Cemetir Holding

Good afternoon. This is the post-call conference operator. Welcome and thank you for joining the Chem and Peer Holding first half 2023 results conference call. As a reminder, all participants are in a 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 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, and Mr. Francesco Caltagirone, Chairman and CEO. Please go ahead.

Thank you and welcome everybody to Chairman Tiroldi's 2023 first half results conference call. My name is Marco Bianconi. I'm here with the Chairman and Chief Executive Francesco Caltagirone.

Good afternoon.

I'm going to go through nine slides presentation deck that you should have received and we leave then room for questions. So starting with the presentation on page two, with the financial highlights for the first half year. Revenues reached €840.7 million, up 1.1% year-over-year. Non-GAAP revenues were €868.2 million, up 5% year-over-year. Cement volumes were down by around 5.5%, mainly due to Denmark, Belgium, the US and Malaysia, partially offset by growth in China, Egypt and Turkey. Ready Mix volumes were also down by 11.3%, with the exception of Turkey, where volumes were up. Aggregate volumes were down by 15.3%. EBITDA, for the half year, reached €200.5 million, up 39.5% year-on-year. Non-GAAP EBITDA was €202.4 million, up 40.9%. It was a higher EBITDA in all regions with the exception of the United States. EBITDA includes non-recurring income of €7.5 million relating to capital gains on asset sale. Non-GAAP EBITDA excluding non-recurring items is €194.8 million, up 35.7% from the same period of last year. EBIT was also up significantly, 68.4% to 138.5 million euro. Non-GAAP EBIT was 143.6 million euro, up 65.4%. Group net profit reached 90.3 million euro, up 35.6%, whereas non-GAAP net profit was 109.8 million euro, up 78.9%. Net cash generation was strong. We reached a net cash position of €11 million, an improvement of €90.5 million year-on-year, including €34.2 million of dividend distribution. Moving to the next slide, the number three, with the most important region, that's Nordic and Baltic, accounting for 40% of group EBITDA. You can see that cement volumes declined as domestic demand was affected by unfavorable weather and slowing demand due to higher interest rates partially compensated by cement supply to some infrastructure projects like Furman. Lower exports also were due to a decline in some markets. Ready Mix and Aggregates volumes were also down 19% and 27% respectively. Despite that, the EBITDA increased thanks to a careful management of energy and distribution costs. Therefore, we returned to a pre-COVID profitability level in Denmark. In Norway, ready-mix sales volumes declined by 23%. Similarly, due to a slowdown of residential and commercial demand, the EBITDA contraction also was due to lower volumes and higher operating costs, and also the Norwegian krona depreciated by over 13% versus the Euro in the period. In Sweden, ready-mix and aggregate sales volumes were sharply down as a result of residential sector demand slump. EBITDA also was down due to lower volumes and higher operating costs. And on top, Swedish krona depreciated by over 8% versus the euro. Flipping the page to page number four, Belgium and France, that's the second biggest region accounting for around 20% of Group EBITDA in the period. Here, again, cement volumes declined by 10%. due to a generalized demand slowdown and unfavorable weather. ReadyMix volumes also were down around 7%, and aggregate volumes were down 14%. EBITDA increased thanks to tight operating cost control and increasing selling prices. Next page, number five, North America, accounting for 6% of Group EBITDA. while cement volumes declined by around 14% in line with the decline in the residential market. In particular, deliveries to Texas and Florida suffered from stronger contraction due to competitive pressures from imports and lower demand. EBITDA was down due to lower cement volumes and higher variable cost, despite a higher contribution from our concrete product subsidiary. there was also a 1.1% US dollar revaluation versus Euro in the first half. Moving to Asia Pacific, accounting for 6% of EBITDA, here you can see that in China, revenue was up 1.5% with volumes growing 16% and a lower average selling prices. Sales were negatively affected by lockdowns and the Chinese New Year, but in Q2, volumes recovered and were significantly up like for like. EBITDA includes €2.5 million of capital gains from asset disposals. Excluding the recording items, EBITDA would have been down 18% year over year. We also highlight that the Chinese renminbi depreciated by 5.7% versus the euro in the first half. In Malaysia, The revenue was broadly stable with decreasing volumes, while cement exports were down 12%, driven by a drop in clinker exports and a different calendar for shipments. Domestic volumes increased as a result of good recovery in the construction market. EBITDA grew as a result of higher prices and reduced freight costs. The Malaysian Ringgit depreciated by around 3.2% versus the Euro. Then we have Tarki, which accounted for 23% of group half-year EBITDA. Here, the revenue increased by 38%, with domestic cement volumes up 16%, thanks to significantly higher sales in both Marmara and Eastern Anatolia. Many new projects were started in Istanbul, driven mainly by anti-seismic investments. Cement exports were down 50% because of a higher focus on the more profitable domestic markets. Already mixed volumes increased by 2%, whereas aggregates were down 14% due to temporary operational issues. EBITDA reached €34 million, driven by cement prices, more than offsetting production cost increase and currency devaluation. EBITDA includes €5.1 million of capital gains on asset sales. This is a non-recurring income, excluding which EBITDA would have reached €29 million, up 137.9%. We also highlight that the Turkish Lira devaluated by 32.7% versus the Euro. The last region, Egypt, accounting for 3% of Group EBITDA. Here, revenue declined by 5%. because of the strong devaluation of the Egyptian pound versus the Euro equal to 74%. White cement volumes increased by 8% with domestic deliveries being stable and higher exports particularly to the US. EBITDA was higher thanks to tight production cost and higher selling prices despite negative effect of the EGP devaluation. The last slide regarding the guidance. As you can see, the guidance is to reach €1.8 billion in 2023 revenues. The EBITDA guidance is being raised from a range of €335 to €345 million to €365 million, that is up over 7% from previous guidance. The net cash position should exceed 200 million euro and the capex should remain unchanged at around 113 million euros. With this, I end my short presentation and I leave the floor to Mr. Caltagirone to answer to your question. Thank you. Hello?

Excuse me, this is the close call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on their touchtone telephone. To remove yourself from the questioning queue, please press star two. Please pick up the receiver when asking questions. Our first question comes from Galazzi Emanuele Equita.

Yes, good afternoon everybody. Thank you for taking my question. I have one question about your new guidance. After the very, let's say, strong first Alfa EBITDA, if I look at your guidance for the full year, the implied second Alfa EBITDA is down roughly double-digit, 10-15%. Can you comment on this and on your assumption for the second alpha? Is it related to the cautious approach to Turkey?

Good afternoon. Yes, of course, as you know, with IAS 29, you have to take the exchange rate of the last date of the period and apply to the old period. So it is difficult to forecast, let's say, which exchange rate we will have the 31st of December. And so it is a bit cautious for sure. I think that most of the competitors released good figures like us. But I think that if you see at our revenues, we are increased only 1%, that is due to the very strong headwind about the devaluation of Turkish Lira and the downturn of the Scandinavian market. If you look at the increase of the EBITDA margin and profitability, I think that we are among the best. So the resilience of our market and our portfolio, and also the hedging strategy, and I also want to remember to some of you that in the bad times, Somebody asked, why don't you sell Turkey and buy assets in other places? Now Turkey is kicking in with very good results, exactly when Scandinavian markets are in the downturn. So from my point of view, and from what the results say, I think that we have a well-balanced portfolio. And let's say that if we just, but this is just a simulation, do a sort of rolling 12 months EBITDA the last six months of last year and the first six months of this year you arrive above 390 million euro this is pure math and so we want to be cautious because, you know, look what happened just after the election in Turkey. In one month the devaluation has been nearly 40 percent. So we have a war and we have an inflation and devaluation in Turkey. Besides this, we are very well hedged in the energy price. We think that we know, especially because of the knowledge that we gained in the last 30 years distributing white cement, that the cost of distribution is something that can hit your balance sheet. And you know that white cement is more complex to distribute than grey cement. And I think that, as I said other times, that this is becoming, especially in Europe, a regulated market where you have your quotas. of emission, so you have your quotas of production. And nobody wants to swap a cost of CO2 for, let me say, a margin that usually is one-third or one-fourth of the cost of the CO2. So for this reason, you see that anyway across all Europe, the price are quite resilient. And I think because of, let's say, a linear cut of these emission rights that we will receive in the next 10 years, year by year the market, the possibility to produce cement will shrink. And then with Sibam I mean, the border tax adjustment that will come early in 26, in two years, this will also limit the import of cement. So, what I want to stress is that in the past two downturns that we saw after Lehman Brothers and then around 2011, 12, where the company went back around 100 million euro of EBITDA. Now, if you see in the last three years, our quantity are slightly, let me say, diminishing as a total, but the EBITDA compared to 2019 with the same perimeter is nearly the double.

Okay, very clear. Thank you.

Our next question comes from Bonizzoni Matteo with Kepler.

Yes, thank you. Good afternoon. I had basically the same question of the previous analyst of Mr. Galassi, but I would rephrase. So you have done 200 million EBDA in the first half. It's not due to volumes. It's just due to, so this growth is due to the spread between pricing and cost. And what you have just said now, goes in the direction to think that in the second half pricing could be not so much at risk but I mean can you elaborate on this point but if it is the case why the hell should do in the second half below EBDA compared to the first half in million euro when by seasonality you typically do 40% of even less of EBDA in the first half and 60% of even more in the second half for the simple reason that Q1 is a very small quarter compared to the other. So again, I would say that your new guidance is definitely on the cautious side, but can you a little bit elaborate maybe at least on pricing condition for the second half and what you are seeing maybe in July just to have one more month of labor? Thanks.

We are seeing that, let's say, what we have seen in the first half is continuous. So weakness and the market in the Scandinavian region is stabilizing in terms of decrease. So it's not accelerating the decrease. You can see also on the figure quarter by quarter that is almost stable. the same, the first quarter and the second quarter slide are around about the same. The answer is the same. I mean, if the Turkish leader that, as you know, we are forced to, let me say, report in IAS 29, but normally, as we do every day, We don't keep Lira until the 31st of December and change the last day. So every day we buy and sell raw material, goats and other things, and we exchange in hard currency. So the real EBDA, I think, is the non-GAAP, but this is what the international standard says. But if you look at the non... the gap number that we released is about 205. Our non-gap net profit for example is 20 million above for the first half the other net profit, the IAS 29. So let's say that if we continue with this situation, we can for sure do better. I'm not so sure that I have a crystal ball to forecast the Turkish lira value in five months, because let's say, it's difficult. So this is the closure, not because we see... The market, I think, as I said, and probably you already heard from the other players, are stable in terms of price. The Belgian France region, for sure, is still, let me say... supported by the Olympic Games that they will have next year. We, in Denmark, we are starting to see, let's say, a stabilization of the market and also some of the big projects that were announced are starting to kick in. The worst market is Sweden, where we have, let me say, a small part of our revenues. But anyway, as you said, usually the second half is, let's say, as good as the first one. But we have to be cautious. So you know us from a long time. So I want that if next quarter we have... than another, let me say, miles that we can... Because otherwise, if we reach what you say, that this is just the half of the result that we can reach, we already reach the target of 2025 in one year. So I would be very happy. It's a challenge. but let's say it's a possibility today but I have to give you the flavor that we have and this is the average scenario not the best and not the worst so I hope that you understand so that there is let me say good chances that this number can be beaten but today we already rise 7% that among the peers are one of the highest, let me say, increase. Considering that most of the other players increase the revenue between 20, 10 and 30% and we are more or less flat, imagine if we go back to, let me say, the increase of the normal market because we share some of the market with the other players. where the company can arrive not this year but let's say also this is a target so if this year we will over perform there should be also space with the same perimeter if the quantity recover but you can do the math I don't want to let me say do let me say where the forecast I'm happy that to see that the company is very resilient with very strong, let me say, headwinds, and I think that we are well prepared to go through the second half.

Yes, thanks.

Our next question comes from Werner Tobias, Stifio Europe.

Yes, good afternoon, gentlemen. Good afternoon, Elisa. Thanks for taking my questions. Just to clarify, the 5.1 million non-recurring items are within the EBITDA, i.e., the 35 million. So if you adjust, that would be your purely operating uplift from Turkey. Is that correct?

No, this is not an evaluation. This is just we sold some assets in China and in Turkey, and the sum of both is 7.5. So in Turkey it's 5 million. But it's a real sale with the real money that we received. And this is within the 35 million of EBITDA.

And just to get a sense of the cash cost in Turkey, should we assume that, I mean, you're talking about here cement exports were down 50%, which is a lot. What sort of volume should we assume in tonnage for the overall business on the back of that? You mean in Turkey? In Turkey, yes. Domestic plus exports. Okay.

One moment, please.

Thank you.

Okay.

We think that we should have both domestic and export that should be above 4 million tons.

For the year?

Yes, for the year.

And for the half year, where were we there? Roughly.

We were at... More or less the half, I mean, because in Turkey there is not a strong seasonality, but let's say that more or less we are, yes.

Okay, so it sounds like your cash cost is around 65 euros per ton, which sounds high for Turkey. I would have assumed it to be lower. Is this really... The devaluation and local inflation kicking into the cost space. I mean, I would have assumed Turkey has a cash cost of, let's say, at the higher end, maybe 50 or so. Maybe I'm not up to date.

But you know, there is a lag, especially for electricity. Today, you are aware that in Europe, the electricity came back to around 120, 150, right? In Turkey, they are around 250. So there are six months of lag because it's a different country. So we started... Last year, we were... When the market... were skyrocketing above €300. In Turkey, we were buying electricity at €100. And now, let's say, there is a delay, but at the end, let's say, it's also important, it depends also on the stock, which is the cost of the stock that we have. And it's not the actual production, but let's say, it's at which price, let me say, you have produced. And if, let's say... Now, for example, the average inflation this year for the first six months has been 20%, last year 40%. The government thinks that they can end up around 35. We don't believe that they will end up around that number, but above. But anyway, let's say when you have this kind of inflation, there is a space not every week, but once or twice a month to, let's say, increase the price. And so if you just make, let me say, the calculation at a certain point, it seems that the cost of cement is high. But it depends that cement that I produce today, at which price I will sell in a few weeks. and if the inflation is above the devaluation, this increases the return in euro. I know it sounds weird and difficult, but I mean, at the end, in euro, if you look at Turkey two or three years ago, where it was below 10 million euro, and with the inflation single digit and the valuation not so high, now it seems that the higher the inflation and the higher is the valuation, the best is for the market. But I already told this last time, that even in 2001 to 2004, when we were for three years in the last 29, for the same reason, we, let me say, recorded very good results. So, I don't think it's the right way to just make at a certain point the calculation because, let's say, the profitability that today in Turkey is around 20%, that is our, let me say, driver. and the last year was probably 10%, the half.

Thanks for that. I mean, one more question if I may. You talked about electricity and with solar energy becoming so competitive, I'd like to get an understanding what the cement industry would gain by investing in more renewable energy or solar energy here. In other words, when you look at your costs today on an annualized basis, just remind ourselves how much is your electricity cost and how much could you reduce that by investing in solar across the board?

For sure, from the moment that we are piling up cash and we don't have, let me say, a target as an M&A, as I said a few times, our main, let me say, target to invest the money is to lower the cost. of energy, the intensity of energy that we use all around our perimeter. If we consider that in 2019 the cost of energy were around 190 million and this year is around 400 million You can imagine that, let's say, and the perimeter is the same and the quantity are more or less the same, that I have space and possibility and there are return today if you invest in wind and solar power, especially in the Nordics for the wind and solar in the French-Belgian region and also in Turkey. We are looking at several projects. Some projects are also co-financed by some states, some countries and funds. And also there are a lot of activities in some energy players to share this kind of project because we are a big energy consumer and so they want, let me say it, they come and say, if we build a solar park for you, and you assure me that you buy for the next 10 to 15 years the electricity at this fixed price, we will take charge of the investment. So this is, let me say, we are investigating which is best from the moment that we have cash, that if we want to invest anyway directly, or if you want to go through this kind of proposal that are arriving every week because let's say today even in Denmark it seems that to produce energy with solar panel is let me say lower in terms of cost than buying from the grid directly Then there is the issue of the internal intensity of both of them, and so you need to balance this. I mean, the maximum that we think we can use from these renewables energy are around 50% to 60%. 40% till the technology won't give us... a battery that can last, let me say, 12 hours during night or during bad weather, let me say, but 40%, let me say, we still have to, let me say, take from the normal grid or normal production. But, let's say, our target in our industrial plan, the damage is to lower by investing in energy. So to enlarge the platform of every plant, where today we just produce and distribute building materials, we can also, as we already do since the last 30 years in Aalborg, where we sell district heating to nearly 60% of the population, nearly 100,000 families, So there is the possibility to sell, to use the energy or to sell the energy to the surroundings. And with this price, I mean, with price above 100 euro, projects that probably three, four years ago with the electricity that, you know, were flat around 40 euro per megawatt, now are becoming, let me say, profitable or very profitable. So, what you say is right, and I think that I am more keen to invest in the next two or three years in this kind of project, including also carbon capture and sequestration, that is, let me say, the mantra of our, let me say, sector. We have to solve this problem in the next ten years, but this is the way we see we can invest the money and to have a good profitability and not to buy let me say other heavy asset I mean cement because ready mix and aggregates let me say are let me say lower in terms of scope one emission and so you can let me say we can continue to invest in both of them, even in precast, let's say. There are these three sectors that are, let me say, close to the cement production. But for sure, now we are aiming to lower the cost of the energy for the long-term period.

Thank you for this very comprehensive and exciting answer. you pointed to sort of diversification into lower carbon materials. Is that going to feature more strongly going forward as well?

Sorry, can you rephrase the question?

What is the... Yeah, so the question is, Mr. Katajorone referred to lower carbon materials with scope 3, 2 exposures, 2 clinker and others. In other words, are you on top of improving your carbon footprint via investments in renewables also considering investing into other product areas, close product areas or investing more in these areas?

Yes. Yes, yes. This is what I mean. But you know, one cement plant can cost hundreds of millions of euros or really mix or aggregate are in the range of tens of millions of euros so we are investing around our perimeter that is already in 18 different countries also in the distribution because I think that let's say till five years ago Let's say if you were able to produce cement that more or less are the same among the various producers, especially grey cement, with one euro less, you have one euro more of profitability. Probably some players understood in the last two years that if you are not good at hedging energy, if you are not good at distributing cement, then you can have even three euros less lower when you produce but then if you pay electricity 10 euro more or 100 euro more and then the direct cost that we have on cement is 5, 10, 50 euros this can hit your balance sheet and this is the way that we started 3 years ago, 4 years ago to see this let's say energy transition so we need not just because it's good for the environment, but just because it's a waste of money, frankly speaking. So if today there is the possibility to help the environment and to lower the cost and to increase also the quality of cement, because future cement goes in that direction, this is our, let me say, path. And in this part, there are also the investing in ready mix aggregates and probably some, let me say, concrete elements. We don't think to make, let me say, a big jump like other players in a very insulation or completely different, let me say, type of material. We think that... in the next 50 years there will be a huge need of cement to change the quality of our life in the city and to lower the emission that every city produce. And so I think that, let's say, the important is to produce the cement when the technology will be available Thank you so much.

As a reminder, if you wish to register for the question, please press star one on your telephone. Our next question comes from Permuti Bruno in Tessa, SP.

Yes, good afternoon. I have a question related to China. I was surprised to see a rebound of the volumes there. So I'd like to understand if it is something occasional or if it is a trend that could continue in the remaining part of the year. So how do you see the situation there? and a second question is related to prices and it is partly connected with your cautiousness on the guidance from the second half of 2023. I was wondering if you see some room for a price decrease if the volumes will continue to go down in the second half of the year. So if you believe that at the current margin level and at the current cost level, the industry could be forced to reduce a little bit the huge price increases that we saw in the last year. And the last question was related to the Turkish lira. If you have the data of the exchange rate that you used for the first half results.

Okay, talking starting from China. I remember that we produce the white cement and the white cement of our quality. We are the only producer. And so let's say when you have like a luxury goods when let's say the market also downturn, luxury continue to overperform. So we have, let me say, we continue to have good numbers in China even if the market I know for the grey is weak but we sell a different product for the exchange rate in Turkey you are forced to use not the average of the period but the S29 force you to use the exchange rate of the last day of the period that is probably the 30th or 28th, 29th, but I remember it should be around 30 Turkish lira per euro compared to 17, 18 Turkish lira of the same period of last year, so nearly 70, 80% of devaluation. Then, sorry, there was the... So about the resilience of the price, let's say, if you see that... It's already happening, for example, in Scandinavia. I repeat, we are in a regulated market. So today, if you don't sell, you save the CO2, right? And if the margin that you have is, as I say, the 20, 25 euro, and the CO2 are not 90 euro, You are not pushed to say, okay, now I'm going out, I will sell 10% more of cement because I have capacity. The market is going down. Now it's better to save the CO2, especially because with this, let's say, linear cut of 3% for 10 years that will become 30% at a certain point. And most of the players are short, like us, of CO2. And so... if I sell in Europe as now for the time being less cement I save CO2 rights so for this reason I think that I cannot put my hand on the fire for let me say all the players but I think that most of the players won't push to lower the price because, let's say, they can save the CO2 that has a profitability that is three or four times higher than the profitability of cement in every single country. This is the same for, probably still suffer more import, but aluminum, glass, they are more or less in the same game.

Okay, thank you.

Our next question comes from Grimaldi Giuseppe, BNP Paribas.

Good afternoon, everybody, and thanks for taking my questions. The first one relates to volume development. what is basically your view for the remaining part of the year if it is fair to assume still a single digit to a double digit decline or it's something that should improve quarter on quarter especially if we consider that in the second part of last year volume were still weak the second question is on on 2022 figures. If I got it correctly, you restated revenues for H1 2022 last year. If you can give some color on why numbers are different. And the last point is on the M&A. Considering you plan to generate still a lot of cash, you have definitely a healthy balance sheet if there is something that is moving on on the M&A side.

Okay, starting from the restatement, the restatement is just because the auditors asked to put the net, let me say, sale of CO2, because we buy CO2 and we sell the CO2 to the customer, let's say, to put on the revenue. We In the last year, we didn't do that because we thought that it wasn't, let me say, our normal business. So at the end of the year, they asked to everybody, not just to us, to put revenues coming from CO2 in the revenue. And so for this reason, we realigned the first half of last year of nearly 20 million. That is just the CO2. So this is just a technical reason because last year, let me say, last year, yes, was the first year when everybody started to adopt the CO2 cost in the invoice. So this is one of the questions. The other was... We continue to see, as I said, the market weakness, but the weakness that is stabilizing in the Nordics. And in most of the other perimeter, let's say, we see the market that should continue with the same pace. So as you see that we are around minus 5% with cement and with the ready mix and aggregates market. on around 10-11%. We think that we should continue, we should end with this kind, let me say, or level by the end of the year. M&A, as I probably said to the previous question, today we don't want to buy, let me say, big assets because we are not aware of the profitability that you can have in the medium long term because we are not aware of the technology that we will use to abate the CO2 and so for the time being we are investing or we will invest our cash to lower but investing in producing energy that we use directly with renewables both solar energy and wind energy probably in the next year industrial plan you will have some visibility of some projects that are let me say not huge but quite big quite let me say cash absorbing but on the other hand the return is that let me say we will have the energy at a fixed price that it is much lower than the price that we have today. This is the way that we think we are going to invest in the next. Then some small, let me say, opportunistic asset buying, but let me say, in ready mix or in aggregates or in concrete elements. because they are less, let me say, CO2 exposed.

Thanks for the answers. Very clear.

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

Thank you.

Thank you. Bye-bye, everybody.

Bye-bye.