Cementir Holding NV

MIL:CEM

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Cementir Holding First Half 2022 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 of Cementir. Please go ahead, sir.

[Marco Bianconi, executive]

Thank you, and welcome, everybody, to the Cementir Holding 2022 first half results highlights. I will refer to the presentation deck that's been distributed on Page 2. We would like to highlight that revenues -- yes, I'm sorry, I'm here with Mr. Francesco Caltagirone, our Chairman and Chief Executive. Good afternoon. And he is happy to take your questions at the end of this short presentation that we'll go through right now.

So on Page 2, starting with this highlights on the results. You can see that revenues for the group reached EUR 811 million, up 22%. Excluding IAS 29, revenues were EUR 805 million, up 21%. Cement volumes were up by 0.8% like-for-like with negative trends in Turkey, China and Denmark. Ready-mix volumes were down 5.1% due to a slowdown in Turkey and Denmark and Sweden. Aggregates were down around 0.6%.

EBITDA progression was very good, up 7.7% to EUR 143.8 million year-on-year. Excluding the impact of IAS 29, EBITDA reached EUR 154.7 million, up 16% year-on-year. Positive results from Belgium, Turkey and U.S. Negative results from Nordic & Baltic and Asia Pacific. This figure includes EUR 11.1 million of Turkish nonindustrial property land revaluation.

EBIT was up 4.1%, excluding IAS 29 impact, was up 23.9% to EUR 98 million. Net profit reached EUR 66.6 million, up 39% year-on-year. Net financial debt was around EUR 79.5 million, a reduction of EUR 58.1 million year-on-year, including IFRS 16 impact, including EUR 6.3 million of share buyback and EUR 28 million of dividend distribution.

To note that the free cash flow generation was strong at EUR 92.4 million in the last 12 months. Let me give you just a few highlights on Page 3 regarding the hyperinflation, IAS 29 application. And we have, for the first time after many years, introduced the hyperinflation accounting for Turkey from June 2022. It is important to underline that this is only referred to Turkey, which accounts for a relatively small portion of our portfolio. It also is just an accounting revaluation.

So in order to provide like-for-like figures, we will comment the figures excluding IAS 29 to make comparables easier. Just as a highlight, it is important that due to this IAS 29 accounting rules, the translation of the Turkish lira exchange rate to euro is taken at the end of the period rather than the average exchange rates. We can go on the details later on.

Let me dive into the results, starting from Page 4 with the Nordic & Baltic that is our most important division, accounting for 41% of group EBITDA. If you will see here on Page 4, in Denmark, the domestic cement volumes were up 14% due to increased market activity, favorable weather and new infrastructure projects. Whereas exports were down 26% due to the redistribution of sales in the U.S. to other group companies.

Ready-mix volumes were down 8% and aggregates were down 16% due to difficult comparable figures. EBITDA overall was down 6.1%, driven mainly by the cement business, impacted by high raw material, energy and logistics costs, only partially offset by better operating leverage and price increases. Norway results were quite strong with volumes up at 7%, driven by new infrastructure projects and higher EBITDA due to higher volumes prices despite cost inflation. There was also a slight appreciation of the Norwegian krone versus the euro in the period.

Sweden, on the contrary, sales volumes in RMC were down 19%, and aggregate volumes were down 35%, mainly due to the completion of major infrastructure projects and a slowdown in the residential and infrastructure sector. So as a consequence, there was a somewhat lower EBITDA and it was compounded by a slight devaluation of the Swedish krona versus the euro.

Flipping to Page 5. Belgium and France, our second largest division, accounting for about 1/4 of our EBITDA. Here, cement volumes increased by around 3%, with good performance, especially in Belgium, the Netherlands and France and negative performance in Germany. Average price is up. Ready-mix volumes were flat in H1 with a 6% reduction in Belgium and 16% growth in France. Overall, prices were up in both countries. Aggregate volumes as well were up 7%, driven by stronger demand for infrastructure. Overall, EBITDA increased by 27%, thanks to higher volumes and higher prices despite increasing raw material cost, fuel and electricity costs as well.

Moving to North America, 9% of group EBITDA. Here, volumes were up modestly, just 1.5%, mainly driven by Texas and California. Whereas in the York region, there was bad weather in Q1 that impacted the activities. Average prices were up. The net effect was an EBITDA up 31%, thanks to better volumes, better prices and good cost control. There was also an impact of a 10% U.S. dollar revaluation versus the euro.

Moving on to Asia Pacific on Page 7, accounting for around 7% of group EBITDA. Here, you have 2 countries, one is China, the other one is Malaysia. In China, revenue was up 11%, driven by mainly prices because volumes in the domestic market were down around 10.5% due to lockdowns, some logistics issues and weather conditions. Overall, thanks to good cost control, EBITDA was down only 4% due to variable cost increase and lower volumes.

There was also a 9% renminbi revaluation versus the euro. In Malaysia, here, revenues were up 31%, driven by good pricing, which compensated higher freight and fuel costs. Volumes were up 5.5% and exports by 8%. Overall, EBITDA declined by 6% as a result of higher fuel and distribution costs. There was also a 5.5% revaluation versus the euro of the Malaysian ringgit.

Moving on to the last 2 countries. We have, on Page 8, Turkey, accounting for 15% of group EBITDA. I remind you that those figures exclude IAS 29 impact. Here, cement sales significantly increased in local currency driven by price increases. Domestic cement volumes were down 14%, export up 30%, but prices were up significantly. Domestic volume were mainly impacted by bad weather in Q1, especially and a sharp contraction in Eastern Anatolia due to the phaseout of some infrastructure projects.

Ready-mix volumes were down 8%. The newly acquired aggregate business was up significantly, but that was due to a perimeter change as the business has been acquired in Q4 of 2021. There was a 71% Turkish lira devaluation versus the euro. To note that this figure includes also EUR 11 million of non-industrial property land revaluation.

Moving on to Page 9. On Egypt, the last geography here, you can see it's a small country for us, only 3% of our profits. Here, cement volumes declined by around 2%, with domestic sales down 8%, mainly due to inventory buildup by Egyptian customers during the month of December. Export up by 2%, thanks to higher deliveries to the U.S. and Central Europe. Overall, EBITDA was down slightly due to lower volumes and higher fuel cost. The Egyptian pound was stable versus the euro.

The last slide of my presentation is Slide #10 regarding the full year guidance, which is confirmed at revenues over EUR 1.5 billion, an EBITDA range between EUR 305 million and EUR 315 million, a net cash position of EUR 60 million after CapEx of around EUR 95 million. Clearly, this guidance refers to like-for-like ongoing operations and does not take into account any intensification of the current Ukraine crisis nor any resurgence of the COVID-19 pandemic.

With this, I end my presentation, and I hand over to Mr. Francesco Caltagirone to answer any questions you may have. Thank you.

[Operator]

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

[Matteo Bonizzoni, analyst]

I have 3 questions. The first one is regarding the guidance for the full year. So we see that in the first half, your EBITDA was up EUR 10 million year-on-year. So basically the guidance for the full year, more or less implies that the second half should be around flat compared to the second half of the last year. Can you maybe provide a little bit more color on the evolution on a year-on-year basis for different geographies?

The second question is as regards this margin erosion in Scandinavia, which is continuing to be in place also in the first half of 2022. Can you a little bit elaborate on the price versus cost balance?

And the last question is more maybe technical issue, one looking at the P&L. We see that despite the fact that you are not investing more than depreciation, you are not investing more than depreciation over the last years, we have seen quite a significant increase of the depreciation in our P&L. So just to know if there is some -- what is basically the reason for that?

[Francesco Caltagirone, executive]

Okay. Thank you for the question. I'll start from the last one. In the IAS 29 besides, I mean, some line by line readjustment in the income statement that at the end more or less leave the same results. In the balance sheet, we have a revaluation, as you can see, in the Slide #3, that the total shareholder equity due to the IAS 29 increased a bit less than EUR 200 million. So the reason of this increase in amortization, depreciation is just because in Turkey, the base -- the asset base has been reevaluated nearly 500%. This is what happened since 2005 the last date when IAS 29 was applied 20 years ago.

And then it is netted by the exchange rate that we have now. So we have EUR 180 million more of total shareholder equity, and this is the reason why the depreciation increase. The second -- the first question about Turkey -- sorry, the guidance, let's say that, frankly speaking, we were ready to upgrade the guidance until, let's say, 10 days ago, when the auditors asked to start to use the IAS 29 because you have to let me say, use IAS 29 when the compound inflation of the last 3 years exceed 100%.

And from the moment that with the IAS 29, you have to use the final exchange rate of the period and not the average. It is difficult for us to understand which will be the final exchange rate in Turkey because when you have an average, more or less, you have a sort of visibility. If in December, the suddenly the Turkish lira devaluates another 15%, then we have to apply that exchange rate for the whole year.

Even if in our normal business, as we do every day, we don't keep Turkish lira in our hands, and we exchange every day, every week as we exchange the Turkey -- dollar to euro every day. But as a prudent approach [indiscernible] that's today, we don't know if the Turkish exchange rate at the final of the period can carve a bit the result in Turkey, we kept the guidance unchanged. Even besides the EBITDA, it is crystal clear that even the revenues that today is already at more than EUR 800 million, probably we will exceed EUR 1.7 billion at the end of the year.

But let's say, there are some headwinds. So we are -- we want to be cautious. And the other important thing is that the number that we have to approve officially is with IAS 29, even if the free cash flow, the investments and everything is linked to the business on a daily basis. And so I want and we decided to keep the guidance. And it is even if in some areas, we're still seeing strong performance.

And going to the second question about Scandinavia, it's the same, let's say, gain of last year. We can upgrade the price at least once a year. We did it in October, November last year with a certain view on energy prices. As you know, the energy prices continue to increase. And so we will adjust the price next time probably in 3, 4 months, probably October, November, but they will start from the 1st of January. So we are chasing the cost, let's say.

But the important thing is that as you see -- as you saw, is that with more or less the same volume for cement and ready-mix and aggregate, we realized an increase of 22%, including a strong devaluation in the Turkish lira because with the cost of Turkish lira otherwise the increase would have been more than [ 50% ] in revenues and probably another EUR 10 million more in terms of EBITDA.

[Operator]

The next question is from Tobias Woerner of Stifel.

[Tobias Woerner, analyst]

Three if I may. Starting with the overall average price increase at the top line, maybe you can give us a sense here, implied number given your volume seems extremely high.

Number two, in the U.S., you seem to have achieved an implied price increase, which is significantly higher than gray cement, i.e., for your white cement business over there, is that correct?

And then just lastly, number three, I'm a bit surprised that your export volumes out of Denmark are down so much given that the euro is so weak? Why is that?

[Francesco Caltagirone, executive]

Thank you, Tobias. I will start from -- even now from the last question. I mean it's a poor tactical reason to shift the quantity from Denmark to partially Egypt and partially with our trading company because we, as you can imagine, can save the CO2 price. So we supply mainly the U.S., and you can see and say that the U.S. numbers are quite strong. So in terms of overall volumes, I think we didn't decrease.

We just shift the origin of the product. And this is because it's more convenient now, it's not just the exchange rate, but that the CO2 is impacting more than the exchange rate. Then in the U.S.A., as you say, that the market is strong, the pricing power is strong because we are the only producer and it's also one of the reason of this good result.

The first question, the average price increase, as I said, and I also remember that I told to you. I mean that it was around 12%, even 15%. Then you have to consider, as we say, that today, with more or less a flat quantity, it seems that the increase is above 20%. And this is due because we have some variable path, as we said the last time that CO2, it is charged at the average price each month. And so this is charged -- so this increased the revenue if -- that the more the price of the CO2, the higher the revenues we have. And we also shifted with some contracts, especially in Belgium for the electricity with the same mechanism. So we gave to the customer a price with a certain cost of megawatt.

And then we say if the price of megawatt is higher than this, then you have to pay the difference. And this is the other reason why, for example, Belgium, France performed so well, and also because at the end, the price increase seems higher. So this is -- I mean, our fixed part of the increase is between 12%, 15%. The other is variable. So even in the next 6 months, on the CO2 price and especially in Belgium, France and in the cost of megawatt because, let's say, for the customer, it's a sort of variable cost -- and even -- so it can continue with this track if -- with this space, if the energy and the CO2 will continue to be around this price.

[Operator]

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

[Bruno Permutti, analyst]

I have a few questions. The first one concern the CO2 price level. So if you can remember us what is the price of CO2 implied in your guidance? And so I understood that eventually increases are partly stabilized by price increases. But I wanted to understand what could be the level you are considering as cost for the group.

The second point concerns the volumes. So I would like to have your feeling, if possible, about the volumes you expect in the second half of the year. And so are you experiencing some impact, I mean, of the price increases in a more cautious demand or you're not seeing these, so this is on volumes.

The third one is the detail on your guidance for the EBITDA if it includes the asset revaluation in Turkey or if it is recurring guidance, EBITDA guidance?

And the last one, I excuse, but I'm not so familiar with IAS 29. I was wondering what is the reason why you have a negative impact on the -- you have a positive impact on the revenue. So while I can understand the negative impact on the EBITDA, I would like to understand the technicality of the positive impact on the revenue.

[Francesco Caltagirone, executive]

Starting from the last one, sorry, I started from technical things. I mean revenue as you can see at Page 3, are almost more or less in line, just a little bit increase because this is -- I mean, the IAS 29 function in this way. Every month, you have to apply the CPI officially. And then at the end of the period, you don't apply the exchange rate at the end of each month, but just at the end of the period. So you accumulate for 6 months, the inflation that, for example, has been 42%. And then you deduct the devaluation of the Turkish lira.

For example, if you have Page 3 in front of you, you can see that, for example, the EBITDA is caused by the devaluation of the spare parts in Turkish lira, as you recover in the net financial income more or less the same amount. In fact, the profit before tax, you can see on Page 3 are exactly the same with the IAS 29 and without the IAS 29. The guidance by the end of the year is the industrial guidance and is not including the revaluation of the land.

And the volumes, let's say, that, as you can imagine, you can -- we are seeing some -- in the second half, some softness in some areas. But also, we think, as it happened in the first half, where you saw more or less, we sold the same quantity that the price increase, it's so strong that even if we might see a 1% to 3% decrease in volume, this will not or won't affect significantly the numbers.

Then I cannot forecast if, let me say, there would be a completely shutdown of the gas in October and the economy will derail, this is a macro issue. It's not just cement or Cementir Holding issue. But with the number that we are seeing from mainly all the region where we are active are some positive, some a little bit, let me say, negative. But so far, as I said, we continue to see a strong trend volume price because also the price is significant, taking in account that there is another, let me say, trick that if you sell less, you use less CO2 and you keep the CO2 on your hand.

So at the end, let's say, we are serving sometimes in some markets, understanding if it is better to push volume or to keep just the price and to save the CO2. We are talking about plus/minus 2%, not just plus/minus 10% in volume because otherwise, we might affect the market share. But so far, let's say that we see a constant level if the economic environment will remain the same.

I don't know, Marco, if there were other questions. Did I miss -- the CO2 price level that is EUR 80. But let's say, above EUR 80, it is charged to the customer. It's not a cost for us. This is now to be clear, because this is the mechanism. When we say that it's variable, we used a euro for the industrial plant as a reference number. Then around if it goes up, let me say, it will be charged to the client; if it's is lower, it will be deducted from the invoice. So this is how it works. So it's like VAT, let's say, that you have a certain number that is not affecting -- just affecting the revenues, but it's not affecting EBITDA, cost or any other line. It's just the number that we charge and then we turn to, let me say, to the authority as a tax.

[Bruno Permutti, analyst]

Okay. So the guidance is not sensitive at this point to the price?

[Francesco Caltagirone, executive]

No.

[Bruno Permutti, analyst]

The CO2 price? Okay.

[Francesco Caltagirone, executive]

No.

[Operator]

[Operator Instructions] The next question is from Roland Konen of Value-Holdings.

[Roland Könen, analyst]

Yes. There's only one left. It's on the gas issue or energy issue, could you remind me, please, on your dependency of the gas flows from Russia or Eastern regions?

[Francesco Caltagirone, executive]

Today, we only use natural gas in the United States. We are planning to use, as you know, but we have to be connected to the network in Denmark at the end of this year and in Belgium during 2024. So I think that this year and next year because if the energy and the gas price will continue to be at this level, it's not convenient to use gas compared to alternative fuel or petcoke. And so the answer is that we are not, let me say, sensible to any price increase in the gas in Europe.

[Operator]

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

[Marco Bianconi, executive]

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

[Francesco Caltagirone, executive]

Thank you. Have a pleasant summer.

[Operator]

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