Cemetir Holding

Good afternoon, this is the Curriculum Conference Operator. Welcome and thank you for joining the Chairman Dear Holding First Half 2021 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. 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.

Thank you, and welcome everybody to Chairman T. Holding's half-year results conference call. Good afternoon and good morning to everybody. You have received the presentation deck, so I will make a short presentation, go through the deck, and then leave the questions to Mr. Cantagirone, who is here with us today for any questions you may have. So starting with the highlights on page two, the results were positive. revenues reached €664.5 million, up 16.5% from last year, thanks to good performance in all geographies. Seven volumes were up 18.7%, driven by Turkey, Belgium and Denmark. EBITDA was up 36.6%, to €133.5 million, and there was a higher contribution from main geographies like Turkey, Belgium and to a lesser extent Asia Pacific and Egypt. EBITDA margin was up to 20.1% compared to the 17.1% of the first half of last year. 2020 figures were impacted by COVID-19 and there were also 5.6 million euro one-off on last year's figures. EBIT was up 83% to €79 million and net profits reached €47.9 million from €20 million of last year. This is after €9.7 million of financial charges and €6.9 million of taxes. Net financial debt reached €137.6 million, down over 51% over the 12 months from 142.9 million euro of last year. This includes 23 million euro of share buybacks and the dividends. Moving on to the different geographies, starting with the most important, page 3, Nordic and Baltic accounting for over 52% of our results. In Denmark, both grey and white cement volumes were up due to increased general market activity. White cement exports in particular were up over 22%, thanks to higher deliveries across the board in Europe, but also in the US. Great German exports were down 11%, mainly due to lower sales into Norway. RMC and aggregates were also up by 11% and 30% respectively from last year. EBITDA was slightly down by 2.5% in Denmark due to cost inflation, raw materials, electricity and other operating costs. Norway, RMC business was up 3% and there was a significant recovery from March onwards with the kickoff of some important projects. It's important to notice that the Norwegian krona appreciated around 5.5% of the Euro in the period. Sweden, the market was robust with favorable weather and a strong construction market where RMC and aggregates volumes were up 19.9% respectively from last year. Also in Sweden, the Swedish Krona appreciated 3.5% versus the Euro. Moving on to the second largest division, that's Belgium and France, on page 4. As you can see here, again, cement volumes were up around 10%. The positive trend was in Belgium and France, whereas the Netherlands and Germany were relatively weak, although much less important in terms of size. ReadyMix volumes were up 30% thanks to some important projects kick off and also aggregates were up 10% thanks to strong domestic demand and exports to France. Operating leverage and some maintenance costs being postponed during the quarter allowed the EBITDA to increase by 25.2% in the period to 29.1 million euros. There was a slight negative impact from higher raw material costs. Moving to page five, to North America. As you can see here, sustained volume growth also in the U.S. up 13%, especially in the areas of the state of Florida and the York region, but also thanks to a favorable base effect. There was also a 1.2% increase in revenue despite the currency translation impact, which was down on average in terms of the FX by 10% versus the euro. EBITDA was, however, up 8% thanks to good cost control. Moving on to Asia-Pacific, on page 6, as you can see here, China reported strong demand with white cement and clinker sales volumes up 16% in the period. EBITDA was up 22.6%. Here, wet cement sales were up almost 48%, whereas the domestic market was up 25%. In June, there was also a new lockdown in Malaysia, which negatively affected the activity both in the domestic and the export market. Export volumes were up 50%, and there were increased exports of cement and clinker to Australia, the Philippines, and Bangladesh. EBITDA overall was up 79%, despite the negative impact of increasing fuel and other fixed costs. Moving to Turkey, on page 7, as you can see here, grade cement volumes increased by around 29%, with domestic sales actually up 40%, with strong demand in the Marmara, Anatolia, and Aegean regions. Exports were down by 8%, and average cement prices were up in local currency, according to different local trends. RMC volumes were up strongly by 80% thanks to the start of new infrastructure projects and the opening on some new plants. In the period, we have to record 33% Turkish Lira devaluation versus the Euro. Overall, there was a strong turnaround in EBITDA and across the board, including RMC and the waste business. We have to remind that 2020 figures included €3.1 million of one-offs. The last area is Egypt, on page 8. You can see that here, again, white cement domestic volumes increased significantly by 30%. White exports were up by 20% and overall EBITDA was up by 41.7% thanks to operational leverage and good cost control. In the period, the Egyptian pound devalued by around 8.5% versus the Euro. The last slide is about the revised 2021 full year guidance. We are upgrading our guidance for the year. We expect now revenues of 1.35 billion euro from previous 1.3 billion and EBITDA range from 295 to 305 million euro from 285 to 295 with the previous guidance. and net debt unchanged to 30 million due to mainly a higher cash outlay than estimated due to the buyback. And then the CAPEX is unchanged at 95 million euro. Obviously, this forward-looking indication does not include any new outbreaks on the COVID-19 pandemic. This ends my very short presentation, and I will now leave the floor to our chairman and chief executive, Francesco Cantagirone, who's happy to answer any question you may have.

Excuse me, this is the course call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Matteo Bonizzoni of Kepler. Please go ahead.

Yes, good evening. I have two questions. The first one is related on your view on the balance between pricing and cost inflation for the year and in general going forward. So clearly cost inflation will remain an issue. What's your view on your ability to offset that in different countries for the second half of this year? For example, we have seen a In Denmark, a little bit of erosion on that slide on the margin. Can you elaborate a little bit on your key geographies? And the second and last question is as regards your thoughts on this 5455 draft, which will basically significantly increase the decrease of the free allocation for the CO2. From now to 2035, basically, we are going, if this draft is going to be approved, that is to be seen towards basically a cancellation of the free allocation in 2035. So there is a lot of time to act, but it is a significant change compared to the current legislation. What are your thoughts about this draft? Thanks.

Thank you.

About the cost inflation, I can say that compared to last year, we expect both for solid fuels and electricity an increase of cost over the 12 months of about 22 millions of euros compared from last year. and 7 million on solid fuels and 15 million on electricity. In terms of increase in dispatching cost and sea freight, we are talking about a minor increase that are around 2-3%. So this is our estimation. We don't think that we might face significant headwinds in the second half, more than what we have already estimated for the full year. In terms of pricing, for sure in the first half, even because last year was less affected by the COVID, the Scandinavian region would have started, let me say, to... a price increase in the second half of this year for some products. The market in Scandinavia is a bit different compared to the other geographies. Usually we set the price for the full year during October, November. and for this reason in the first half of this year we didn't consider this sharp increase especially in energy and so for this reason we suffered a bit but we think that for the second half the price increase should outweigh the increase in energy so we should go back to, let me say, a normal profitability. Even because the demand is quite strong for every product, starting from white cement to grey, but also ready mix and aggregates, and in all materials we see a scarcity of supply even from the competitors, so that is, let me say, It's more easy to pass the price increase because there is no availability of cement and brady mix in most of the European markets and not just in Scandinavia. My thoughts about fit for 455 about the clear location and what will happen to this sector. I can say that, as you know, we in our, let me say, long-term plan considered a decrease of 30% by 2030, by a linear decrease of 3% each year for the next 10 years. now what it seems that we will have this amount of allocation that will be kept for the next five years till the end of 2025 as they are today and then we'll decrease the 10% from 2026 so considering our linear model we think that till 2027 so by the reduction of nearly 70% of this amount, we are still in our, let me say, plan and trajectory. The other thing, as you know, today I think that this document is mainly a technical, let me say, proposal that should be backed by the 27 countries in the next couple of years. I don't frankly believe that we should keep this kind of cap especially after 2030 because as you know today there are not technical solutions in carbon capture there are sequestration users of the CO2 so as we already seen from even from the automakers or also the steel production it's not easy just to implement a timeline scale of this investment because there is no technology. So what I can say is that till 2027, for us, it is more or less as it is today. Then we will have to see, but I think it's difficult to forecast now 6-7 years ahead what will happen and what will be the technology but also what will be the final price of the CO2 because it's almost even quite clear that part of the price inflation that we are seeing in most of the raw material is produced especially in Europe by the increase of the CO2 price so at the end as I already said in one, let me say, in the previous meeting that we had that I don't see that the European community can allow the price of the raw material starting from electricity that is already the double or even more than the price of last year that can keep continuing increasing with this pace and just because we have to finance something that is unknown so far. And so from the moment that electricity especially will hit all the people living in Europe and affect their balance sheet, I don't see that this, let me say, path will be straightforward. I think that there will be a lot of challenge in the next two years from every countries because I think it is good and we have to do our best to cut the emission, but then also we have to consider that it's not only an issue of the industry, widely speaking, from steel, comb to cement, but it's also about every people that have to change its own behavior. and probably to change the balance sheet because also plastic is affecting our everyday life and probably plastic will be affected in terms of price from 100 to 300% if the CO2 price will go towards 100 euros. So this is my, let me say, early thought about this, but for sure we have to build in the next few quarters and I think it won't be a straightforward path. For sure, as I already said, cement is something, together with steel, that we need to change our economy and the way we live. So, for sure, I expect that every price increase, even because we will have this border adjustment that will be in place from 2026, as already said, will limit the lending of the various products from outside the European market. So this will affect the price for sure.

Thank you.

The next question is from Tobias Werner of Stiefel. Please go ahead.

Yes, good afternoon, gentlemen. Thanks for taking my questions. And also thank you for... specifying the cost of the increased fuels and electricity costs. With regard to that cost, can you give us an indication of the 22 million, how much you've incurred in the first half and how much in the second half, or maybe just a weighting of that increase? That would be my first question. The second question relates to Turkish cement prices. Maybe you can give us an idea what the average price was for the first half, maybe in euros or in Turkish Lira, whatever you prefer, and what rate it has exited June and where we are at now. And then just thirdly, in Egypt, there was just an agreement struck for the grey cement industry around capacity utilizations. and optimizing pricing for the gray cement industry. Will that have an impact at all for you as the white cement industry, or is it something we can ignore? Thank you. Okay.

Starting from the last question, the gray cement will not affect the white cement, but mainly the white cement is exported and the grey cement is mainly domestic. For the cost inflation in energy, more or less is 50% and 50% because especially we have a very low inventories in coal last year due to the sharp increase of the sharp rebound of the market in the last quarter of last year. And mainly in electricity we have, let me say, a contract in place that, let me say, let us, let me say, to spread all the increases. So this affected our balance sheet in the first half of around 10.5 million and will be 11.5 million in the second half. Regarding Turkey, the price scenario is quite positive for tourism when you have inflation up to 16-18% you have to increase the price nearly every month and then also the demand for Real investments are still good and also the export from Turkey is very healthy for two reasons. One, because with the CO2 of 50 euros, cement exported from Europe especially to Africa is, let me say, hard to zero because there is not any more convenience and so they replaced part of, let me say, these exporters from Europe and also because the African market, especially the West Coast, is experiencing for COVID, especially in the harbor. And so it's also, let me say, I think that even this year and next year, the extra capacity of the Turkish market will be mostly sold for export. That this year and last year peaked near around 30 million tons from an average over the last 10 years of around 10 million tons.

Thank you.

As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Bruno Permutti of Intesa. Please go ahead.

Good afternoon. A few questions. The first one relates to the utilization rate of your capacity in Turkey. I would like to have an idea of where you are now and related to this, what is the outlook you imagine for the operating profitability in the country. So if you, what could be a normalized operating profitability when you have recovered the utilization of your capacity. And a second point was more a strategic, a medium term strategic outlook. So you are recovering the situation of Turkey that was probably an issue in the last few years. Probably also Egypt has returned to normality. So you have a very, very low net debt, or you plan to have a very low net debt by the end of So from the point of view, in the midterm, what is the growth strategy? What could be the growth strategy for the group? So can we imagine that, how do you imagine the group in the next two, three years in terms of possible growth? expansion possible growth drivers.

Okay, starting from your first question, today in Turkey we have, let me say, for the whole year, sales about 4.2, 4.3 million, both of cement and clinker, on a capacity that is roughly 5 million. Of these 4.3 million, 800,000 are exported, so this is the situation. environment as I say is quite healthy and I mean the average of profitability in Europe because then there is also the headwind of the devaluation of the Turkish Lira we think that is as already said can go back between 30-40 million euro a million euro of EBITDA so this is the average where we expect that we can land in two or three years About our strategy, as I said, let's say we are, let's say, zero net death by the end of the year, or the death that we will have at the end of the year is the debt that we produce for the buyback. So from the industrial point of view, it would have been zero because we are, let me say, more or less going to spend nearly 30 million for the buyback that will end early in October. Today, it's difficult, as I say, to value an asset for this Fitfort 45 project because still we don't have the final, let me say, approval and which will be the final allocation, the cost of CO2 or the technology that we might develop as a sector for carbon capture and sequestration It is just betting at the casino where you can earn a lot of money and waste a lot of money. So, as I said, I don't believe that for this and next year we are going to make a major deal everywhere, because with the border tax adjustment, besides protecting the domestic industries, Europe wants the other countries to converge to its own, let me say, system. So, even investing in, let me say, emerging markets or even China, today is difficult to evaluate because if they start to converge in the next two or three years, then we have to understand at which level, which will be the possible, let me say, cut of As you know, China pledged to reach the zero, the neutrality, by 2060. That is 10 years later, but we don't know what will happen from now to 2060. And this is a long-term, let me say, sector, and we cannot invest in this sector just having, let me say, the next five or 10 years. I think that the M&A activity in the sector will be quite slow. The strategy is to continue then to develop the low CO2 intensive that we are mainly aggregates and partly ready mix and also on the side product that you can let me say produce with the white cement that we are already producing for example in Malaysia or we ship for the Australian market, but frankly speaking, I think that these are minor deals. I think that what, let me say, can support and we believe that we are also quite ahead in our three-year plan because the results are supporting us, that There will be a scarcity of cement in the next five to seven years even because what we have seen so far is just a demand from the household for restoration and the main flow of European funds for the recovery funds will arrive starting from next year. So this will be an extra demand that will add on this, let me say, situation. so we expect in terms of growth and even this year compared to last year that was anyway a record year in revenue we expect to increase our revenues 10 percent that keeping the same perimeter is not so easy but anyway this means that quantity and price are, let me say, addressed in the right direction. And I see, as I already explained last time, that we are going to experience a market that for the next five to seven years that probably is completely different than the market that we have seen for the last 13 years after Lehman Brothers. So with the market that is capped in terms of capacity because of the CO2 allowance, nobody is, let me say, supported to increase or revamp a plant in Europe. And with the border tax adjustment, the flow of cement will be all limited or will arrive with an extra cost of the CO2. That means that this will support an increase of the price widely. So this is what I think. So today for M&A, frankly speaking, I don't see, let me say, reason to invest or to rush to invest because we don't know what will be the cash flow for the medium-long term.

Thank you.

The next question is from Michele Baldelli of Exxon BNP Paribas. Please go ahead.

Hi, good afternoon to everybody. I have two questions. The first one relates to the exports from Turkey, because from the slide that you presented, there is written that export ports are down. I imagine not to Africa, but probably more to Europe. So I was wondering why and if the cost of transport and the, let's say, shipping of goods by ships has been one of the reasons. The second question relates to the increase of the guidance. If you can just elaborate the two or three regions that you see performing better than the previous expectations, And other questions relate to the Turkish margins. Because my idea, but maybe I'd be wrong, that probably already this year, the margin can be on the double digit figure. So I was wondering if you share this photo, you want to be more cautious. Thank you.

The export from Turkey decreased mainly because the internal market is healthier than the export market. Then you have to consider one thing that today for example with the actual freight it costs nearly from 15 to 25 euro to ship cement large vassal to Europe but you avoid 50 euro of CO2. So this is the game and because why the export from Turkish market is so healthy. The guidance, we have increased the guidance first for, let's say, because if you add, let me say, what we have done in the first quarter, in the first half, and then if we add the second half of last year, you lend around 300 million euro of EBITDA. So, from the moment that we expect that probably we should even be a little bit better in all the regions, there is not a specific region because as I said, today, Turkey, Norway, Belgium are performing better than expected, but, let's say, In Turkey, we might expect a headwind from exchange rates, like what we experienced in the first half from the USA. But also the Scandinavian market, I think it's, let me say, good and well positioned, especially the Swedish market and the Danish market. So the guidance, let me say, as what we have seen in the first half, is better for every market, let's say. More or less, I mean, they will contribute. But for sure, I expect that in the second half, probably we might see a better performance from, let me say, Denmark. than what we have seen in the first half. Margin in Turkey, yes or no? Yes, we are, let me say, close to double digit in terms of profitability.

Okay, thank you very much.

The next question is from Alessandro Tortora, Mediobanca.

level of allowances and the potential let's say deficit you may have next year if I remember well you mentioned something between 600 tons okay something like that or 700 it depends on that so just understand how you're going to deal with that if you're going to purchase on the market these deficit of allowances and if you're fully confident then to pass through these costs through price increases

And yeah, these are the two questions.

Thanks. The U.S. market is performing better, besides, I mean, the issue of the currency rate. No, the price pressure is not anymore, especially because The trade rates are so high that especially the other small players are, let me say, arriving with more difficulties in the United States and for this reason, let me say, it's easier and we have done a price increase during the last months. The second question was about The allowance, let me say, we are working hardly to decrease our needs, especially because, let me say, as I said, we think that Early next year we will have the natural gas in Aalborg and it seems that also we will have in the second half of 2023 in Belgium. As you know, switching from coal to natural gas will cut the 30% of CO2 emission in one shot. And then also working on the mix and the rollout of the Future SEM is going better, so I hope that probably in the update of the industrial rolling update that we will do at the end of this year, probably we will release earlier next year, probably we can cut during especially the 21-23 or the 22-24 that will be the next let me say industrial plan cut significantly the need of the CO2 that we have probably I hope that let's say will be around 30% This is my feelings that we can cut this for the next three years, figures. In terms of how we can finance, let me say, because we already put in every contract, everywhere, and the supply, every cement player is doing this, the cost of CO2 is a line of cost. If the cost is higher then probably The reason that we are already sharing is that there is a lack of material in some markets already, right in the UK, but I expect that in most of European countries, the cement products in most of the markets are short in cement, especially if the infrastructure demand for cement will arrive in the next several years. So I don't think, and this is, let me say, our view in our industrial plant, that the price of the CO2, even if it will be around 60 or 70 euro, will be a major, let me say, issue to fulfill our industrial plan.

Okay, okay. And then, sorry, I recall the third question was on Denmark. Are there any specific reasons why you were not able to pass through the cost inflation through price increases also in light of the good, the strong volume trend you mentioned in the country?

I explained before that in the Danish market usually you signed nearly 90% of your supply in October-November and we didn't have last October-November a view of this price increase, so for sure for the contract that we already start to talk and we will finalize in October November this year they will include all the pricing cost increase inflation that we had during this year so for this reason I expect especially in the last quarter of this year a recall of profitability just because there is a mismatch because in most of the other markets you sell just one or two months ahead In the Danish market, even because we are the only player, we set the price for the full year. This is the reason. Not because we are not able to pass the price, but if you sign a contract, then you have to fulfill a contract. For this reason, we are going to increase the price, let me say, for the next year for sure.

Okay, thanks.

Gentlemen, there are no more questions registered at this time.

Then thank you very much for your interest in Charmanty Holding, and we wish you a pleasant rest of the day. Thank you. Thank you. Bye-bye. Bye-bye.