Cemetir Holding

Good afternoon. This is the course call conference operator. Welcome, and thank you for joining the Chementeer Holding first quarter 2023 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 first quarter 2023 results. I'm here with our Chairman and Chief Executive, Francesco Caltagirone, who is happy to take your question at the end. I will go through nine slides of our presentation deck, starting with page number two with the highlights. Revenues in the first quarter increased by 14.5%, reaching €414.8 million. On a non-GAAP basis, they increased by 14.2% to €413.8 million, driven mainly by price increases. Cement volumes were down by around 4%, mainly Nordic and Baltic, Belgium and the US, 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 €81.2 million, up 33.8% year-over-year. On a non-GAAP basis, EBITDA reached €85.6 million, up 41.1% year-over-year. The higher EBITDA is mainly Nordic and Baltic, Turkey, Belgium and Egypt, and the lower EBITDA was recorded in the US and Asia Pacific. EBIT was up 49.5% to 49.2 million euro. On a non-GAAP basis, it was up 70% to 56.2 million euro. Profit before taxes reached 63.9 million euro, up 50.7%. on a non-GAAP basis was up 61.1% to 68.3 million euro. Net financial debt reached 32.1 million, down by around 56.6 million euro year on year, including IFRS 16 impact and a 28 million euro dividend distribution. Moving to the largest division, that's Nordic and 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 return to a pre-COVID profitability level in the country. In Norway, aridemic 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 aggregate 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 the page to number four, Belgium and France, accounting for about a quarter 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 cost and selling prices. Moving to page five, 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 V&E 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 clean-core exports due to a different calendar for shipping and lower deliveries in some countries. Domestic volumes increased as a result of good recovery in the construction market. Overall, EBITDA in Malaysia grew as a result of higher prices and reduced fuel and freight costs. partially upset by higher variable costs and lower volumes. The Malaysian 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 market. Ready mix volumes increased in line with the market and EBITDA reached 7.8 million euro, 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 evaluation 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 1.8 billion Euro of revenues. EBITDA range between 335 and 345 million Euro. reached a net cash position of over €200 million after a capex of around €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. Castagirone, who is happy to take your questions. Thank you.

excuse me this is the course called 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 touchtone telephone to remove your question from the question queue please press star and two please pick up the receiver when asking questions the first question comes from Matteo Bonazzoni of Kepler thank you good afternoon I have two questions the first one

regards the margin trajectory. In Q1, your margin, your BDA margin, XJAS 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, it implies the vice versa. So it implies growing revenues and flatish EBDA, so a compression of the margin. So basically, I want to know why is that? Why do we expect margin to compress in full year 2023 when in Q1 the margin, which is a small 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 a clarification as regards what we have seen on the net financial position. So the net working capital trend proved particularly benign in Q4 last year because you were beating your 60 million net cash guidance in Q4 by around 30 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. Thanks.

Thank you. Good afternoon. Regarding the increase of the margin percentage, this is linked mainly the opposite of what happened 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 this month there will be the election in Turkey. Turkey so far has performed very well but the outcome of the election can be worse and we don't know and for this reason even if the first quarter seems 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 keep 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. So there will be two rounds of elections, the 14th and the 28th of May. and then we will see who will rule the country for the next five 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 investment especially that one in Belgium that kick in in the first quarter but this doesn't change our outlook for the full year and we remain addressed at the 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 we don't see price increase for now in any other geography most of the costs are stabilizing except for the petcoke that versus 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 three, the mix is, let me say, still positive. And then also the labor cost, something that last year wasn't, let me say, part of the problem of the rising cost, we are seeing, as it is normal, a pressure to increase wages. 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 have peaked. Today the gas is around 40 euro and the electricity is around 130, 140 depending on the year. But keep remember that it's three times the 40 euro 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 of the last 10 years so we don't think that we will see other than this 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 compared to last year. So these are the main reasons for our questions, and I hope to have answered your questions.

Yeah, thank you very much.

The next question, sir, is from Emanuele Negri of Mediobanca.

Good afternoon, everybody, and thank you for taking my question. The first one is related to pricing. We have a positive price impact in the first quarter. It is related to price increases 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 we expect in Belgium and Denmark. And the third one is if you can give us some more colors on the cash absorption dynamics in the first quarter beyond the investment in Belgium you said before.

Thank you. The increase in prices has been done during the second half of last year This year we haven't hiked any price anywhere

the price 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 or push back a little bit but let's say normal and you can see also that in 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 a substantial increase of price probably the next three quarters we will see a less, let me say, a less big gap compared to last year, so that the increase should be smooth.

Yes, I can take this one on the CapEx that the Chief Executive was alluding to before. I mean clearly we do have a we have a plan to actually upgrade Kim for 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 alternatives fuel substitution rate and slightly increasing capacity We have not disclosed the amount, but you're talking about a few million euro investment that is going to be spread across the industrial plan horizon, so between 2023 and 2025. So that's the main reason for the upgrade of the Kiln IV in Belgium.

Okay, thank you. Sure.

The next question is from Tobias Warner of Stifel.

Yes, good afternoon, gentlemen. Thanks for taking my questions. When I look at Denmark, it 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 and that's question number one and question number two 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.

Yes, on the export side, the coast, the shipping coast has breathed and also this helped, for example, Egypt, white against Denmark, and so we shifted some of the quantity to Egypt that we shipped especially to the United States. Then your second question was... In Turkey, you know, I don't think a sudden, let me say, soft stop of everything. But taking consideration that today We live 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, they will raise the rates sharply, I expect, and so they will slow down the economy and probably they will weaken a little bit further the 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 forecasts that were in favor of a re-election of Erdogan. Now it seems that they are very close one to each other. I mean, 52 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 will have to raise the rates higher. even because around the world everybody is raising the rates, so they cannot keep this kind of rates forever.

Okay, the third question on Sweden and Norway. Just to give you a feel for the trends, I mean, if you take the three Nordic countries, you know, the decline in Denmark was within the single-digit, 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, 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, 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 about 800,000 tons. This is the ratio between the two in terms of size. Whereas in Sweden, you're talking about a much smaller ready mix operation, about 200,000, but a much bigger aggregates business. So we sold something like 2.6 million tons of aggregates. So 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 during the year, and we expect, you know, 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 interest rates hiking. But that's more or less the situation. I hope I answered your question.

Thank you very much, yes.

As a reminder, if you wish to register for a question, please press star and 1 on your touchtone telephone. The next question comes from Bruno Permuti of Intesa San Paolo.

Yes, good afternoon, everyone. I have a question on the volumes. If you can remember us, what is your assumption in the guidance related to the Julio volumes impact on the top line? And a second question concerns most specifically Egypt. We have seen the sharp depreciation of the Egyptian pound So what's going on there in terms of prices, what is internal sales? I mean, prices are compensating, price increases are compensating for the depreciation. I'd like to understand what is the situation for the internal market in Egypt. Okay, that's it, that's it.

okay to answer I'll take your first question regarding the the assumption for our guidance I mean this central assumption the central assumption that we 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 middle of the year, a normalization and then an improvement. So for the year, as I told you, broadly flat or 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 project due to the very sharp rise has been temporarily suspended because they need to 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 asking 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 normalization, especially in public works. For the macro, let's say, now is the first phase where people, after 10 years, need to, let me say, being accustomed with this new race that... Look in the past, not 10, but 20, 25 years, it was normal to have 10 years rates around 3% to 4%. So now this has been sudden, but let's say that we don't see a persistent weakness of the market and we don't know if it will last once more or less or one quarter more or less but let's say in our scenario this year was let's say a year of transition in fact also our EBITDA in our guidance is more or less flat compared to last year because last year we did or every year We did a 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.

Yes, so excuse me, if I may. So in this scenario, perhaps also the price increases that were announced until now are likely to speak, are likely to increase. to continue to be accepted. I wouldn't see with this volume scenario a negative output for prices or the will of the customers not to pay or requiring discounts or things like that. Is this something that is reasonable or are you seeing a different attitude from customers? Because in some way we are all more used now to inflation and to accept price increase of everything.

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 lose some margin but I save 85 euros 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 decreases the margin and you spend the CO2. So it's a completely silly move. So when I said 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 asks 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 emission or with blending or changing the fuel mix but it has its limit you can do till a certain point and then to cut production so for this reason I expect that ourselves and other players are more disciplined because everybody is aware that one ton more sold gives you 20 euro in margin and cost you 80 euro in CO2. And the same is when you save. You sell one ton less and you have one ton in your pocket that you can spend all in the year till 2030 or just to cash in and you have four times the margin that you have today in cement, as an average, more or less. For this reason, mainly, let's say, I don't think that I have to be 100% correct. I don't think that, like other, let me say, times of downward economy, we might see a chase to bring down the price to keep market share not the environment where we move today.

Thank you.

And the Egyptian pound, sorry, yes, it keeps devaluating, 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 50%. 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.

Thank you.

The next question is from Alessandro Cecchini of Equita.

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

Yes, I take this one.

I think 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 price, 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 areas, as the chairman highlighted before, that where there are more There is more evident signal of a widening of the spread in that the spot prices of Vernergy 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 cost. Then, as explained before, what we see during the course of this year is that a 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, you know, clearly increasing the price of the products in the face of a declining energy bid. 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, you know, Q1 has been a 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, you know, for a number of reasons, as explained, linked to the uncertainty of the Turkish election, etc., 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.

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

Depending from the country. For example, you know, in Italy we were used to have a Scala mobile that has been, let me say, abrogated 10, 15 years ago. So there is no natural, no 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 percent realignment for labor costs. In other countries, it depends. So we have, let me say, put in every country an increase of labor costs. But, let's say, it depends As I said, in some parts it's automatic, and in other countries are, let me say, driving 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.

Okay. Many thanks.

The next question comes from Giuseppe Grimaldi of BNP Paribas.

Good afternoon everybody. I have actually two questions. The first one relates to the 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 questions relate to the energy. If I remind correctly from the latest call, you mentioned energy as something like more than 20 million headwind into the EBITDA of the year or something like that. So if you look at the current spot price, do you think it is still fair to assume a headwind from energy cost in the world year?

There you go. Okay, as far as the energy, I take this one. 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 is 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, is not always easy to hedge or is almost unedgeable in strict terms. We see that there is a favorable development in that the prices that we have envisaged and forecast and 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, that 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, you know, prices of almost everything shot through the roof. So we have to be cautious. But if trends continue, I think there is, you know... 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 evident 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 mid-year. because of just mechanical factor, either comps, but also because we think that at some point these interest rate hikes will have sort of run their course and the market should start to react also because, as you know, there are significant public investment programs in the different countries sustaining repair and maintenance, sustaining infrastructure, construction projects, etc. So We're not like, you know, usually optimistic, but we are confident over the medium term that the output 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. I hope to have, you know, answered your question.

No, thank you. Thanks a lot.

Gentlemen, at this time there are no questions registered.

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