Cementir Holding NV

MIL:CEM

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Cementir Holding First Quarter 2023 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Marco Maria Bianconi, Head of M&A and Investor Relations. Please go ahead, sir.

[Marco Bianconi, executive]

Thank you, and welcome everybody to Cementir Holding First Quarter 2023 Results. I'm here with our Chairman and Chief Executive, Francesco Caltagirone, who is happy to take your questions at the end. I will go through 9 slides of our presentation deck, starting with Page #2 with the highlights. Revenues in the first quarter increased by 14.5%, reaching EUR 44.8 million. On a non-GAAP basis, they increased by 14.2% to EUR 413.8 million, driven mainly by price increases. Cement volumes were down by around 4%, mainly Nordic & Baltic, Belgium and the U.S., partially offset by growth in Turkey.

Ready-mix volumes were down 9.7% due to a negative trend in every country, except Turkey, and aggregate volumes were also down by around 18%. EBITDA reached EUR 81.2 million, up 33.8% year-over-year. On a non-GAAP basis, EBITDA reached EUR 85.6 million, up 41.1% year-over-year. The higher EBITDA is mainly Nordic & Baltic, Turkey, Belgium and Egypt, and the lower EBITDA was recorded in the U.S. and Asia Pacific. EBIT was up 49.5% to EUR 49.2 million on a non-GAAP basis was up 70% to EUR 56.2 million. Profit before taxes reached EUR 63.9 million, up 50.7% on a non-GAAP basis, was up 61.1% to EUR 68.3 million. Net financial debt reached EUR 32.1 million, down by around EUR 56.6 million year-on-year, including IFRS 16 impact and a EUR 28 million dividend distribution. 

Moving to the largest division, that's Nordic & Baltic, accounting for 48% of group EBITDA. Here, in Denmark, cement volumes were down with domestic markets affected by unfavorable weather and a slowing demand due to high inflation and interest rates. Lower white cement exports were due to a decline in some export markets. Also, RMC and aggregate volumes were down. EBITDA increased, thanks to a tight control of energy costs and selling prices. We returned to a pre-COVID profitability level in the country.

In Norway, our ready-mix sales volumes were down due to a slowdown of residential and commercial demand and some adverse weather conditions and some delays in new infrastructure projects. EBITDA was down due to lower volumes and higher operating costs and also the Norwegian krona depreciated around 10.7% versus the euro. In Sweden, both ready-mix and aggregates volumes were strongly down as a result of the general drop in demand, especially in the residential sector. Lower EBITDA was due to lower sales volumes and higher production costs. The Swedish krona also depreciated by around 7% versus the euro. 

Moving to page to #4, Belgium and France, accounting for about 1/4 of our EBITDA. Here, cement volumes decreased with negative performance in Belgium and the Netherlands, a stable performance in France. The falling demand was due to unfavorable weather and the slowing construction activity. The same was true for ready-mix and aggregates. EBITDA increased, thanks to tight control of energy costs and selling prices.

Moving to Page 5. North America, accounting for around 7% of group EBITDA. Here, while cement volumes declined in line with the residential market. Deliveries to Texas and California suffered from a stronger contraction due to competitive pressure from imports. EBITDA was down due to lower cement volumes and higher operating costs. There was a positive contribution from Concrete Products business Vianini Pipe. Also, the dollar revaluated by around 4.4% versus the euro.

Moving to Page 6. Asia Pacific, accounting for 4% of group EBITDA. Here, revenue in China was down by 6%, driven by lower cement prices and despite volumes up by around 3%. Until January 2023, cement sales were affected by lockdowns and the Chinese New Year. EBITDA was down in China due to higher variable costs and lower prices and also the renminbi depreciated by around 3.1% versus the euro. In Malaysia, revenue was down by 3.4% driven mainly by a drop in clinker export due to different calendar for shipping and lower deliveries in some countries. Domestic volumes increased as a result of good recovery in the construction markets. Overall, EBITDA in Malaysia grew as a result of higher prices and reduced fuel and freight cost, partially offset by higher variable costs and lower volumes. The Malaysia ringgit was in line with the euro. 

Moving to Turkey on Page 7, accounting for around 9% of group EBITDA. Here, the revenue improved by 82% in euro terms. Domestic cement volumes increased with significant higher sales in Northeastern Turkey and Marmara, driven by new projects and lower sales in the Anatolia region due to the depletion of infrastructure projects. Cement exports were down to focus on the domestic markets. Ready-mix volumes increased in line with the market and EBITDA reached EUR 7.8 million, driven by cement prices more than offsetting production cost increase and currency devaluation. The Turkish lira in the period devaluated by around 29.3% versus the euro.

Moving to the last geography, Egypt on Page 8 here accounting for 4% of group EBITDA. Revenue declined by 12.8% because of the strong devaluation of the Egyptian pound versus the euro. And while cement volumes declined moderately with higher deliveries on the domestic market and lower exports. EBITDA increased, thanks to tight control of energy costs and selling prices despite a 79% Egyptian pound devaluation versus the euro. 

The last slide, on Page 9, is the full year guidance, which is unchanged. We expect for the year to reach around EUR 1.8 billion of revenues, EBITDA range between EUR 335 million and EUR 345 million, reached a net cash position of over EUR 200 million after a CapEx of around EUR 113 million. This guidance refers to a like-for-like ongoing operations, non-GAAP, so excluding IAS 29 and excluding any extraordinary items. This ends my short presentation.

And I will leave now the floor to Mr. Caltagirone, who is happy to take your questions. Thank you.

[Operator]

[Operator Instructions] The first question comes from Matteo Bonizzoni of Kepler.

[Matteo Bonizzoni, analyst]

I have 2 questions. The first one regards the margin trajectory. In Q1, your margin, your EBITDA margin IAS 29 was up 400 basis points. This was not due to operating leverage because volumes were down, but it was due to a widening spread between prices and costs. This impact of the pricing versus cost spread was particularly visible, I think, in Denmark, in Belgium, but also in Turkey. If you look at your guidance for the year, we -- it implies the vice versa. So it implies growing revenues and flattish EBITDA. So a compression of the margin.

So basically, I want to know why is that? Do we expect -- why do we expect margin to compress in full year 2023 when in Q1, the margin, which is more quarter clearly, but it was up 400 basis points. In particular, do you expect this strong pricing versus cost impact to fade in the subsequent quarters? Second question is regard-- is a clarification as regard to what we have seen on the net financial position.

So the net working capital trend improved particularly benign in Q4 last year because you were beating your EUR 60 million net cash guidance in Q4 by around EUR 3 million, but there was a large reversal in the first quarter of this year. I think it was due also to working capital. Can you comment on these swings and also on the working capital evolution in the remaining part of the year?

[Francesco Caltagirone, executive]

Regarding the distant increase of the margin percentage, this is linked mainly the opposite that what happened last year. Last year, we saw a soaring price in raw materials and energy, and then we adjusted the price. This year is happening, the opposite. We have adjusted the price and some of the raw materials and energy are going down. Our, let's say, caution is because these months, there will be the election in Turkey.

Turkey so far, has performed very well, but the outcome of the election can be worked and we don't know. And for this reason, even if the first quarter seem to be very buoyant, it doesn't allow us to, let me say, move our forecast. The second thing is that we are continuing to see some softness in demand in the Nordics continuing even after the first quarter. And this keeps us, let me say, cautious and vigilant because, as you are aware, we might be close to a final round of rate increase of the central bank or we don't know if especially in autumn, we might see some other round.

So let's say that at this moment, we keep our guidance unchanged, especially because we want to see what will happen in Turkey. And so there will be 2 rounds of election, the 14th and the 28th of May, and then we will see who will rule the country for the next 5 years. And today, the polls are very close. And so we don't know what will happen. 

And about the net financial position is just a sort of natural mismatching of starting of some big investments, especially that one in Belgium that kicked in, in the first quarter. And -- but this doesn't change our, let me say, outlook for the full year, and we remain addressed at the EUR 200 million.

So also the working capital is affected also by the sharp increase in revenues that we have seen, especially last year, but especially the last quarter against last year and the first quarter of this year is continuing. So we are, let me say, I think we will start to normalize the working capital in the second half because we don't see price increase for now in any other geography. Most of the costs are stabilizing, except for the petcoke that the same quarter of last year is up nearly 90%. Energy, electricity and oil and fuel oil are going down but the sum of the 3, the mix is, let me say, still positive.

And then also the labor cost is something that last year was, let me say, part of the problem of the rising cost. We are seeing as it is normal pressure to increase wages. So also for this reason, we don't think that probably on the cost side, we have seen the peak. Probably we will have other things that have to peak, probably electricity and gas has picked. Today, the gas is around EUR 40, and the electricity is around 130, 140 million depending on here.

But keep -- remember that it's 3x the EUR 40 that we have seen in electricity for the last more or less 10 years. And also the gas price is the double of the average over the last 10 years. So we don't think that we will see other let spike, but labor cost and also the cost of financing. We have a net cash position. But as you can see in the first quarter, we are negative, we will, let me say, probably go back to positive in this quarter. But anyway, we have to pay interest that are different rate complete -- compared to last year. So these are the main reason for our cautious and I hope to have answered your questions.

[Operator]

The next question is from Emanuele Negri of Mediobanca.

[Emanuele Negri, analyst]

The first one is related to pricing. We have a pierce impact in the first quarter. Is this related to price increase you applied in the first quarter of the year? Or it is still related to last month's price increases? The second one is on the demand trend you expect in Belgium and Denmark. And the third one is if you can give us some more color on the cash abstraction dynamics in the first quarter beyond the investment in Belgium, you said before?

[Francesco Caltagirone, executive]

No, all I can say is that the increase of the price has been done during the last -- during the second half of last year. This year, we haven't hiked any kind any price anywhere. The prices are stable or a little bit, let me say, downward because with so big spike with the energy going down. It's normal also that the customer ask push back a little bit. But let's say, normal, and you can see also that in the quarter, with more or less -- with less quantity in every sector of our business, the revenue compared to last year increased nearly 15%. So for sure, this quarter compared to the first quarter of last year has substantial increase of price. Probably the next 3 quarters, we will see less, let me say, less bigger, I mean, the gap compared to last year. So the increase should be smooth.

[Marco Bianconi, executive]

Yes. I can take this one on the CapEx that the Chief Executive were alluding to before, I mean, clearly, we do have -- we have a plan to actually upgrade kiln 4 in Belgium. And the main reason is driven by the alternative fuel substitution rate that is expected to exceed 75% from the current rate. So increasing both the alternative fuel substitution rates and slightly increasing capacity. We have not disclosed the amount, but you're talking about a few million investment that is going to be spread across the industrial plan horizon, so between 23% and 25%. So that's the main reason for the upgrade of the kiln 4 in Belgium.

[Operator]

Next question is from Tobias Woerner of Stifel.

[Tobias Woerner, analyst]

When I look at Denmark, actually surprised quite a bit on the upside from what we were expecting. Is this also partly a function of the fact that your exports benefit from lower freight rates in Denmark, but also within your trading division? That's question #1. And question #2 relates to Turkey. Can you give us a little bit more granularity what sort of volumes increases we've seen in the first quarter?

And how you would see the year -- well, I know there is an election now, but if it wasn't totally disturbing to the end demand, what you see there for the remainder of the year? And then just lastly, your EBITDA in Norway and Sweden has clearly come down quite drastically. Again, give us a sense of what the volumes have done significant double-digit declines or what have you? And how you see the year pan out, especially in Sweden? And just remind us of the split between Norway and Sweden in terms of volumes.

[Francesco Caltagirone, executive]

Capacity only. Yes. On the export side, the cost, the shipping cost has decreased. And also this helped, for example, Egypt white against Denmark. And so we shifted some of the quantity to Egypt that we ship, especially to the United States. Then your second question was on Turkey. I don't think a sudden, let me say, soft of everything. But taking in consideration that today, we leave a very artificial situation with the inflation that is last year around 85%, 90% this year in the first quarter has been around 15% and the rates are at 16%. For sure, if we have a change in the government, we will -- that they will rise the rate sharply, I expect.

And so that we slow down the economy and probably they will weaken a little bit further than Turkish lira. If Erdogan will win, the move might be smoother, but for sure, it's unsustainable because they have depleted all the reserves in foreign currency, and they cannot keep, let me say, the rates at this level. The other, let me say, big question mark, is that the earthquake that happened a few weeks ago changed a little bit also the forecast that was were in favor of and the reelection of Erdogan. Now it seems that they are very close one to each other, I mean, against 48%. So let's say that I expect probably a tougher '24 and '25 than a sudden stop in '23. But for sure, whoever will win, we'll have to raise the rates even because around the world, everybody is raising the rates. And so they cannot keep this kind of rates forever.

[Marco Bianconi, executive]

Okay. The third question on Sweden and Norway, just to give you a feel for the trends. I mean, if you take the 3 Nordic countries, the decline in Denmark was within the single digits, let's say, mid-single-digit range. on average. In the middle, you have Norway with a low double-digit decline. And Sweden is at the far end with a high double-digit decline if, let's put it this way. This has to do partially with the dynamics in each country, Sweden being a bit more advanced in what is a bit of a -- like a housing recession where interest rates have dented a bit more, the demand for housing and the mortgage cost.

To give you a perspective, I mean, clearly, each country has a different product mix. In 2022 actual, the domestic ready-mix in Denmark, apart from cement was about 1.6 million the domestic -- sorry, volumes were about 1.1 million cubic meters. In Norway, you're talking about 800,000 tons. This is the ratio between the 2 in terms of size. Whereas in Sweden, you're talking about a much small ready-mix operation, about 200,000, but a much bigger aggregates business. So we sold something like 2.6 million tons of aggregates. So different product mix saw a different exposure in Sweden, we are mainly geared towards the south of the country, the Malmo area, where a number of projects also have been terminated.

And this is also the reason why the aggregates fell a bit more than expected. That said, I mean, clearly, the comps will get easier along -- during the year. And we expect somehow the situation to sort of gradually normalize throughout the course of the year. But obviously, nobody is sure of what's going to happen. And this also largely depends on how far the Central European Bank is going to go as far as the interest rates hiking. But that's more or less the situation. I hope I answered your question.

[Operator]

[Operator Instructions] The next question comes from Bruno Permutti of Intesa Sanpaolo.

[Bruno Permutti, analyst]

I have a question on the volumes. If you can remember us what is your assumption for -- in the guidance related to the full year volume impact on the top line? And a second question concerned more specifically Egypt. We have seen the sharp depreciation of the Egyptian pound. So what's going on there in terms of prices or what is internal sales, I mean, prices are compensating price increases and compensating for the depreciation. So I'd like to understand what is the situation for the internal market in Egypt.

[Marco Bianconi, executive]

Okay. To answer, I'll take your first question regarding the assumption for our guidance. I mean this central assumption -- the central assumption that we took is that volumes were for the year broadly unchanged or marginally down. But that is the central case we have taken when making our budget and providing our guidance for the year. So we were expecting, in fact, a bit of a tougher first and second quarter and then towards the mid of the year normalization and then an improvement. So for the year, as I told you, broadly flat to slightly down volumes overall. That is the central case. Considering you have also to consider one thing that is happening, for example, in Italy, is that a lot of public projects due to the very sharp rise has been temporarily suspended because they need to repeat.

And so this takes a few months or even a couple of quarters. So we are seeing, let me say, in terms of macroeconomics has slowed down due to the increase of the rates, but also another, let me say, external factor is that some projects all around Europe are delaying the start because of the sharp increase we saw last year. And so now the contractor is testing for a revised price, and it takes weeks or months. So we think that in the second half, we should start to see a sort of a normalization, especially in public works.

For the macro, let's say, now is the first phase where people after 10 years, I need to, let me say, being accustomed with this new rates that look in the past not 10, but 20, 25 years, it was normal to have 10-year rates around 3% to 4%. So now this is -- has been sudden and -- but let's say that we don't see a persistent weakness of the market, and we don't know if it will last one month more or less or 1/4 more or less. But let's say, in our scenario this year was, let me say, a year of transition. In fact, also our EBITDA in our, let me say, guidance is more or less flat compared to last year because last year, we did over -- we did the big jump in the revenues and the EBITDA, and we need now to consolidate, let's say, and also people, companies need also to consolidate the idea that the things cost more than the last decade.

[Bruno Permutti, analyst]

Yes. So see, if I may. So in this scenario of the has also the price increases that we announced until now are likely to seek likely to be -- to continue to be affected and wouldn't see with this volume scenario and negative outlook propriety for the will of the customers not to pay or recurring discounts by that. Is this something that is reasonable? Or are you seeing a different attitude from customers? Because in some way, we are more used -- we are almost used now to inflation and to accept a price increase of everything.

[Francesco Caltagirone, executive]

I think that the reason is the same of the few quarters that I gave a few quarters also ago. Now each year, more or less everybody has to cut 3% because of the CO2. So considering that if I don't sell, I look some margin, but I save EUR 85 of CO2. You have to consider also this in every balance sheet. And so nobody is now trying to, let me say, follow the customer decreasing the price because it decreased the margin and you spend the CO2. So it's a completely silly move. So when I say the last -- I mean, a few -- a couple of quarters ago that you have to look at this market as a regulated market now.

Completely different where you have, from one side, the regulator that asked you to converge to a certain target in 2030, 2032, and to cut your emission with the actual technology. And on the other side, the only way to do this without a technical, let me say without a new way to produce cement, you can cut your remission or with blending or changing the fuel mix, but it has its limit you can do deal certain point and then to cut production.

So for this reason, I expect that ourselves and either our other players are more disciplined because everybody is aware that 1 ton more sold gives you EUR 20 margin and cost you EUR 80 in CO2. But the same is when you say you sell 1 tonne less, you have a 1 ton in your pocket that you can spend all in the year until 2030 or just to cash in and you have 4x the margin that you have today in cement as an average, more or less.

So for this reason, mainly, let's say, I don't think that I have to be 100% correct. I don't think like that like other, let me say, times of downward economy, we might see a chance to bring down the price to keep market share not -- it's not the environment where we move today. And the Egyptian pound, sorry, yes, it keep evaluating. But as you have seen in the first quarter, let's say, the revenues were nearly 10% lower, but the margin was higher even because we export 50% and we serve the internal market is 3%. So the decrease of the Egyptian pound favors us for the export, and this is one of the reasons why we increased in absolute way the EBITDA.

[Operator]

Next question is from Alessandro Cecchini of Equita.

[Alessandro Cecchini, analyst]

Just a quick follow-up on the pricing environment. So you basically said that you expect year-on-year trend in pricing to decline over the next quarter. It seems to me that it is something related to comparison? Or are you already assuming that you should, I mean, mitigate or to decrease pricing because some clients are asking, even if the industry seems discipline. So if you can elaborate a little bit more on this topic.

[Marco Bianconi, executive]

I think you have to look at the year as a whole. I mean, clearly, it's very difficult to predict what's going to happen. And you know in some countries, we do tend to agree on the -- undertake price negotiation on a yearly basis, so towards the end of the year for the following year. So most of the pricing for the core market has already been sort of set. Clearly, there are some area as the Chairman highlighted before that where there are more -- there is more evidence signal of a widening of the spread in that the spot prices of energy are declining significantly. Some clients selectively may ask for some pushbacks. But that's relatively selective. So overall, I think the overall riding trend in Q1 has been price increases still offsetting the average increase in energy costs.

Then as explained before, what we see during the course of this year is the normalization on the cost side because clearly, the spot prices are now despite the average being still high significantly below last year average. And therefore, we would expect those costs on average to start normalizing and then decline if the spot prices remain where they are. Clearly, the price will sort of tend to follow. We cannot keep clearly increasing the price of the products in the face of a declining energy business. So that would follow.

And so we don't see any significant disruption, I would say, in the price cost spread going forward. But probably Q1 has been particularly, I would say, abnormal quarter in the delta in the price cost spread. Overall, we see this normalizing over the course of this year. And so we -- for a number of reasons, as explained, linked to the uncertainty of the Turkish election, et cetera, we prefer to maintain the guidance where it is, also because Q1 represents a relatively small proportion of the yearly profits. So it's a bit early days to draw any meaningful conclusion as far as the rest of the year.

[Alessandro Cecchini, analyst]

Okay. And you stated about labor cost. This kind of inflation, it's already in your numbers in the first quarter? Or do you expect that the pickup in inflation in labor costs you can see, I mean, in the second quarter or second half? So just to better understand these.

[Francesco Caltagirone, executive]

Depending from the country, for example, in Italy, we were used to have a scalable that has been, let me say, abrogated 10, 15 years ago. So there is no natural mechanical adjustment. For example, in Turkey due to the very big inflation every quarter, the government decided to align the wages. In Belgium, last year, we had an 80% realignment for labor cost. In other countries, it depends. So we have, let me say, put in every country, an increase of labor cost. But let's say, depend, as I said, in some parties automatic, in other countries are, let me say, driven from the central government. So we don't know. But they are, let's say, included in our -- the guidance is already included this kind of, let me say, adjustment.

[Operator]

The next question comes from Giuseppe Grimaldi of BNP Paribas.

[Giuseppe Grimaldi, analyst]

I have actually 2 questions. The first one relates to the Ben development that you have seen in April and in May, if you could give us an update if we are still facing a scenario in which volumes are still double-digit down or high single-digit down or things are improving. And the second question related to the energy. If I remind correctly, from the latest call, you mentioned energy has something like more than EUR 20 million headwind into the EBITDA of the year or something like that. So if we look at the current spot prices, do you think it is still fair to assume a headwind from energy cost in the whole year?

[Marco Bianconi, executive]

Okay. As far as the energy, I take this one, the -- what I would say is that what we see is that there is clearly a favorable development in energy because the spot prices today, despite being the average higher than the average of the last few years, still is way below what it was last year. So the comps going forward, Q2, Q3 would get easier. And so given where the spot prices are and our hedging policy, which it's a bit rolling. So we do generally hedge a high proportion of electricity and a lower proportion of thermal energy, especially coal because in the case, for example, of petcoke, it's not always easy to hedge or it's almost unhedgeable in strict terms.

We see that there is a favorable development in that the prices that we have envisaged and forecast that included in our numbers when we did the budget that was in Q3, Q4 of last year were higher than the spot price of today. So there could be some -- if spot prices remain where they are, there could be a positive, I would say, tailwind in our favor on the energy front. But it's a bit early days, given what happened last year and you know very well what happened especially from Q1, half of Q1 up to Q3 over the summer, prices of almost everything shut to the roof. So we have to be cautious. But if trends continue, I think there are -- there is a favorable development as far as the specific cost is concerned. 

With regard to April and May flavor of how things are going, I would say that there is no evidence of reversal of the trends that we've seen in Q1. We still see pretty much the same trend at least for the month of April or May. We do expect, though, a stabilization towards midyear because of just mechanical factor, i.e., either comps but also because we think that at some point, these interest rate hikes would have sort of run their course and the market should start to react.

So because, as you know, there are significant public investment programs in the different countries, sustaining repair and maintenance, sustaining infrastructure, construction projects, et cetera. So we're not like hugely optimistic, but we are confident over the medium term that the outlook for the industry is favorable, especially also for the transition to a green economy because you need quite a lot of building materials and cement, in particular, for the transition.

[Operator]

[Operator Instructions] Gentlemen, at this time, there are no questions registered.

[Francesco Caltagirone, executive]

Well, thank you very much then for your interest in Cementir Holding, and we wish all of you a pleasant rest of your day.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephone.