2023-07-28 15:37:04 ET
Imerys S.A. (IMYSF)
Q2 2023 Earnings Call Transcript
July 27, 2023 12:30 PM ET
Company Participants
Alessandro Dazza - CEO
Sebastien Rouge - CFO
Vincent Gouley - Head Financial Communication
Conference Call Participants
Sven Edelfelt - ODDO
Aron Ceccarelli - Berenberg
Mourad Lahmidi - BNP
Presentation
Alessandro Dazza
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, Sebastien Rouge, our CFO. And as always, let me start by sharing with you a few key messages for the semester and for the quarter.
Imerys posted a very resilient performance in the first 6 months of the year, achieving sales of €2 billion 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 before strategic CapEx, significantly ahead of last year. Sebastien will walk you through the financials in more detail 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 are 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 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 U.K. 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 EMILI, 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 EMILI side, on our French project, another step was achieved with the completion of the scoping studies for EMILI, confirming its economic viability. The pre-feasibility study, which is the next technical step, has been launched and is underway as well as the permitting process for the construction of the pilot plant. 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 would only pave the way for the next steps in this key project.
If we now on the next page look at our strategic CapEx program and innovation road map. I would say 2 important elements. We commissioned in the month of April, May, the third production line of carbon black at our Willebroek site in Belgium. We target at least €60 million to €70 million 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, which 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 decarbonation road map. We signed a long-term contract with E.ON, I guess everybody knows E.ON, a big producer of -- distributor of electricity in Germany, to build an energy recovery plant on our Belgium sites at Willebroek. 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 our -- 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 Lompoc, 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. So 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 remains 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. We are a bit less confident for Europe, where we see 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 levels, 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 and 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 on 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.
Paper production as our notes continue to decrease on the back of very high inventories. And iron and steel also hits typically as a consequence of construction and low industrial activity, especially in Europe, I would say, due to the -- as I said, the general slowdown of economic activity and construction business.
I will now hand over to Sebastien for a more detailed analysis on our financials.
Sebastien Rouge
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 million 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 Imerys.
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 2 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 down 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, and its decrease is mostly linked with volume shortfall and an unfavorable business mix effects. 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 & Solutions. 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-like 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 aggressive sectors.
If we go now to the group's profitability as a whole. The current EBITDA 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 '22.
We can note a slowdown of the variable cost increase in Q2 versus Q1. It was €50 million. It's €18 million 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 EBITDA 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 noncash 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 has reached €218 million at 11% of sales. The net financial result was negative at €26 million, slightly above last year levels because of FX variations. The current net income from continuing operation just decreased by 7.1% to €139 million.
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. This free operating free cash flow figure includes €178 million in paid capital expenditures.
Out of them, we have €39 million of strategic CapEx. This strategic expenditure includes the end of our JADE project, the performance mineral plant which has been commissioned in China; and the Line 3 and 4 in Willebroek; and the lithium EMILI project, as reminded by Alessandro just earlier on. You remember that we have deliberately increased our gross CapEx spend as part of our capital allocation strategy.
How do these different elements translate into Imerys balance sheet? Thanks to the divestiture 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 1.7x. In absolute terms, the net financial debt decreased significantly to €1.2 billion.
On these good note about Imerys sound financial structure, I now hand over to Alessandro for the outlook.
Alessandro Dazza
Thank you, Sebastien. 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 on the -- in general on the macroeconomic environment, the latest news that appeared in the press are not very optimistic. So we assume that the next 2 quarters, the activity will not improve significantly but also not degradate significantly.
So if that's the case, what 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 will 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 0 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, good 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 million and €650 million 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 plants, 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 to long-term perspective, we do maintain our midterm 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.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question from Sven Edelfelt from ODDO.
Sven Edelfelt
I would have a couple of questions from my side. I noticed a €36 million cost from expenses linked to disposal or reorganization. So presumably, this is linked to the carve-out of the paper business. Can you confirm that this €36 million is a one-off and there will not be additional cost in H2? And could you be a little bit more specific about when the paper business will be sold?
And a clarification on pricing. You mentioned pricing to be stable. 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 to 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?
Alessandro Dazza
Thank you. Although I'll let Sebastien explain the €36 million please.
Sebastien Rouge
It's -- the main two elements are actually an incremental impairment related to the paper assets, highlighting actually 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 noncash, first of all.
Alessandro Dazza
And nonrecurrent.
Sebastien Rouge
And obviously nonrecurrent, 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 noncash impact when we dispose of Berg that we are disclosing in the accounts of the translation reserves that will be recycled to P&L for a large amount, 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 decide, as we do once upon a time, to combine some operations together then announced the closure of one plant in China. Not losing the market, but combining manufacturing assets in this area.
Alessandro Dazza
Thank you, Sebastien. A short update on our paper assets divestiture. It continues. It was, we knew, a complicated carve-out because of multi-geography, small plants. I remain confident it will be soon, August.
So not -- 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, where we mentioned stable is 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 precrisis 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 it 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, 5 years of work on the deposit on the technology, pilot plants 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 EMILI in France.
Operator
The next question is from Aron Ceccarelli from Berenberg.
Aron Ceccarelli
I have one on your guidance. Maybe can you explain, if I take the midpoint of your €630 million to €650 million, that implies that the second half should be down 10% year-over-year. It was down 3% in Q1, and now it was 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 not surprising.
The second one is on synthetic graphite and carbon black. As we know, you're investing big time here. I would like to understand a little bit if there's any capacity presold at this time in synthetic graphite and carbon black. Anything you can disclose 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.
Alessandro Dazza
While Sebastien looks at the figures and will answer to you in synthetic graphite and carbon black, I am not sure presold if it is the right words. What we have announced when we invested in the second -- sorry, in the third and in the fourth lines of carbon black as well as in the second expansion in synthetic graphite, all these 3 latest investments are largely covered by take-or-pay agreements with our key customers. And therefore, for me, as you say, presold, 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 offtake.
Sebastien, do you want to take...
Sebastien Rouge
The way we build H2, I would say, is very much 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 2 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 secured the significant decrease of freight costs that will kick in, in the second half of the year.
You have in mind the freight represents more than -- or represented last year more than €600 million at the peak of 2022 costs.
Energy, same thing. I think we have discussed that in prior calls. We have a habit of hedging energy costs. During a big portion of last year, we did not hedge in order not to freeze costs at a very high level. Since the beginning of 2023, we are back in a position to hedge.
And we have, therefore, secured 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? And I would say a market-driven decision on the pricing, that's where we see H2 slightly lower than H1 in the worst case.
Alessandro Dazza
If I may add, Aron, purely met. As you said, if you take the middle or, let's say, the middle of our guidance, it would mean the second half at €310 million; €320 million for EBITDA for the second half, which compared to the first half is very close, €330 million, 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. Sebastien, you want to comment on working capital?
Sebastien Rouge
We are not very vocal about guidance and target on working capital. I would probably stress 2 main factors anyhow. First of all, 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 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 cap. I will not give a specific figure, but we have seen the really inflation point in this first -- in the 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 raised 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.
Operator
[Operator Instructions] And the next question from Mourad Lahmidi from BNP.
Mourad Lahmidi
Yes. Most of my questions have been answered, but I have one left. In 2022, I think that the 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?
Alessandro Dazza
Mourad, I see if Sebastien 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, it's the biggest drop in volumes that the group saw in 2023 is for the paper market.
And therefore, mathematically, the percentage of -- on overall group sales is dropping mathematically, definitely. Do we know what...
Sebastien Rouge
We were still in the 9% range overall.
Alessandro Dazza
It is one point, but it's the market that has suffered the most. After an extremely strong 2021 in the paper world with very high prices for our customers, everybody has been producing. So it's the -- 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 significantly -- or had a significant impact on the first part of the year. So these market suffered more than any other.
Mourad Lahmidi
And if we had to take out the EBITDA contribution of paper from your guidance of €630 million, €650 million, what would be this guidance?
Alessandro Dazza
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.
The business itself is, from a profitability point of view, aligned to the group. It's simply the declining profile that is -- needs to be addressed on a regular basis.
Operator
Thank you for your question. There are no further questions at the moment. I will hand the conference back to management for closing remarks.
Alessandro Dazza
Thank you. First, I would like here to thank Vincent Gouley, 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 EMILI team to develop this fantastic project we have.
Vincent Gouley
And British Lithium as well.
Alessandro Dazza
And British Lithium as well, sorry, in the lithium world. He will be substituted by Thierry Laren Jag [ph], who some of you might have met already. And if not, he will be the one accompanying me and us in the future. He's 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 wish you probably a good summer. Thank you very much.
Sebastien Rouge
Thank you.
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Imerys S.A. (IMYSF) Q2 2023 Earnings Call Transcript