Imerys Sa Ord

Ladies and gentlemen, thank you for standing by and welcome to Vimerys Q1 2023 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question, you will need to press star 1 1 on your telephone. I would now like to end the conference over the CEO of Vimerys, Alessandro Dazza. Please go ahead.

Thank you and good evening to all of you. Thanks for joining us today, this evening, to review Imerys Q1 results. With me on the call, as usual, Sébastien Rouge, our CFO. Let me start by giving you some highlights of the quarter. A tough quarter. We saw these challenging market conditions already developing in Q4 and certainly continued in Q1. Even in this volatile market, Imerys delivered robust results and succeeded to reach a billion euro in sales, basically in line with last year at historically high levels. Volumes were down, impacted by different reasons. Paper markets, first of all, a general weakness in industrial markets, and you will see in the market trends that triggered a continued destocking also in Q1, and the construction markets, which suffered both in the US and in Europe, low activity on the back of rising interest rates and tightening credit. Nevertheless, we demonstrated the resilience of this business and posted a current EBITDA above 15%, higher than Q4, so the trend goes in the right direction. thanks especially to solid pricing and good cost management. I would say another proof of this resilience is the double-digit increase in current operating income, 15% increase at €105 million compared to last year, and also in net current income from continuing operations up 12% versus last year. As said, all of this was possible thanks to solid pricing actions that more than offset variable and fixed cost inflation, inflation that remains, as we all know, quite persistent. If we now move on to the next slide, we deep dive on different markets. Let's start with the most important for the group. As you recall, around 40% of our exposure, construction markets. You see here the numbers on the top part of the slides. Slowdown, both in Europe and North America. A bit less in the remaining part of the world. What I find impressive is really the U.S. Two consecutive quarters negative and 10% down this quarter alone. These are really impressive numbers in the negative way. It said Asia was better and China seems to be restarting thanks to some policies of public support to the construction industry. Good news from consumption and consumer goods. Private consumption remains sustained basically in all geographies and we see a strong momentum in China after many quarters of COVID lockdowns. Going forward, we expect the U.S. to remain quite solid. Whereas Europe could eventually suffer from a higher and more persistent inflation ahead of us. On the next page, I would say one of the strongest markets in the quarter, automotive. Bright spots, picking up strong rebounds. As you can see from the numbers, very nice. We are still way below 2019 levels or 2018 levels. So I believe there is more positive news to come. But we enjoy still a good level of activity. Asia, especially Asia down or not much as up. Drag down certainly from China. The subsidies incentivizing electric vehicles expired in December 22. So there was a rush to purchase new cars at the end of the year with a consequent slowdown in Q1. and the same impact you see on the second part of the tables on what we call energy and electronics. Clearly, mobile energy down into one because of this Chinese effect. I remind you China is by far the largest EV market in the world. Also inflation has caused the slowdown of the electronic markets, entertaining market. On the next page, industrial production. impacted differently according to the region, certainly soft activity in the U.S. and in Europe, caused by rising interest rates, low corporate investments. Asia, well-oriented or better-oriented, strong in India, and China finally restarting, and we do expect more to come after the end of the COVID lockdowns in the second part of the year. Last, a word on the bottom part, a word on paper. Terrible quarter, Q1, with very low production and activity on the back of energy prices and mills shut down, but also iron and steel. As expected, especially in Europe, I would say general slowdown of activity and, again, high energy prices having a negative impact on activity. Sebastian, I hand over to you to give more answers. on the financial results.

Thank you, Alessandro. Good evening, everyone. We will walk through some of the key aspects of our financial performance and start with revenues. TES reached 997 million in the first quarter, a slight 1.6% decrease versus prior year. mostly driven by a flattish organic growth at minus 0.9%. As we have seen already in 2022, the contribution of price has been significant throughout the quarter, also decreasing in Q1 as compared to Q4 last year. It was above 18% in Q4 and offsetting a big part of the volume shortfall. The perimeter and currency effects were limited, reflecting small divestiture in hydro-scaroline business last year and the strengthening of the USD versus euro as compared again to the first quarter of 2022. If we look now into more detail at our two business segments and their respective markets, we start with performance minerals, The segment generates 68% of the group's turnover, with sales of $677 million in the first quarter of 2023. Geographies saw different trends, with like-for-like revenues up 4.4% versus 22% overall. If we look at the market, on one end, the mobile energy market was weak due to the end of subsidies in China, and the construction industry was impacted by rising interest rates, and that was true both in Europe and in the U.S. On the positive side, the consumer goods sector all do well. We have noted as well a significant rebound of the automotive market, but we are still not reaching the levels of 2019. If we look now at our refractory, abrasive, and construction business, our second segment recorded sales of 320 million in Q1, representing 32% of Imerys' consolidated revenue. The revenue was still impacted by a low level of industrial activity and customer stocking, in particular in Europe. The business benefited from building an infrastructure resilient performance, but activity in Asia remained supportive with a strong momentum in India. The rebound in China post-COVID restriction is just starting. Now, how does it look like for the group profitability as a whole? Current EBITDA for Q1 reached 151 million, down 3.4% year-on-year, so very close to last year's Q1 level. The evolution reflects a decrease in volume contribution for 57 million. We have a positive continued price contribution of 111 million, which compensates for the 50 million net increase of variable costs. That is the consequence of continued input cost still at a high level especially when we compare to Q1 2022. And we have to note that our price contribution also more than offsets the increase of 16 million of fixed costs and overhead, which is impacted by inflation. As a percentage of sales, the margin is very slightly down as compared to last year, but increased from 14.8% in Q4-22 to 15.1% of sales in Q1 this year, proof of the group's resilience, even with lower level of industrial activities. If we look now at the other elements of our income statement, In absolute terms, the current operating income variance is better than the one of EBITDA, thanks to positive development of non-cash items, depreciation, and contribution of joint venture and associates in particular. Current operating income thus reached 105 million euros in Q1 this year. Net financial result was negative 12 million impacted by some FX variations. Income tax of 25 million corresponds to an effective tax rate of 27% in line with last year. Current net income from continuing operation does increase by 12.2% to 68 million in the quarter. we note a positive contribution of discontinued operation and the booking of the final disposal of our HTS transaction. All in all, net income was at $101 million, above the figure posted last year of $73 million. On this fast summary, I end it back to Alessandro for the conclusion and outlook.

Thank you, Sebastian. So, let me wrap up this short presentation of our Q1 results. So, we see clearly a volatile market with different dynamics and trends depending on the geography and really on the end markets. On one side, construction and in general industrial applications were weak, are weak, mostly due to high interest rates and destocking. probably expected to remain soft in the nearby future, again, on the back of credit tightening. On the other side, we see more positive side. We see business in the second part of the year should gain momentum thanks to much lower energy prices, especially in Europe. That should foster economic activity. This talking will be over. The automotive market is rebounding. And we do expect the Chinese manufacturing world to accelerate as well as, and of course, drive also the mobile energy business. So we really believe this softness was a quarter and the long-term view remains very positive. In such a context, we need to remain cautious and prudent. We will continue to focus on costs and cash management. because we want to preserve, as we have shown in this quarter, our margins. But we will continue also to invest in growth opportunities along our path, because we are convinced that we will achieve our midterm objectives. Thank you. And on this, I open the floor to questions.

Ladies and gentlemen, we now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 1 on your telephone. If you wish to cancel your request, please press star 1 1 again. We are now taking the first question. Please stand by. And the first question from Van Hedershelt from Hodo. Please go ahead. Your line is open.

Yes, good evening, gentlemen. Thank you for taking my question. A couple for me. First of all, can you give us a sneak preview of what kind of deposit you have in Cornwall? I remember at the same period last year, you basically gave us some elements of the deposit. That's the first question. Second question, can we assume that was probably the worst quarter? and therefore the volume are improving in Q2 to, let's say, zero in Q3. Finally, on the pricing, can we assume that you will start to remove your energy surcharge in Q3 or a little bit later in the year? Thank you.

Thank you, Sven, for your questions. On Cornwall, when we spoke last time, I think it was end of the year or maybe even the full year results, we said that before the summer, we should have a good view of what we have, and therefore, if we have a business case. And I confirmed that before we go on vacation and certainly before our results in July, we will have these answers. The drilling campaign is ongoing intensively. We have feelings, but it's too early to give you an answer on what we found, in which quantities, in which quality. So bear it with me another really couple of months, and we will deliver all the answers as soon as possible. On volumes, I think we have touched the bottom. We do see markets – we do see, first of all, the destocking coming to an end. Customers that have not ordered for quite a long time reordering. Big quantities, no. Very prudent, especially in certain industry, construction and industrial applications. But clearly, we see a trend in the right direction. Very volatile, and that's why making, first of all, we normally don't make provisions so early in the year, but making really a commitment, it's quite difficult. Personally, I am convinced the worst is behind. we should see a Q2 improving compared to Q1. If you look at last year, Q2 last year was the best quarter in the history of the company. So we will have a very strong comparison basis, but fine, we know it perfectly. As long as we see the markets rebound and go in the right direction, I think we will deliver good results. And I want to believe, and that's what institutions say, the second part of the year, Europe as America should come out of this slowdown and move back to solid growth. So that's the way I see it as of today. In terms of pricing, your assumptions are relatively correct. As you recall, about half of our pricing was energy surcharges. Basically now, so April, May, in Most of countries, or let's say largely in Europe and in the U.S., the main economies, energy is close to pre-crisis level, and therefore these energy surcharges are coming to an end, or very little, but it was half. So I'm convinced we will keep some pricing effect in 2023, and other costs have raised, salaries have. fixed costs, meaning especially salaries, this year we do expect a higher impact compared to last year. And this, of course, we need and we will translate into fixed price increases for the year because they are needed. So we will see a price effect going forward, maybe not the 11%, 12% that you have today because the comparison basis is higher and because some surcharges will drop. but we will certainly continue to see a price effect also in Q2 and probably little, but still there in Q3, Q4.

Thank you very much indeed.

Thank you for your question. We are now taking the next question. Please stand by. The next question from Murad Laimidi from XM. Please go ahead. Your line is open.

Yes, good evening, gentlemen. I have three questions, please. So the first one would be on the guidance that you, I mean, the indication that you pointed out for 2023. Is it to say that you will be able to deliver your medium-term guidance of 3 to 5% growth even in 2023? Then second question is on the variable cost inflation. Do you expect to see the drop in freight costs and energy costs in your P&L from now on? And finally, a question on the depreciation. It seems that your depreciation has dropped quite significantly. Is it due to the deconsolidation of HTS? Could you give us an indication of the depreciation as percentage of cells on the new proforma? Thank you.

We'll let Sébastien answer the third question, which is more technical. In terms of guidance, We do not issue guidance this early in the year, so it will be more a topic for our half year results. The three to five percent growth that we have announced, it's an average growth over the next three years, and I remain fully committed to deliver it, and also convinced that we will. We knew when in November we presented this trajectory, we knew that Q4 and Q1 would be difficult, because we saw the slowing down of construction, the interest rates growing. So we were fully aware. Probably it's coming a bit harsher than expected, but it's a moment in the trajectory. I remain fully committed. Will we already post it this year? It depends a lot from the second half. We count a lot on the recovery of automotive on China and especially mobile energy. Our line three is coming online as we talk. It's producing, and this will be a big contributor in top line and profitability. So if we can fill it rapidly over the next eight months, we will see it in our numbers. If the mobile energy, so basically electric vehicles, remains soft, It might take a bit longer, but mid-term, that's why I remain fully convinced and committed. On the variable cost inflation, your assumption is right. Energy has been going down basically continuously, now probably stabilizing. We see gas between 40 and 50 euro per megawatt hour. We have restarted hedging because we believe this price is a reasonable price. Some customers are willing to commit on mid-term purchases if we commit mid-term pricing, which we're willing to do now that we have visibility, and we will see the effect of this lower gas price in our P&L. We've start to see it in Q1, and we will see it more going forward. A bit less on electricity. Electricity is today, I would say, something around 120, 150 euro. It is still twice as much as before. Of course, less than half of what it was a few months ago. The issue with electricity, it's very difficult to hedge because the spot price is much, much lower than long-term pricing. So if it stays at this level, we will remain non-hedged. We will profit from the spot price. We will see costs going down in our P&L. And that's why what you said is, again, correct. I hope this market as well stabilizes once for good, and then we can go back to a much more stable pricing, costing, and that's what our customers are looking for. In case of for freight, we are back to square zero. Freight prices today are exactly at pre-crisis. Advantages and disadvantages, imports from Asia are competitive again, and our high quality products can travel again, especially to Asia, to the US, to South America. So with both sides of the medal, some positives and negatives, but for sure in terms of variable cost, we will see it clearly in our P&A going forward. On depreciation, Sebastian, do you want to comment?

Yes, one point to take into account, and you're right, Mohad, the impact of depreciation is both HTS is out of the perimeter, and also for technical reasons, there are a few millions of depreciation missing because of the application of IRS 15 for the paper business. So that helps a little bit. the current operating income as compared to EBITDA. The second point, which is probably de facto in your bridge, is actually the contribution of joint venture and participation, which we do not count in our EBITDA up until we receive dividends from them, and we have year on year an increased contribution of those.

Okay, very clear. Thank you very much.

Thank you for your question. As a reminder, if you wish to ask a question, please press star 11 on your telephone. There are no further questions at the moment.

Thank you. Then we can close the call here. Thank you very much. It's late in the evening. Thank you very much. And we are available.

We remain... Alessandro, I think there is a question from Jean-Christophe that we see in the line.

We have one question now. Please stand by.

Sorry, I tried... try to ask my question, but unfortunately the system didn't work out. So it is a follow-up question. Is paper-related business still included in the sales and EBITDA or not? A second question regarding energy and transportation. Energy last year, in full year 2022, was close to 550 million euros, and transportation close to 665. Is this amount about to decline in full year 2023, or is that too early to make a prediction?

Jean-Christophe, thank you for the questions, and sorry it didn't work. Now we hear you very well. And Sebastien will give you more information on the number. The easy answer is paper, yes, because of accounting rules. Today, our paper business belongs to Emeris, and it is in our sales numbers. And it's one of the reasons of the volume decline, because paper has been very soft, very, very soft in this quarter. But it is still fully included in our numbers. In terms of energy and freight, Sebastien, the numbers...

I mean, at least what we can confirm in the trend is that, yes, we are very confident to have both freight and energy at lower level this year as compared to last year. A small reminder on the way we operate. For freight, we mostly work with yearly contracts. And that's usually, by the way, start middle of the year. And we know as a fact that the new contracts that will be implemented from the spring onwards is at way lower level than what we have suffered in 2022. And for energy, same thing. Even though Alessandro alluded to the fact edging on electricity is still relatively difficult because the forward are still difficult in European electricity. For gas, even the forward have gone back to acceptable level, and we have covered large amounts of our 2023 exposure. So for gas, which is typically our biggest energy source, we have almost locked down the fact that it will be lower than last year.

Excellent. Merci. Many thanks.

Thank you for your question. There are no further questions at the moment.

Then I'll try again. Thank you very much for being with us this evening. And of course, the team is available should you have any further questions. Thank you very much. Good evening. Goodbye.

Good evening. That concludes the conference for today. Thank you.