are having those conversations with customers. And with time, I'm sure pricing will go through. Regarding the recent trends on construction markets, we do not see substantial changes in the coming months. Nevertheless, the year on year evolution will not be the same knowing that we had a strong rebound in H2 last year. So the base of comparison is different, but the sequential evolution, it is still a strong demand and positive oriented market. Thank you very much. The next question comes in from the line of Pierre Lissot calling from Barclays. Please go ahead. Thank you. Good afternoon, gentlemen. First question, there's a level of non operating income, about €18,000,000 that you report between the EBIT and operating income. That's a little bit higher than what we had pre COVID. So I was wondering what's in that number, if you still have any kind of specific COVID-nineteen related expenses. And if you could provide a view as to how this charge could move over the full year? And then the second question be a bit more specifically on India, please. Could you give us some elements there? Clearly, the margin is much above what it has been historically. Do you think it could continue at that level? Is this a country in which you are seeing a lot of energy cost inflation into the second half? Thank you. Yes. Good afternoon, Pierre. Thank you for your questions. Non operating level, it is mostly I mean, it is a nonrecurring item As I think disclosed in the press release, it is mostly related to a write down of debt, we have linked to our investments in EBIT for 11,000,000. Euros So this is not expected to be recurring. Regarding India, obviously, the Indian market has gone through difficult times in terms of health situation, but the business trend has been very strong. The demand is still very strong. The price trend in H1 was particularly solid. Nevertheless, as you know, India is a volatile environment historically. So we always need to be agile and to adapt. But as we see it from today, there is a strong demand. And cost wise, is there a lot of pressure there in H2? India is one of the countries where we do feel a strong inflation on energy. But we have, as you know, quite efficient tools and we work on substitution. And again, we are working on passing on those costs to the market. And so far, we have been successful doing so. Understood. Thank you. Thank you. There are currently no further questions in the queue. So as another reminder, if you would like Thank you. And the final question comes in from the line of Tobias Werner calling from Stifel. Please go ahead. Yes, good afternoon. Thank you for taking my questions. I mean, Vika is a group which has been around for a very long time. I may test your historical knowledge of the company, but we haven't seen high inflationary periods for a long time in mature economies. But that is a potential risk or opportunity, whatever way you want to look at it, now on the horizon. Do you have a sense of how your business performs in inflationary periods as they happened in the mid-70s, 80s, early 80s? What your pricing power looked like back then relative to the general inflationary pressures, which was seen? That's the first question. And the second question relates to your African businesses. How do you feel about Africa, West Africa at this point in time? It seems that West Africa has done relatively well. Obviously, Africa is a huge continent, but there were more mixed markets generally. Do you feel that Africa could provide us with some surprise or upside into next year? Thank you. Yes. Good afternoon. Thank you for your questions. On the first one, obviously, the market structure and the market framework has changed a lot in the last 50 years, mostly in mature countries. But by this time, we were, at least in France, in a controlled price environment. So I don't think that we can really draw experience from there. And though I was not in the business at the time. What we can feel in your view is that the construction I mean the building material and pricing power, especially if you look back in the recent years. We don't have the experience of high inflation in mature countries. We do have it from time to time in emerging countries and we know how to manage it in those environments. So I believe this could apply. And despite any recovery in the general inflation, probably the CO2 equation will have to push us to a substantial price increase as well. Regarding your second point regarding West Africa and your comment is perfectly good. I mean, I'm speaking only regarding the 3 countries where we are, not globally Africa. What we can observe on a long period is a very dynamic market. I mean, this market has been growing from 5% to 7% per year for the last at least 30 years, probably more. So the geography is dynamic. The economic development is picking up. So the growth prospects are substantial. So we believe it will be a promising business there as we are experiencing it for more than 20 years now. So this is an environment we don't expect surprise in the short term. We do expect strong growth prospect long term. Thank you. Maybe one quick question follow-up question on the previous Egyptian situation. Thank you for highlighting this in your report. When I look at some more up to date cement prices in Egypt, I now get indications of anywhere around 870 to almost 900 Egyptian pounds per tonne, let's say 875, that's quite a bit more than before. So it seems we're already seeing this in the market in quite a marked manner. Is that a fair observation? Or are you seeing different developments? Yes. We have seen some movement that started to anticipate this mechanism in Q2, but in a limited manner, and we start to see price increases now. Figures you mentioned are perfectly possible. It could come higher as well. Both our market price, we have to monitor as well how this translate into ex wax price, which is always a question in Nynchit. And I understand that this agreement has been struck, so prices are driven by that at the end of the day. But can you just remind us where the overall capacity utilization is in Egypt? I don't have in top of my mind. I think it's I mean, it's somewhere around where it has been set by the regulation. I mean, it's around 60%. The important element of it is that everybody is applied. So nobody goes above 65 because obviously the unbalance of the market came from a new utilization of its higher power by the Army. Do you see the opportunity for some plants to be shut down? Or given that this should be normally a high growth market, they're just being moth balled? I mean, there has been a couple of announcements last year from oil plants. So I think those are done. It could be 1 or 2 more, but globally, the capacity will stay there because as we are, most players are convinced that there is substantial long term growth prospects. Thank you so much for your answers. Much appreciated. Thank you. That was the final question in the queue. So I shall hand the call back across to yourself, Mr. Chamel, for any concluding remarks. Thank you, Courtney. This concludes today's call. I would like to thank you for your interest in the Vika Group and remind you that we will be publishing our Q3 sales figure on November 3. In the meantime, I wish each and all of you a great summer break. Thank you for joining today's call. You may now disconnect your handsets.