Imerys S.A. (OTCPK:IMYSF) Q2 2022 Earnings Conference Call July 28, 2022 12:30 PM ET
Company Participants
Alessandro Dazza – CEO
Sébastien Rouge – CFO
Conference Call Participants
Sven Edelfelt – ODDO
Adrien Tamagno – Berenberg
Alessandro Dazza
Thank you, and good evening to all of you. Thank you for joining us today, again, to review Imerys’s 2022 first half results. As usual, with me here, this late afternoon, Sébastien Rouge, our CFO.
And as always, please let me start by sharing with you a few key messages for this semester. First of all, Imerys, posted a very strong performance in this first part of the year, achieving record sales, historically, close to €2.6 billion, driven by a strong pricing effect needed, really needed, to offset rising inflation, but also thanks to a good level of activity in most end markets.
Though we live in a very challenging context, volumes are so far holding quite well. In particular, if we exclude, as we will see later on, the unavoidable impact of the Ukrainian crisis and the sanctions against Russia, as well as, local lockdowns and restriction in China. All these events combined, as you will see later on, had a negative impact on our volumes of approximately 1.5 percentage points in the first semester.
As previously announced, we have continued to increase our prices to offset extremely high inflation. The efforts delivered a price effect of 16% in the first half with the peak of 20%, and above, in the second quarter alone. I would like to remind you that this figure was only 12% in Q1. All these actions allowed Imerys to post a positive balance between price and variable costs for H1, as you will see in few more — in few slides.
Our current EBITDA continue to grow with an increase of 11% versus prior year, reaching €445 million for the semester. It is the best ever for this company. Sébastien will give you more details on this great performance later on.
Net current income in H1 followed was close to €190 million, double-digit growth compared to last year.
And last comment on free operating cash flow, positive, but clearly impacted by the strong activity level by inflation and by an increase in spending on strategic CapEx project, which we have recently announced and launched.
Next to the half year results. Today, we are also announcing an important step in Imerys long-term strategy. The Group has entered today into an exclusive negotiation to sell to Platinum Equity, a global investment firm, operating companies in a broad range of markets, its High Temperature Solution business for an enterprise value of approximately €930 million. This divestiture is expected to be completed by the end of the year and, of course, is subject to the fulfillment of customary conditions, including the consultation with working councils.
Short reminder for you, HTS is a global provider of refractory solutions for iron & steel, for thermal, for foundry markets. This business generated last year €800 million of sales and approximately €470 million in the first part of this year, as you will see in the tables later on. The contemplated divesture of this business would be an important milestone in the Group’s refocusing efforts towards its core, high-growth specialty minerals business. It would improve our growth profile. And once completed it would also provide Imerys with additional financial resources to pursue our development strategy, and in particular, in markets such as green mobility, where we are investing a lot, sustainable construction, natural solutions for consumer goods.
We do look forward to presenting on a more wider scope our long-term vision, our growth strategy for the future at a dedicated Capital Market Day that we will host in the fourth quarter of this year.
If we now look again back at the semester to organic growth at constant perimeter and FX, you can see the revenues continue to climb in Q2 2022. It is the eighth consecutive quarter-on-quarter revenue growth for the Group. On the right side the usual exposure to end market, it has not changed, and, of course, it has not been adapted to recent announcement on potential perimeter changes.
We will go to each market in the next slide, starting by construction. As you can see from the figures, and partly, as I already mentioned during our last call in April, this growth has slowed. It remains positive throughout the world basically, with the exception of North America, but we see a certain slow in this growth, partly is driven by constraints, labor shortage in many markets, the U.S., but also Europe, inflation on raw materials, so especially on the residential side we do see some slowdown.
Iron and steel, another important market. Soft quarter Q2, you see a lot of negative numbers in the table, for sure driven by rising energy costs, and in general, more difficult macroeconomic conditions. Still believe that the reduction of steel exports from Russia and Ukraine, which has come to an halt will benefit other producers in the rest of the world and Imerys will benefit from this trend being our presence outside these two countries much higher proportionally.
As far as Asia is concerned, we have India doing extremely well. Overall, the continent impacted by negative growth in China, again, partly due to lockdown restrictions, but also slowdown in the construction sector. Recent messages from the Chinese government to sustain the economy should however reverse this trend going forward.
Moving to the next slide, automotive. Again, very disappointing Q2, even if in some areas, as you can see in the table, Europe, North America, positive, worldwide still negative, and especially worldwide still between 17% and 20% below pre-crisis level or below 2019. Europe and America benefited certainly from a very low comparison basis last year when the semiconductor shortages really peaked.
At paper after very strong Q1 cost inflation but also some production issues, affected the industry in Q2. The conflict in Ukraine has an impact on the raw material side, but also some strikes in the Nordics have impacted the production of some paper mills. In Asia, the business remains strong and growing, and we do expect to continue to be so going forward.
The final slide, two markets with definitely a positive trend, consumer goods continued their recovery post-COVID. Yes, restrictions in China; yes, inflation, might undermine a bit consumer confidence going forward with the potential effect on consumption, but we don’t see that happening now rather towards the end of the year.
Electric vehicles continue to be very dynamic in all geographies, boosting demand for lithium ion batteries, and therefore, for our products. Consumer electronics were a bit slower in this quarter especially due to lockdowns in China was a big taker of such products.
Let’s now focus a bit on costs and prices. Thanks to the really great efforts of our sales teams, Imerys managed to offset the extraordinary rise of inflation in Q2. I think this is exceptional given the context. The balance that you see on this table, price variable costs was positive in Q2 and is positive for the entirety of H1, even though inflation has been continuously growing, especially in energy and especially in Europe.
Now, we also see this impact on fixed costs. For instance, maintenance, spare parts, even labor itself, services, inflation has an impact on these parts. And that’s why we present such impact on the right of the table. There was some in H1 — in Q1, but of course, clearly less impacting than it is today.
This balance, the positive balance, confirms Imerys strength, even if it remains today, frankly, a challenging work in maintaining a reasonable relationship with our customers is a key for the long-term future of this company.
And now I’ll hand over to Sébastien for some more details and analysis on our results. Sébastien?
Sébastien Rouge
Thank you, Alessandro. Good evening everyone.
Let me walk through some of the key aspects of our financial performance starting with revenue. Sales reached €2.56 billion, an 18.7% increase versus prior year. This was mostly driven by the €360 million price increase, corresponding to 16.1% price effect on sales, out of which 20.1%, if we look at Q2 alone.
The increase in revenue also includes a positive currency effect of €101 million. This mainly reflects the strengthening of the U.S. dollar against the Euro. There is a negative €26 million perimeter effect which relates mostly to the recent activity disposal serving the paper market, mainly our Kaolin assets in North America and five Berlin activities.
Finally, volumes were very slightly negative at minus €29 million, due mainly to the impact of the Ukrainian conflict and local lockdowns in China due to COVID outbreak. It means that as of today, demand continue to be strong, even in our inflationary environment.
Let’s now look into more detail at our two business segments and their respective markets. Let’s start with Performance Minerals. This segment generates 54% the Group’s turnover with global sales reaching €1.4 billion in the first half of 2022. All regions saw an overall good level of activity in H1 with like-for-like revenues up 16.2% in Q2.
Logistics remain constrained, in particular, in the U.S. for its export activities. If we look at the applications, ceramics and construction-related markets continue to be dynamic and more than compensated the automotive market decline, which continued to suffer from global chips availability issues.
Reported under Asia-Pacific, we continue to benefit from the continued growth of our graphite and carbon activities, in particular, for mobile energy. The Group has launched a capacity expansion to support the dynamic growth of the main automotive battery players. As you can see from the EBITDA, profitability of the segment is maintained at a good level in spite of cost increases.
If we look now at our High Temperature Materials and Solutions, our second business segment totaled €1.2 billion sales in H1 representing 44% of Imerys consolidated revenue. The 18.4% organic growth of this business segment was supported by price increase that offset energy cost inflation in the first half of the year.
In Q2, the business benefited from well-oriented building and infrastructure markets, which compensated for the soft refractory abrasive market and automotive. The majority of the Russia and Ukraine impact for Imerys is in the HTMS segment.
In India, the new Greenfield plant in Vizag continued its ramp up. The profitability of the segment is improving as compared to last year with EBITDA reaching €187 million. This segment took advantage of operating leverage with continuous growth since Q3 2020 and excellent performance in emerging market, Turkey and India, in particular.
If we go now to the consolidated figures and the Group profitability as a whole, current EBITDA for H1 reach €445 million, about11.2% year-on-year. This evolution reflects a strong price effect contribution of €365 million which more than compensated for the €270 million net increase in variable cost and €74 million increase in fixed cost, both a consequence of extremely high inflation, in particular, energy costs.
We have also a currency positive effect of €26 million. As a result, current EBITDA margin is resilient. You will note in the detailed financial, the sequential improvement of our EBITDA. In Q4 last year with the first wave of inflationary impact, EBITDA decreased €167 million. It recovered gradually to €189 million in Q1 2022 and €256 million in Q2. With €445 million in EBITDA in H1, it corresponds to 17.4% of sales.
If we look now at the other elements of our income statement. In absolute terms, the increase of EBITDA drives the increase of current operating income reaching €293 million, up 19.5% versus last year.
Income tax expenses of €75 million correspond to an effective tax rate of 27% in line with last year. Net income from current operations, Group share and per share, went therefore up 19.7%.
The other income and expenses including particular restructuring costs related to Russia and Ukraine compensated by capital gain on the disposal of our natural graphite activities, all in all €15 million charge in line with last year. You will note we also posted a gain of €18 million on the net monetary position of hyperinflation countries in accordance with IAS 29 and this relates to our activities in Turkey.
Net income Group share therefore total of €192 million in H1.
If we look now at the operating cash flow generated, we report a positive net current free operating cash flow in a context of very high inflation and continued supply chain difficulties. This figure includes an increase of €32 million, in strategic CapEx expenditure that will support Imerys development in the green mobility field. And the €160 million increase in operating working capital as compared to December of last year. Main driver of the increase is the inventory, in quantity and value, driven by the strong activity and inflation.
Our working capital as compared to revenue remain stable compared to 2021 and will be a key area of attention, now that we have early sign of supply chain normalization and some sustaining of the demand.
Let’s look now at the evolution of debt. The ratio of net financial debt to current EBITDA of June 2022 was stable at a very good 1.9 level, same as in December 2021. Debt servicing cost and other income and expenses, mainly restructuring, were limited to a €11 million and €23 million, respectively. The net financial debt increased therefore slightly as compared to December of 2021 after the dividend payment for the full-year of €131 million. It increased €1.53 billion which is just under the June 2021 level of €1.55 billion. On this good note about Imerys sound financial structure; I hand over back to Alessandro for the outlook.
Alessandro Dazza
Thank you, Sébastien.
And let me wrap up this presentation with our outlook for the coming months. I think everybody reads the newspaper, so geopolitical tensions, tighter monetary policy, potential new restrictions in China; this will impact consumer confidence and therefore business activities, especially in the second part or towards the end of the year.
Gas curtailments in Europe are also a risk. Still, as we have shown today, I’m convinced the Imerys will continue on this path of profitable growth and will deliver this year, again, an improvement of EBITDA year-on-year and above market expectations.
The second part of the year will be slower, out of discussion, but our very bright — wide geographical footprint, our diversified business, the continued growth of EV and the batteries world, our strategic CapEx, which slowly are coming on stream and our ability to pass inflation on cost to the market as we’ve seen today will support us.
In this context, we expect current EBITDA to reach €810 million, €840 million in this range, assuming, of course, that there is no significant market disruptions in the second part of the year and excluding the contemplated HTS divestiture, which has not been taken into account yet.
And I close by saying that these divesture these potential transaction is a very important milestone in the refocusing of the Group’s towards our core high-growth specialty mineral business. But we will speak about this and the future of Imerys in the fourth quarter of this year at our Capital Market Day.
Thank you for your attention and I open the floor to questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions].
We’ll take our first question. Please standby. And your first question comes from the line of Sven Edelfelt from ODDO. Please go ahead. Your line is open.
Sven Edelfel
Yes. Good evening, gentlemen. Thank you for taking my question. Congratulation on the Calderys potential disposal. This is a very positive move on news. Coming back on Calderys, can you share with us the margin for EBITDA? If I’m not mistaken it should be close to 14% EBITDA margin, this business, which means that the disposal would imply the 8, of something, times EBITDA. That’s the first question. And then, I had another question on lithium, on the Beauvoir mine. We know from the BRGM that there is at least 320,000 ton of lithium in this mine. Now, conversation with investor suggest the CapEx to operate with mine that could run from 600 to 800 million on given the CapEx is linked with volume to be sold annually, I estimate in fact, the reserve could be between 700,000 or 900,000 ton. So this is very significant as it implied potentially a stellar valuation for this reserve. And it seems it might be a game changer for Imerys as whole. So first question, what’s your take on my calculation? And considering a lot of information on — that there is a lot of information and talk on the market, why are you not more vocal about the potential of this mine? These are my two questions.
Alessandro Dazza
Thank you, Sven. As always you’re a very detailed analyst, as we know. Sven, we have never communicated on the segment’s EBITDA, therefore we stick to this with the next publication of results. Of course, we will restate all the figures and so on, so it will become transparent and you will have all your answers in due time and we are really working on preparing this information for after this summer.
I can confirm to you that this divestiture will be in the region of 8x to 10x EBITDA of last year. So the — your range is not wrong probably on the lower side. More clarity on figures, impact on guidance and so on will be done. It’s really fresh off today, so will be done with the next quarterly presentations, and of course, during the Capital Market Day.
On lithium, we are almost there. I still do not have all the answers. I don’t think that the CapEx will determine the reserves — the reserves are there or not, and therefore, the CapEx needed will be approved or not depending on what we find the quality and the capacity to extract it. We still remain very excited and that’s why we still continue full speed with the maximum of resources possible. And we are close to having all the answers. You know, Imerys is a prudent company. So we will be vocal and very vocal the moment we have concluded everything. We are, I would say, really couple of months away. And I count on the fact that you’re in the Capital Market Day, we will have all the answers to your questions.
Sven Edelfel
Okay. That’s very clear. So just to follow-up, you said fourth quarter for the Capital Market Day. I thought it was the third quarter?
Alessandro Dazza
Yes. But the current events of today pushes us to, September will be tight has been honestly and we don’t believe October is a good month to do a Capital Market Day because of the different releases that will come. So will probably be in the early days of November.
Sven Edelfel
Okay. Okay. It’s about the same. Okay. That’s fine. So —
Alessandro Dazza
Yes. Yes, exactly —
Sven Edelfel
So more vocal about lithium on —
Alessandro Dazza
That’s why —
Sven Edelfel
More vocal about lithium in October?
Alessandro Dazza
Yes. You mean, around that we should be able to, as I said, we will have now around the summer our results of mining and all the drilling campaigns on the technology around Q4. So is one of the reasons why we would like to be clear when we speak about the future of this company, if lithium is, as you say a pillar of the future or is just not viable, and then we will have all the answers.
Operator
Thank you. [Operator Instructions].
We will now take our next question. Please stand by. And your next question comes from the line of Adrien Tamagno from Berenberg. Please go ahead. Your line is open.
Adrien Tamagno
Hello, good evening. Can you hear me well?
Alessandro Dazza
Yes, Adrien, we hear you well.
Adrien Tamagno
Okay. Good. Yes. One follow-up on the HTS disposal. So yes, that will be quite significant proceeds for the company. So would you like to keep the leverage around 1x net debt to EBITDA going forward or perhaps give your shareholders a special dividend or we should think about these proceeds to be used to grow the business, yes, as you have many options in the table now?
Alessandro Dazza
Adrien, we — it will be much easier to give you an answer when we will have the cash in our bank accounts, which is not the case today. But as you can read in the — in our release, we do counts to use these additional resources to grow our business in Performance Minerals with a clear focus on some very promising markets. Then the details of how to use the proceeding is of course, under review. We do have many ideas. And it will be really the focus in the core of our Capital Market Day after the summer.
Adrien Tamagno
Okay. That’s understood. And yes, a follow-up on the HTS. I suspect this relies heavily on the RAC division volumes for refractory and foundries. So those that did involve also an agreement to off take this RAC upstream volumes, and hence, perhaps the nice price tag?
Alessandro Dazza
I would put it a bit in relative terms, our RAC business, refractory abrasive and constructions, as you know, is a business that that sales — with revenues of, I would say, between €1.2 and €1.4 billion. The part that goes to the HTS side is double-digit. So is definitely less than €100 million, therefore less than 10%. So there is no heavy dependence on one business to the other and reciprocal.
This being said, of course, we very much value the contribution of HTS to our business, as well as for HTS of our unique raw materials. So, yes, we have an agreement with the future owner to continue to supply in the mid long-term to this business.
Operator
Thank you. [Operator Instructions].
There are currently no further phone questions. I will hand the call back to you. Sorry, sir, just to advise, there are no more questions on the phone lines, I will hand the call back to you for any further comments.
Alessandro Dazza
Okay. I guess everybody’s ready to go on vacation. So lots of publication today, as well. No, I — then I wrap it up. I would like to thank you for dedicating us the time to go through this, I believe, very good results for the six months and to listen to this milestone, really, in the repositioning of the Group towards minerals, specialty minerals, and high growth — with high growth potential. I do look forward to tell you more around the Capital Market Day and really around lithium as well. And I remain confident that we will have a good project there, but too early to be affirmative.
Thank you. And I wish all of you some rest during the summer. Thank you.
Sébastien Rouge
Good evening.
Alessandro Dazza
Good evening.
Be the first to comment