Earnings Call: Q1 2021

May 6, 2021

Hello, and welcome to the Vicat First Quarter 2021 Sales Call. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded and for the duration of your call, your lines will be on listen only. However, you will have the opportunity to ask questions. I will now hand you over to your host, Yigal Shomel, Deputy CEO and CFO to begin today's conference. Thank you. Good afternoon, ladies and gentlemen. I am Hugues Schommer, Chief Financial Officer of the Vika Group. With me is Stephane our Investment Relations Director. I will be presenting to you our 2021 Q1 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 now move to Slide 3 with the key points at the end of March 2021. The Vicars Group's performance over the 1st 3 months of 2021 reflects the dynamic trends in our markets and once again demonstrates the effectiveness of our business strategy and of our geographical portfolio. Consolidated sales came to just over €700,000,000 up 22% in the 1st 3 months of the year at constant scope and exchange rates. Throughout these 1st 3 months, there was a solid business growth in all regions. With the pandemic situation still a concern, the measures we have taken since the first half of twenty twenty have enabled us to seize growth opportunities in our markets and capitalize on government's economic stimulus measures. It is important to note that the group benefited from a favorable base of comparison during the Q1. And lastly, against this backdrop, the group continued to commit further technological and financial resources to accelerate its ecological and digital transition. On Slide 4, and before getting to the Q1 geographical analysis, I'd like to start with a few comments about the sector's environment today as a whole. As we have noted over the last few quarters, the industry is recovering its pricing power. It is driven by a set of structural factors. Firstly, the return of stronger demand in most markets that leads to shortage situation in some markets such as the U. S. This is also coupled to a reduction in export capacity of some countries such as Turkey and China. Another key factor is the growing necessity to manage the CO2 and climate imperative. And finally, the steady increase in energy cost is also playing an increasing role. In this environment, Vicar will be benefiting from the necessary available capacities in its growing markets. The ability to increase capacity in the right markets such as at Raglan in the U. S. That is happening at the right time The group has the ability to leverage the efficiency of plants that have benefited from steady investments in the past as well as the optimized and long term management of its CO2 rights. All these elements provide the group with decisive medium term factors of success in this positive environment. Let us move to the geographical analysis, and we start with France on Slide 5. Over the 1st 3 months of the year, the group's performance in France moved higher despite the pandemic, in line with the trends seen in late 2020. The base of comparison for the quarter was favorable, given the very sharp slowdown at the end of the Q1 of 2020. In the Cement business, operational sales rose 16% due to a favorable base of comparison and a supportive industry environment in the group markets. This positive trend was coupled to hike in selling prices in the domestic market. Operational sales recorded by the Concrete and Aggregate business rose 22% with volume growth in concrete and aggregate. Selling prices moved higher in aggregates and was stable in concrete. In other product and services business, operational sales advanced 24%. Please turn to Slide 6. In Europe, there was a stark contrast in activity trends between Switzerland and Italy. In Switzerland, the group consolidated sales climbed 2%. In Cement, operational sales grew by 4.4% on the back of solid market trends as well as a solid activity in the waste recovery business. In the Concrete and Aggregates business, operational sales declined 13% due to less favorable weather conditions than in the Q1 of 2020. Conversely, selling prices picked up. The other products and services business recorded an 18% increase in sales in a market that remained highly competitive. In Italy, consolidated sales rose 14%, thanks to a very favorable base of comparison. We may now turn to Slide 7 for our performance in the Americas. Despite a still concerning pandemic situation, especially in Brazil, activity levels remained strong in both the United States and Brazil. In the United States, the macroeconomic and sector environment remained supportive throughout this Q1. The group consolidated sales rose 13%. The Cement Business operational sales rose 8% on the back of a solid market trends. Selling prices advanced over the period and a new price increase was passed on April 1, 2021. In the concrete business, operational sales rose 14%, thanks to solid market trends, especially in this office region and favorable average selling prices, especially in California. Finally, the Raghavan CapEx program is progressing well. We expect commissioning in H1 2022 just in time to fill out the stronger expected market demand. In Brazil, growth that began in the Q3 of 2020 continued in the Q1 of 2021 and consolidated sales came to €35,000,000 up 58% at constant scope and exchange rates in a dynamic market despite a still very concerning pandemic situation. In Cement Business, operational sales posted a solid increase at €29,000,000 driven by a strong improvement in demand and in selling prices. In Concrete and Aggregate Business, in line with the increase in the cement business, operational sales settled at €10,000,000 The improvement in market condition came with a rise in selling prices, both in concrete and aggregates. Let us now move to Slide 8 for performance in Asia. While the industry situation in India remained more favorable in the Q1 of this year than it was in 2020. The country has been hit by a new and highly aggressive wave of the pandemic over the past few weeks. Taking these factors into account, business trends in India remained strong during the Q1 as a result of a supportive market environment. The group recorded consolidated sales of €89,000,000 in the 1st 3 months of the year, up 42%, reflecting the resumption in large project and the improvement in selling prices. As things stand, the measures taken by the government to counter the situation have enabled the group to continue operating free of any production or business related restrictions unlike in the first half of twenty twenty. In today's uncertain context, the group remains focused on implementing measures to keep its employees, its suppliers and customers safe. Consolidated sales in Kazakhstan came to €11,000,000 up 12%. This performance was driven by a solid trend in the domestic market, which made up for the contraction in exports. Given this favorable geographical mix and the dynamic trends in the domestic market, price recorded a significant increase. Please turn to slide 9 for our performance in the Mediterranean region. In Turkey, while the continuing depreciation in the Turkish lira and the pandemic crisis continued to affect the macroeconomic and sector environment, recovery in construction market remained on track. Consolidated sales totaled €28,000,000 up 77% at constant scope and exchange rates. Due to the strong seasonality in the activity in this region, it's important to note that Q1 progression should not be considered as representative of an expected performance for the full year. In the Cement business, the former trend observed in the Q3 of 2020 carried through into the first quarter of 2021 with favorable weather conditions also providing a boost. The level of activity and selling prices posted a solid increase compared to the Q1 of 2020. In this basis, operational sales rose markedly to €21,000,000 The operational sales recorded in Concrete and Aggregates business rose to €13,000,000 in the quarter on the back of an improvement in market conditions that paved the way for higher selling prices. Lastly, it is important to note that the recovery in market demand has made exports less attractive for Turkish players and should indirectly support pricing in many markets throughout the world in the medium term. In Egypt, consolidated sales totaled €15,000,000 up 33%. Growth in activity observed in the last quarter of 2020 continued early in the year supported by a market progression. Note an increase in selling prices has been initiated towards the end of the period. Average prices, however, are still lower than during the same period of 2020. Finally, on to Slide 10 for the performance in Africa. The group continues to benefit from the favorable sector environment despite the pandemic crisis, from improvement in performance at its Rufus plant and from the ramp up of its new grinding station in Mali. In the Cement business, operational sales in Africa region grew 16% with a boost provided by the dynamic trends in the West African market, especially in Senegal and the ramp up of sales in Mali. Conversely, net selling prices in Senegal were lower even the introduction of a new tax on cement introduced in May 2020. In Senegal, Aggregates business sales were up 4% with the gradual resumption of government infrastructure projects. On slide 11, I'll turn to the changes in the group's financial position at the end of March 2021. From activity levels in each market, the favorable trends in pricing levels and the continued focus on controlling cost led to a strong increase in operating profitability during the Q1. As a reminder, however, due to the seasonal nature of its activity, please note, the Q1 is not representative of full year trends. At the end of March 2021, net debt stood at under €1,270,000,000 down from €1,400,000,000 a year ago. To conclude on Slide 12, you have seen the key points of our outlook. 3 factors are likely to have an impact on the group financial performance and its evolution throughout 2021 an unfavorable exchange rate variation a rise in energy cost mainly in the second half, a favorable base of comparison in the 1st 6 months followed by conversely unfavorable comparison against the Q3 2020. As a result, the group expects a solid growth in its first half year EBITDA and an increase in its full year EBITDA at constant scope and exchange rates. Molly, we can move now to questions. Thank you. The first question comes from the line of Paul Roger calling from Exane. Please go ahead. Your line is unmuted. Good afternoon, Hugues and Stefan, and congratulations on the strong start. Maybe the first question, going on Slide 12 on that second bullet point on the energy costs. Is it possible to quantify the potential headwind in the second half if you assume that energy spot prices stay where they are today? And I guess on the flip side, do you believe that price increases that you've already announced will be sufficient to compensate for that? Or do you need more later in the year? Thank you for your question. On energy cost headwinds, I will go back to the quantification we did share at the time of our full year result presentation, we believe that all in all, the full year energy inflation will be 5% on a full year basis and will mostly materialize on H2. And we this is taking into consideration the fact that we expect an increased development of substitution rates. Okay. So there's been no change to that since you last updated us? No, there is not. As far as the price cost differential. Obviously, this is one of the always an uncertainty on how fast we can pass on the cost to the market. As highlighted in my preliminary remarks, the industry has regained substantial pricing power. The trends are well oriented, but there is always a possibility of a time lag. Okay. And maybe second question, just back on the pricing then. Are you able to quantify the sequential price increase you've got in Europe, so France, Switzerland and Italy in January? And how much you posted in the U. S. In April? On the last point, again, and I'm sorry to go back to February statement, but the price increase is of the expected magnitude around $5 in the U. S. On April 1. On other markets, it's very different depending on local situations and client and product mixes. So I will not comment further. Okay. Well, perhaps I can have one last one. I'll try and get something that wasn't mentioned in February. If you look at what some of your competitors have been saying during this results season, it's been quite interesting that a number of them have talked about the potential for a second sequential price rise in both Europe and the U. S. This year. Obviously, that's not something that's been discussed before and it's not that typical. Is that something you believe will be possible? And are you thinking about that as well? It is certainly something that we will be considering, especially if the expected cost increase on energy is materializing. If you remember well, we had the opportunity to do a price increase last September in California, for example. So we could be we will be considering it. It again varies very much depending on market dynamics. But again, we will be very focused on trying to pass on the any cost inflation to the market as the time goes. That's great. I've got a few more, but I'll pass it to someone else and go back on the queue for later. Thank you. Thank you. The next question comes from the line of Yazeen Tari calling from On Field Research. Please go ahead. Your line is unmuted. So just a couple of questions. Could you give us a little bit of an update of the situation in India? So we hear that it's quite difficult from a sanitary point of view. Have you seen any impact on the business of on the level of activity in the past couple of weeks? Or is it only something that you have to be very careful in terms of keeping people safe? Or have you seen a decline or any changes? Then the second question is on Turkey. Turkey, the recovery has been very strong. Could you develop a little bit about what are the driver of this recovery? Is it the lower interest rate? Is it the investment in infrastructure by the government? And how sustainable do you think the recovery in Turkish domestic volume is throughout 2021? Thank you for your question, Yatin. Regarding situation in India, obviously, this is probably one of the main areas of uncertainty going forward this year. Indeed, the pandemic situation has deteriorated a lot as you are fully aware. Just as a reminder, what we have experienced during the last 12 months is that the business impact is not so much linked to how bad the pandemic situation is, but to what measures the governments are taking. Last year, obviously, the Indian authority decided for a strict lockdown that did prevent us to operate for more than 4 weeks. This year, the measures are not directly affecting the business. There is no restriction today to operate or plans and so on. Nevertheless, as we speak, our office are virtually closed and people are working from home, but they are working. And the sales are operating properly. It depends. And the plans are operating properly. Nevertheless, there is a potential impact. As you know, in India, there is an important subject, which is the so called migrants manpower that has been partially going back to rural areas. So this is affecting the demand temporarily. This is an unknown factor going forward. So far, the country has been doing very well for us. Yes, please. So regarding I'm not sure I understand this underground manpower that have gotten back to the overall area. What does it mean that you've got less activity in the big cities? I mean, typically, construction sites, drivers, helpers and so on are people coming from rural areas to large cities. And during this large pandemic peaks, they tend to go back to their original countries, which is likely to slow down larger infras in the big cities and to give more activity in very old areas. And there is bad and good sides to those realities as we did experience last year. And if I remember well, the rural demand in India is more than 2 third of the cement consumption. Is that correct? I don't have the precise number in mind, but it is surely a large chunk of it. If I move to your question regarding Turkey. The situation has been surely largely driven by the impact of interest rates and is largely linked to the residential demand. So far, it has been very sustained and it's quite similar to previous trends of the post crisis situation that we have experienced in Turkey in previous cycles. Obviously, there is quite a lot of economical and geopolitical challenges in France of Turkey, but so far we have observed a very robust trend. And maybe last question on your could you give an update on your investment to reduce your carbon footprint, anything new since February? Well, we are working on it constantly. We did not shift our strategy ever since. We did not slow down. We are on it, but it does not happen overnight. Just as a reminder, again, what we are working on 2 different timescales, 1 which is going on right now to reduce our footprint for 2,030 is linked to increase the decrease the clinker rate, increase substitution, improve energy efficiency and this is, I would say, many small to medium sized projects or larger size when it comes to activated clay. So those projects are going on in most almost all geographies. At the same time, we keep on working on more long term patterns to have to work on the carbon neutrality for the value chain on more emerging technologies. And again, that has a quite broad range of technologies. As we mentioned during our annual call, we intend to host a specific event dedicated to the climate strategy of the group probably right after summer. Thank you very much. You're welcome. The next question comes from the line of Jean Christophe Levy, Moulin. Please go ahead. Your line is unmuted. Hello. Good afternoon. I have some questions, if you don't mind. The first one on Slide 5, the French core business. In France, how was the month of March suppose very strong? Is it possible maybe to quantify or to give a note of magnitude of growth? And maybe also a question regarding ready mixed concrete. Do we have in 20 20 and also over the Q1 2021 external growth in ready mix? Second question is Egypt. Could you maybe quantify price hike before and after transportation cost? And also last question, Turkey, we you raised the subject of Turkish exports about to diminish, but they were very strong in 2020, roughly 16,000,000 tons. How is the trend in 2021 as Turkey has a competitive advantage? It's not concerned by the CO2 emissions legal issues? Many thanks. Thank you for your questions. I mean, we don't comment monthly trends, but indeed March was very solid. Comparison to last year is not really meaningful as there was 2 weeks almost standstill last year, but it was indeed a very strong year even compared very strong month even compared with March 2019. So that was solid business trends. Ready Mix Concrete, I mean, there is very small movements in ready mix in of perimeter in ready mix. So it's really not significant. As far as the balance of Turkish exports, exports, I'm sure you have all necessary sources. But obviously, this will this is not changing overnight. We were just, I would say, highlighting a medium term trend with increasing demand on the domestic market, gradually absorbing the excess capacity that was waiting the market in the past years. Regarding Egypt, it is worth mentioning that we have witnessed in the last week last weeks, end of the quarter and early April, a noticeable evolution in the market situation. That is a positive signal with significant price hikes during this last week, even from the army plants, which as you know was capping the market prices for the last years. This is a positive signal and this paves the way for a progressive return to a rational behavior in this market. Obviously, it is very hard to tell us whether it will last or not and what is the impact for the various players. But this is the 1st time in almost 3 years that we have a significant price hike that is lasting. This was a movement that if you remember, was announced by the authorities for a few months. And we did comment previously that we were expecting waiting to see whether this will materialize. It did. Whether it will last, we don't know. But is it possible to even order of magnitude of the price hike 10%, 5%? It is somewhat more than 10%. Excellent. Merci beaucoup. Many thanks. Thank you. We have no further questions on the phone line queue at the moment. I will hand back to the speakers for the webcast question. Thank you. Yes. Thank you. We actually have a question from Benjamin Clasheren from Kepler. So the question is the following. Could we have an overview of group like for like growth in January, February and in March? That's the first question. Or can we look at the base effect regarding pricing in the next quarters? And third question, you mentioned comps are unfavorable in Q3. What about Q4? Regarding the monthly the detail of our monthly growth, as commented before, we don't go into this level of detail. Usually, we did exceptionally last year, but in a very specific context, we did not see major changes from 1 month to the other beyond the different market trend seasonality that we observe usually. Regarding the base effect in the second half, Obviously, as you probably have observed, the Q4 last year was one of the strongest quarter we have had in the group. As such, it is a challenging base of comparison. And obviously, the growth will be the variation will be less probable than what we are seeing today. I just would like to comment on your expectation for the year. As you have seen, we do expect a strong EBITDA increase for H1, even the business trends we see in the short term as well as the comparison base. Over full year, we do expect a like for like growth on a like for like basis of our EBITDA. Next question maybe? We do have some further questions coming from the phone lines, if you're happy to take them. The next question from the phone lines comes from the line of Sven Altdfelt calling from ODDO. Please go ahead. Yes. Good afternoon, gentlemen. I had 2 questions, if I may. The first one is on the Senegal. Just would like to know more about the tax on cement. What is the magnitude? And do you think you would be able to increase prices to customer to limit the effect of this tax or not at all, but the first one? And the second one, how do you see the legislation evolve in the U. S. Regarding CO2? Presumably the upgrade in the raglan cement plant has something to do with tightening of the regulation or not? Thank you, Sven, for your question. Just as a reminder, the tax on cement in Senegal was implemented in May last year, and it represents 2,000 francs EFA per ton. Ever since in the specific context of the Senegal environment, we were not able to increase the prices on the general products. So we will, of course, be trying in the year, probably not up to this level. So we are currently having a negative base effect going forward. In the H2, it will be neutral as it was already encountered last year. Regarding environmental regulation in U. S. And O'Reynman project, Well, our project is underway for quite some time and so it is not linked to any short term regulation evolution. Nevertheless, it is one of our objectives is to reduce energy to improve energy efficiency and reduce the carbon footprint. So this will be a significant decrease of energy consumption per ton and a significant possibility to increase substitute fuels. So we believe this will help us to face any new regulation. At the same time, it will help us to serve the market at a time where we expect demand to further develop. The next question comes from the line of Pierre Rousseau calling from Barclays. Please go ahead. Your line is unmuted. Yes. Hello, gentlemen. Thank you for taking my questions. The first one would be on Brazil. We've had 3, 4 quarters of very strong growth there. So could you comment on the drivers? Do you think the sales levels that you've achieved over the last 12 months, the new sustainable level going forward? And second question would be on your comment on the infrastructure market in Senegal, which historically has been quite a profitable business for you. Again, could you comment a little bit on the trends going forward? Do you believe that there is good volume growth coming in this business and that we could see a sustainable return of higher earnings in this specific area? And the last one would be on France. Again, Q1 was really, really strong. So I was wondering if you could comment on the drivers and if you were expecting any kind of normalization as the year progresses? Thank you. Thank you, Pierre, for your questions. On Brazil, indeed, since beginning of Q3 last year, the market and operations have been accelerating substantially. In all view, this trend in the consumption has been fueled by mostly residential demand. During a good part of last year, it was supported by the government incentives that were stopped earlier this year. It is mostly driven by the residential segment, and it has been probably fueled by the exceptionally low level of interest rate that Brazil is enjoying since 1 year. There is a movement of some increase in interest rate, but that still remain at historically very low levels. So we see this trend as probably will continue, but obviously at a much lower pace of growth as we will progress with time with a more challenging base of comparison. Regarding Senegal, as you mentioned, we did develop a substantial business in aggregates linked to the infrastructure the public infrastructure projects. This market did slow down substantially since the second half of twenty nineteen. This slowdown was further impacted by the pandemic with a lot of contractors removing their teams. There is nevertheless quite substantial pipeline of large projects that are financed and start to resume gradually. So we do expect this demand to come back, but it will not go back overnight to the previous level. So we see a start of improvement. We don't expect a sudden recovery to pre 2019 level. Regarding France, while the market has been quite resilient since Q3 last year, I mean there was a big rebound in Q3 and a strong Q4 and Q1. We do expect activity levels on the full year to be on a growth pace. Nevertheless, again, as we will go further in the year, obviously, Q2 will be, again, an easy base of comparison. As we go into H2, we should see some obviously a more challenging base effect. The next question comes from the line of Yazeen Tewari calling from On Field Research. Please go ahead. Your line is unmuted. Just a follow-up. Thank you very much. Just a follow-up of a couple of follow-up questions. We've seen substantial price increase in California, and I understand that price cement price increase were also substantial in France. Were you able to pass that on your ready mixed concrete business? So my question is like, could we see some negative impact on ready mix concrete margin from this cement price increase? Or is it the opposite? Is it are you living in a context where the good cement pricing translates into good ready mix concrete pricing and good margin for ready mix concrete? And my second follow-up question would be on the latest trend that you've seen in April. Do you see any acceleration or deceleration in April versus March in any of your key countries? Thank you. The price dynamic in ready mixed concrete in the different markets has to be read with prevailing situation in the previous years. So in U. S, the prices are still increasing and are dynamic. So I believe there is some potential further potential there. In France, as we mentioned in the presentation, the price was stable so far this year. Obviously, we will continue to pass on the cost inflation, but in the context that where the prices have been increasing and recovering for quite a few years now. Regarding recent trends, as mentioned, obviously, base of comparison, April 2020, not very tough. So we have good business trends in April. And that's why I was asking compared to March 2021, if you look at the evolution and the slowdown or particularly Obviously, as you know, April March is a seasonality situation. So there is no rupture in business trends, I would say. Okay. That's very clear. Thank you very much. We have no further questions coming through on the phone lines. So I'd like to hand the call back over to your host for any closing remarks. Thank you. This concludes the call for today. I'd like to thank you all for your interest in Vika and Abiento for all half year results.