Imerys Sa Ord

Thank you, and good evening to all of you. Thank you for joining us today, as usual, to review Imerys 2023 first half results. With me today, Sébastien Rouge, our CFO. And as always, let me start by sharing with you a few key messages for the semester and for the quarter. Iberis posted a very resilient performance in the first six months of the year, achieving sales of 2 billion euros approximately, current EBITDA margin of nearly 17%, and even 18.3% in the second quarter, and net current free operating cash flow of 135 million euros before strategic APEX, significantly ahead of last year. Sebastian will walk you through the financials in more details in just a few moments. I would say that this is quite an achievement given the record high comparatives of last year. I remind you Q2 was probably the best in the history of the company. And an overall challenging context we are operating in, continued customer destocking, macroeconomic weakness in key end markets, and I will come back on these topics a bit later. Once again, Imerys demonstrated what we can do well, cost management, cost discipline, positive price-cost balance, which are definitely core strength of the group. And pricing, important, holding well, as you can see on the bottom right of this page. Let me now walk you through a few of the key events of the second quarter, 2023. First, we made significant progress on our lithium projects. At the end of June, you're aware, we announced the creation of a joint venture with British Lithium with the objective of creating the United Kingdom's first integrated producer of battery-grade lithium carbonate. Imerys contributes its lithium mineral resources, land, and infrastructure for an 80% share in the JV. British Lithium brings its bespoke lithium processing technology, IPs, technical team, and a very nice pilot plant for the remaining 20% in the JV. So far, we have assessed a lithium deposit containing 160 million tons of inferred resources at 0.54% lithium oxide content, indicating a life of mine potentially exceeding 30 years based on the capacity of the plant we would like or we plan to build. In fact, we target an annual production of 20,000 tons per year of lithium carbonate equivalent, enough to equip the equivalent of 500,000 cars every year. This by the end of the decade. This announcement came just a few weeks before the decision of the Tata Group. I don't know if you are aware, recently announced, owner of Jaguar Land Rover, to build a gigafactory for batteries in the UK. That will be a major boost for the economy, but also for the British car industry, very close to our future operations. The combination of this, as well as EMILY, that you know better, would make Imerys the largest integrated lithium producer in Europe by the end of the decade, representing more than 20% of the announced European lithium output by 2030. If we now look on the right, on the EMILY side, on our French project, another step was achieved with the completion of the scoping studies. for Emily, confirming its economic viability. The pre-feasibility study, which is the next technical step, has been launched and is underway, as long as the permitting process for the construction of the pilot plans. We have also filed and applied to the, what we call CNDP, La Commission Nationale du Débat Public, which is a necessary step to hold a public consultation, which will probably take place sometimes in the first half of next year. Quite important, or very important, I would say, we produced a laboratory scale, the first battery-grade lithium hydroxide from the French granite. Imerys technology and process are validated by these encouraging results, and for me, played a way for the next steps in this key project. If we now, on the next page, look at our strategic CAPEX program and innovation roadmap, I will say two important elements. We commissioned, in the month of April-May, the third production line of Carbon Black at our Wilburg site in Belgium. We target at least 60 to 70 million euro sales once at capacity. Fourth line, I remind you, is under construction on time and on budget and should be completed by mid of next year. We're also accelerating our investments in research and development in this field. We just installed a new carbon black R&D reactor whose commissioning should come really in the next days. Very important to develop the next generation of conductive additives for batteries. I think also worth noting that we entered a cooperation agreement with the MIT of Boston to develop the next generation of carbon blacks for batteries, leveraging the capabilities offered by this brand-new, innovative reactor. Not only we invest in research and development and on CAPEX, we also progress on our decarbonization roadmap. We signed a long-term contract with E.ON. I guess everybody knows E.ON, a big producer of electricity and distributor of electricity in Germany, to build an energy recovery plant on our Belgium site at Wilburg. We will use part of the energy, but the large majority of the energy produced by this unit will be supplied to the local grid in Belgium to satisfy the equivalent of approximately the consumption of 40,000 households. The installation of this energy recovery represents definitely a major step forward for a more sustainable carbon black, first of all, And secondly, also will help to reduce CO2 emissions on site by more than 70% or more than 90,000 tons per year. A second important project in Lombok in California, we partnered with TotalEnergies to install a very large solar panel and energy storage systems. The unit will cover at least 50% of the site's current electrical needs with renewable energy and reduce our CO2 emission by at least 7,000 tons per year. Let's now look at our end markets. Let's start with construction. As you know, it's the most important for the group, representing around 40% of our sales. Markets continue to slow down both in Europe and North America, maybe less so in other parts of the world. The drop in the U.S. is the fourth consecutive quarters, and I find it particularly impressive. High interest rates, lower activity levels continue to have a negative impact on the sector and, of course, on our business. The Asian construction market was helped by a slight improvement in confidence reopening of China to be seen if confirmed. On the bottom part of the slide, private consumption or consumer goods remain sustained in all geographies, especially in China, with large reserves of household savings being released now. U.S. is expected to remain robust thanks to a resilient job market. Bit less confident for Europe, where we fear a recession on the back of persistent inflation or more persistent inflation. Automotive on the next page. Definitely one of the few bright spots in terms of end markets in the quarter. Good rebounds. Of course, starting from a lower level, and probably we are still below 2019 level, so pre-crisis level, so still margin for improvement, but definitely good order intake and good development. Even China, with new subsidies being announced, is expected to rebound significantly. As the second part of the slide shows, in general, in the world of energy and renewable energy, so lithium-ion batteries, we do see the market after a dip in Q1 returning to solid, healthy growth. Maybe a bit less on electronics post-COVID. On the last page of markets, and maybe the least positive news, Industrial production impacted differently depending on the geographies, but certainly on a negative trend for the U.S. and for Europe, where Imerys is more present. Better in Asia, especially in India. China, yes, improving, but I would say less than markets had expected a few months ago. Pepper production, as our notes, continue to decrease on the back of very high inventories. And iron and steel also heat, typically as a consequence of construction and low industrial activity, especially in Europe. I would say due to, as I said, the general slowdown of economic activity and construction business. I will now hand over to Sébastien for a more detailed analysis on our financials.

Thank you, Alessandro. Good evening, everyone. Let's go through some of the key aspects of our financial performance in the first half. Sales reached 2 billion, a 7.4 decrease compared to H1 last year, which was a high comparison basis. You remember the second quarter in particular of 22 was one of the best in the history of Emery's. The decline was mostly driven by a $271 million volume decrease corresponding to a drop of almost 13%. On a like-for-like basis, revenue is down only 5.6% thanks to a positive price effect of $152 million. Prices are still up more than 7% as compared to the same period last year. Revenue also includes a slightly negative currency effect of 13 million. This mainly reflects the depreciation of U.S. dollar against the euro. I remind that because this impact will increase in H2 if exchange rates remain at current levels. If we now look into more details at our two business segments and their respective markets. We start with performance minerals. This segment generates 67% of the group's turnover, with global sales reaching 1.3 billion in the first half of this year. Overall, the activity levels were low across all geographies, with like-for-like revenue downs 8.7% in Q2, which was a very high comparison basis. If we look at the applications, Ceramics and paper-related markets continued to be impacted by destocking and mill downtimes. This was only partly compensated by the rebound of the automotive market. On the half-year, sales drop is limited to 2.5% on an organic basis. EBITDA decreased to 215 million euros. and its decrease is mostly linked with volume shortfall and an unfavorable business mix effect. We have to remember that also for margin, H1 last year was at peak levels for performance minerals. Looking now at our high-temperature materials and solution, sales of our second business segment totaled 648 million in H1, representing 33% of Imerys' consolidated revenue. In H1, the decrease of 12.2% of this business segment, like for Wallach, stemmed from lower revenue from the construction sector simultaneously in Europe, in the U.S., and even in China to a lesser extent. Only the Indian market remained robust. The lower level of profitability for this segment is suffering from lower sales and production volumes, especially due to continued destocking and low activity in refractory and abrasive sectors. If we go now to the group's profitability as a whole, the current EBDA for H1 reached $331 million, down 11.8% year-on-year. This evolution is a combination of several factors. The first one is the strong price effect contribution for $149 million, which more than compensated for the $70 million net increase in variable fixed costs and overhead. This is the consequence of the carryover of price increase in 2022. We can note a slowdown of the variable cost increase in Q2 versus Q1. It was 50 million euros. It's 18 in Q2. We anticipate this trend will continue in Q3, taking into account the benefit in particular of lower European energy prices and lower transportation costs. We can note as well that in spite of labor and service inflation, fixed costs and overhead are in absolute value at 2022 levels, reflecting savings actions that have been implemented. These savings and these actions will carry on during the second half of the year. Finally, we benefited from the contribution of dividends from JV and Associates, Reported on this graph in the last variance column, this explains why this variance is positive 17 million in spite of inventory reduction efforts. As a result, current EBDA margin is resilient at 16.7% above the level that we saw in H2, 22, which was 16.1%. 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 the positive development of non-cash item, in particular depreciation, and also, again, the contribution of joint venture, which is higher on the P&L than the dividend that we received. The current operating income does reach 218 million euros at 11% of sales. The net financial result was negative at 26 million euros, slightly above last year levels because of FX variations. The current net income from continuing operation just decreased by 7.1% to 139 million euros. Other operating income and expense were negative at 38 million related to the disposal and the reorganization activities. All in all, net income was at 145 million versus 192 million last year. Let's now look at the cash flow generation. we reported a current free operating cash flow of 96 million with a small improvement of the operating working capital. We start to see the first impact of a normalization of inflation, which penalized us a lot in 2022. The 11 million decrease in operating working cap compared to December last year is the result in particular of tight management of our inventories and receivables. These three operating free cash flow figures include $178 million in paid capital expenditures. Out of them, we have $39 million of strategic capex. These strategic expenditures include the end of our Jade project, the performance mineral plant which has been commissioned in China, and the line 3 and 4 in Villebrook, and the Lithium Emily project as reminded by Alessandro just earlier on. You remember that we have deliberately increased our gross cap expense as part of our capital allocation strategy. How do these different elements translate into Imerys balance sheet? Thanks to the diversity of our HTS business activity, And even after the exceptional dividend payment of €330 million, we have deleveraged the company and reinforced the balance sheet. At the end of June, the ratio of net financial debt to current EBITDA decreased as compared to December, reaching 1.7 times. In absolute terms, the net financial debt decreased significantly to €1.2 billion. On this good note about Emery's sound financial structure, I now hand over to Alessandro for the outlook.

Thank you, Sébastien. And let me wrap up with one last slide, the way we see the next few months or quarters. First of all, very little visibility into customer demand. and in general on the macroeconomic environments. The latest news that appear in the press are not very optimistic, so we assume that the next two quarters the activity will not improve significantly, but also not degrade significantly. So if that's the case, would the group shall do and has proven in the past that being able to do is, first of all, to focus on costs, cost savings, cost reductions, programs that we have launched and that we'll deliver in the second half. You have seen our, on the variance bridges, the impact of fixed cost and overheads in a year where inflation is double digit. We basically managed in H1 to keep these costs under control at zero variation compared to last year, therefore compensating entirely the inflation. And I think we can do even better. We do expect savings, variable costs, especially on logistics, transportation, partly on energy, that will deliver in the second half. We expect pricing to remain stable, which in such a deflationary environment will be a good achievement. And therefore, all of this will guarantee stable goods profitability in the second part of the year, although historically the second part of the year is a weaker half considering the month of August and the month of December. Summarizing in this context, I would say we expect to achieve a current EBITDA between 630 and 650 million euros for the full year 23. Of course, assuming no big disruptions in the second half happens under current perimeter, which still includes the paper assets. We will focus on cash flow. We have launched programs to reduce our working capital through better performance of our plans, shorter lead times, and we believe there will be strong cash generation also in the second half of the year. Finally, on a more on a mid-long-term perspective, we do maintain our mid-term objectives as announced last year at the Capital Market Day. We are convinced they remain achievable thanks to our ongoing actions to improve profitability, cash generation, thanks to our geographic footprint, and very diversified market exposure. Good end markets.

and especially our ambitious program in strategic capex that will start to deliver in the coming quarters thank you and now open to your questions ladies and gentlemen we now begin the question and answer session if you wish to ask a question please press star 1 1 on your smartphone and wait for your name to be announced We are now taking the first question. And the first question from Sven Hederslet from Oddo. Please go ahead. Your line is open.

Yes. Good afternoon, gentlemen. Good afternoon, Alessandro, Sébastien, and team. I would have a couple of questions from my side. I noticed a 36 million euro cost from expenses linked to disposal or reorganization so presumably this is linked to the carve out of a paper business can you confirm that this 36 million euro is a one-off and there will not be additional cost in H2 and could you be a bit more specific about when the paper business will be sold. And the clarification on pricing, you mentioned pricing to be stable, but that means H2 versus H2. One should expect pricing to be flat. Is that the way we should look at it? And then a third one, and then I go back in the queue, I think there has been some article mentioning that you offer to buy the 20% of British lithium that you do not own. Can you maybe elaborate on that? Thank you for your answers.

Thank you. Although I let Sébastien explain the 36 million, please.

The main two elements are actually an incremental impairment related to the paper assets. highlighting the latest status where we are in terms of final negotiation. And I will let Alessandro finish maybe on the negotiation itself. Obviously, if we have, it's non-cash, first of all, and obviously non-recurrent, and that's our best view as of today of what shall happen when the transaction occurs. I take this opportunity to remind everybody that there will be also non-cash impacts when we dispose of BERG that we are disclosing in the accounts. of the translation reserves that will be recycled to P&L for large amounts, but that will neither impact cash nor the equity of the company, just an accounting entry. The second big portion of the 38 million is actually a reorganization, small or medium reorganization of some manufacturing assets in China. where we have decided, as we do once upon a time, to combine some operations together, then to announce the closure of one plant in China, not losing the market, but combining our manufacturing assets in this area.

Thank you, Sebastian. A short update on our paper assets divestiture. It continues. It was, we knew, a complicated carve-out because of multi-geography, small plans. I remain confident it will be soon. August, so for sure not now. I hope it will be Q3, but if not, it should be within the end of the year. It's definitely a reasonable assumption. Ongoing, really. In terms of pricing, when we mentioned stable, it's more current pricing remaining stable through the end of the year without releasing much of it. Energy prices are slowly coming to pre- crisis level, pre-energy crisis level. Logistics is coming to pre-crisis level. Therefore, most of the surcharges have already been returned to customers as per agreement. What's left are real price increases needed to cover fixed costs and other increases. So I believe if we can manage to keep current pricing into H2 stable, it would be a great effort, and we will see its bottom line. Your last question, Sven. On British lithium, I have no idea the source of these rumors, but I can tell you there is no truth behind it. We are very happy to join forces. British lithium brings very important aspects to this joint venture the knowledge five years of work on the deposit on the technology a pilot plans and a very entrepreneurial spirit and a bit of english touch in the project so i believe it's a very valuable partner and today there is really it's really a pleasure to be together it's working well And I count in developing this project as rapidly as Emilie in France.

Thank you. Thank you for your question. And we are now taking the next question. Please stand by. The next question from from Berenberg. Please go ahead. Your line is open.

Hello. Hi. Good evening. Thanks for taking my questions. I have one on your guidance. Maybe can you explain if I take the midpoint of your 630 to 650, that implies that the second half should be down 10% year-over-year. It was down 3% in Q1 and now it's down 18% in Q2. Maybe can you help me understand a little bit what are your assumptions for the second half of the year in terms of cost probably and also pricing? The second one is on synthetic graphite and carbon black. As we know, you are investing big time here. I would like to understand a little bit if there's any capacity pre-sold at this time in synthetic graphite and carbon black. Anything you can discuss would be helpful. And the last one is on working capital. It's nice to see some working capital release now. It would be great to have some color how you think about that going forward for the remainder of the year. Thank you.

While Sebastian looks at the figures and will answer to you in synthetic graphite and carbon black, I am not sure if this is the right word. What we have announced when we invested in the third and in the fourth lines of carbon black, as well as in the second expansion in synthetic graphite, all these three latest investments are largely covered by take or pay agreements with our key customers. And therefore, for me, as you say, pre-sold, yes. And we did not commit the entire capacity. We do want to have some freedom to serve other customers. But the bulk of the business is secured mid to long term, really with top tier customers and guarantee of take. Sebastian, do you want to take?

The way we built H2, I would say, is well in line with what Alessandro has said. We intend to still suffer from volumes, that's for sure. The comparable will be easier, but in absolute value, we do not expect a large improvement. We will, and it was explained, I would say to a certain extent, give back a little bit of price what is actually related to energy and freight and keep the rest. We will, and we are clearly banking and we are securing a cost decrease on the variable side. Two comments I could do on that. You have in mind freight and energy are the two biggest external variable costs that we have. We have the habit of contracting on a 12-month basis our freight contracts They typically are June to June type of contract, and we are actually secure the significant decrease of freight costs that will kick in in the second half of the year. You have in mind the freight represented last year more than 600 million euros at the peak of 2022 costs. Energy, same thing. I think we have discussed that in prior calls. We have an habit of edging energy costs. During a big portion of last year, we did not edge in order not to freeze costs at a very high level. Since the beginning of 2023, we are back in a position to edge, and we have therefore secured a way cheaper energy price, both gas and electricity in Europe, in H2 as compared to H1. So when we blend all these factors, that's roughly what we show, a little bit of uncertainty of the volume, positive certainty of the input costs, Question mark and I would say market-driven decision on the pricing. That's where we see H2 slightly lower than H1 in the worst case.

If I may add, Adrian, purely math, as you said, if you take the middle or let's say the middle of our guidance, it would mean a second half at 310. 320 million EBITDA for the second half, which compared to the first half is very close, 330, which would be a significant improvement compared to last year, where the second half was around 30 million below first half. I remind you that second half has August and December, so I believe it means a significant improvement in performance. Sébastien, you want to comment on working capital?

We are not very vocal about guidance and targets on working capital. I would probably stress two main factors anyhow. First of all, a mechanical factor. We suffered a lot collectively. We were not the only one of inflation last year, which has increased working cap. I would say this inflation mostly is over. So at least it will not increase further. So receivable inventory will increase. be at equivalent volumes at the same level of last year. Our volumes are decreasing and obviously we are working mostly on the inventory side at adjusting so Honestly, our target is to keep on decreasing the working gap. I will not give a specific figure, but we have seen the really inflation points in this first half of the year, and we expect that to continue again, both by mechanical value factor, by the impact of volume, and by the impact of the work that we are doing throughout the organization. There has been, you know, a race during 21 and 22 to pile up inventory of every person on the planet because logistics was scarce. I would say now we are back to normal and back to readjusting our inventory levels in particular.

That's helpful. Thank you.

Thank you for your question. we don't have any other question at the moment but if you wish to ask a question please press star 1 1 on your telephone we are now taking the next question and the next question from morad limit for bmw please go ahead your line is open

Yes, good evening, gentlemen. Most of my questions have been answered, but I have one left. In 2022, I think that paper-related businesses accounted for 9% of your sales. Has this share remained stable in H1, or was there any big difference compared to that? Thank you very much.

Hello, Murad. I see if Sebastian can find the proper number. Your assumption for last year is correct. It was around 9% to 10% of the business. Proportionally, this year, 2023, the paper business, as you saw in the analysis of markets, suffered the most. So definitely is the biggest drop in volumes that the group saw in 2023 is for the paper market. And therefore, mathematically, the percentage on overall group sales is dropping mathematically. Definitely.

Do we know what? We're still in the 9% range overall.

Okay. It loses one point, but it's the market that has suffered the most. An extremely strong 2021 in the paper world with very high prices for our customers. Everybody's been producing. So I would say the consumption of paper has not changed significantly other than the natural trend that we all know. But extremely high inventories have had a significant impact on the first part of the year. So this market suffered more than any other.

And if we had to take out the EBITDA contribution of paper from your guidance of 630, 650 million, what would be this guidance?

We said that it's pretty much aligned. It was a business of around 400 million, and it's pretty much aligned with the group EBITDA. That's what we always communicated. So if you do the math, you can easily get to what could be a quarter or a few months of EBITDA.

Okay, thank you very much.

The business itself is, from a profitability point of view, aligned to the group. It's simply the declining profile that needs to be addressed on a regular basis.

Thank you for your question. There are no further questions at the moment. I will hand the conference back to management for closing remarks.

Thank you. First, I would like here to thank Vincent Goulet, who has been our investor relations vice president for a long time, and I know that all of you on the phone know him by now. and if you don't, you have not done your job properly. He's not leaving the group, but he's moving to a new task, and he will join the EMILY team to develop this fantastic project we have. And British Lithium as well, sorry, in the lithium world. He will be substituted by Cyril Arangiag, who some of you might have met already, and if not, he will be the one accompanying me and us in the future. He has been for many, many, many years in the group, so he knows inside out our activities, our markets, our customers, and our structure. The second point is to thank you all for this call, and we wish you probably a good summer. Thank you very much.