Imerys S.A. (OTCPK:IMYSF) Q3 2021 Results Conference Call November 2, 2021 1:30 PM ET
Alessandro Dazza - Chief Executive Officer
Sebastien Rouge - Chief Financial Officer
Conference Call Participants
Sven Edelfelt - Oddo Securities
Mourad Lahmidi - Exane BNP Paribas
Jean-Christophe Lefèvre - CM CIC Securities
Good day and thank you for standing by, and welcome to Imerys First Nine-months and Third Quarter Results 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
I would now turn the conference over to speaker today, CEO, Alessandro Dazza. Thank you. Please go ahead.
Good evening to all of you. Thank you for joining us today to review Imerys results for the third quarter and for the first nine-months of 2021. With me next to me here this evening, Sebastien Rouge, our CFO.
For sure, third quarter was a challenging one characterized by growing inflation on all fronts, and further supply chain disruptions. And I believe frankly that the next quarter will be just as challenging. However, also in this context, Imerys has shown solid performance, as you will see in the coming slides underlying the quality of this company.
Let me now share with you a few highlights of the quarter, as well as some key financial KPIs. First of all, the group continued to outperform market by delivering, again, double-digit organic growth 18.6% to be precise, carried by good commercial performance of the team, and, of course, continuous recovery of most of our end markets. And we will go in more details later on.
Supply chain and logistics remain an issue, both in terms of costs and even more worrying availability. But again, I will go in more detail if you wish. Inflation accelerated clearly in Q3, compared to the last time we spoke end of July. In particular, around energy and certain raw materials the group utilizes.
Imerys pricing also celebrated in Q3 with a 3.6% increase versus prior year. Again, more details there is a specific slide on this later on. Sales were up 21% at more than €1.1 billion for the quarter. Bottom-line current EBITDA grew by 18% in the third quarter to €194 million, corresponding to a margin of 17.6% on sales and 18.2% for the nine-months. This is in line with our 2021 targets and above 2019 levels.
As a result, net current income for the first nine-months more than doubled to 233 million versus last year. Furthermore, as already communicated at the end of July, we signed an agreement to divest our North American Hydralisk Caroline assets, mainly serving the U.S. paper and board markets, and the revenue approximately US$76 million.
I’m convinced that this market, as we said at the end of July needs consolidation to address declining demands in our assets are best placed with a field Caroline company family-owned business, which will extract the most value from these great assets. At the same time, this will allow Imerys to continue its active business portfolio management, and to refocus on activities in markets offering higher growth perspectives.
I would also like to update you briefly on the U.S. Talc Litigation. I’m sure you have read our recent press release on October 14th, in which we explain that on October 13th, the day before the courts overseeing the North American Chapter 11 cases issued a ruling that certain votes, certain ballets tests in favor of the plan of reorganization will not be counted.
This means that the approval of the plan now falls just short of the required 75% majority vote to be precise 73%. Unfortunately, this ruling is expected to result in a resolicitation of the vote on an updated plan, which will extend the Chapter 11 timeline into 2022.
Important and which is even more important, we do not expect this developments to affect the terms and condition of the agreements with the Imerys and the North American Talc entities is currently embodied in the plan.
Though unhappy about the delay, we remain very confident that the Chapter 11 process will find an end next year. And the group continues to consider that the balance of the provision in the financial statements as of the end of 2020 practically unchanged to today is appropriate to cover the expected financial impact of the Chapter 11 process on the group.
And I will of course answer your questions should you have any. If you now move on to Slide 6
and look about a bit about market and growth. You can see that revenues continued to rebound in Q3 with another quarter of records double-digit organic growth 18.6%, as I mentioned before.
We will deep dive a little bit on each key end market in the two following slides. And you will see that some of them have now returned to pre crisis levels probably faster than expected maybe a year-ago with the exception of automotive and paper and only partly iron and steel.
On the right in the pie charts, we have added to the market we addressed. We have added a symbol plus minus to show what we would say current market dynamics, which I will comment again when going through the single market on the following slides.
So, we start on automotive. This is the market today causing the biggest worries at the moment. As you can see significant decline in production practically everywhere in the world, due as I’m sure you know the shortage of electronic components on a global scale.
At the moment, we assume that the situation will last well into 2022, clearly impacting our sales.
And I remind you that automotive is an important market for Imerys, 7%, 8% exposure for the group, but not only in terms of direct sales also indirect sales typically iron and steel. What is however important thing is as good hope for the future as demand for cars is stronger. So there will be, there must be eventually a rebound when availability constraints will be removed.
If we now move on to iron and steel, good growth in the quarter, except for Asia. Surprisingly, but the impact is due to a significant drop for the first time in years significant drop of production in China 10%, minus 10% mostly relating to CO2 emission reduction targets imposed by the government.
In this regard, I think these are recent announcements around future potential future policies around CO2. I would like to point out the China - reduction of production in China, steel and aluminum which is what is in discussion could have a tremendous impact outside of China, boosting among others, European and U.S. producers.
Needless to say that these will have positively impact on Imerys sales, as these are markets where we are much more present than we are in China. So more to come and trends to be followed with attention.
If we now look at construction, markets enjoyed gain a healthy level of activity globally, despite in some places shortage of workforce and raw materials. However, I do believe that the bigger growth that we have seen in the last 12-months, a big catch up post first wave of COVID is largely behind us. Good level of activity, but not the strong growth of the past. Of course, some help could come if it is announced, well published infrastructure program in the U.S. is rolled out rapidly to be seen.
Looking at paper, after a strong rebound, you see on the left side of the bottom graph, that the strong rebound in Q2 though comparing to a very low base Q2 last year, paper markets continue to recover even if at a bit slower pace, partly due to constraints in capacity relating to past closures. Today, paper is short.
Not shown here, but awards and consumer goods, which continued to progress well or very well, thanks to the removal in particular of all the confinement measures in most countries. Industrial markets as well clearly picking up on the back of good economic activity.
If you now look at Page 9, probably an answer to many questions you might have around inflation and pricing. Inflation has been clearly accelerating in Q3 in particular around energy, all forms of energy, and in particular in Europe, which had an increase of 60%, 70%, 80%, or sometimes even above a 100%, definitely unexpected when we spoke last time and unforeseen in this magnitude.
The Group reacted, reacted rapidly. Although the implementation and the respect for our customers has forced us to give some delay and ahead information, which is not always the case when we receive typically from governments increases in energy cost and energy prices.
As you can see our efforts on pricing clearly scaled up also in Q3 with an increase year-on-year 3.6%, compared to 1.5% for the first half. Specifically on the quarter, given the rapidity of the increase on energy was not enough to fully compensate the cost in Q3.
More in relation to timing rather than magnitude. But we do expect to see a positive balance going forward, as we see on a full-year basis still today. So, full deployments of our price increases still to deliver in the remaining part of the year. Once again, for the nine-months we remain positive, which underlines, once again, Imerys’ ability to pass through cost increases to the market, even when extraordinary.
I now hand over to Sebastien to go in a bit more in detail on Q3 financials.
Thank you, Alessandro. Good evening, everyone. Let me work through some of the key aspects of our first nine-months and third quarter financial performance. And we will start with revenue. Sales reach 3.3 billion in the first nine-months to 16% increased versus prior year. This corresponds to an organic growth of 17.3% versus 2020, which was mainly driven by your 413 million volume increase.
We maintained a positive price mix of 2.2%. That is 16 million positive contribution to revenues for the nine-months period. As Alessandro mentioned before, for Q3 earnings only price mix was 3.6% accelerating versus first and second quarter. The revenue also include still significant negative currency effects of 75 million. This mainly reflects the depreciation of the U.S. dollar against the euro in the first part of the year. You notice that this strength as reversed in the third quarter.
The EUR 52 million perimeter effect relates to the net positive effect of recent bolt-on acquisition: Haznedar in Turkey, Cornerstone in the U.S., Sunward in Taiwan and Hysil in India, and the disposal of kaolin operations in Australia.
If we now look into more detail at our two business segments and their respective markets. Starting with performance minerals. This segment generates 56% of the group’s turnover. We sell the 1.8 billion in the first nine-months of 2021.
All geographies saw improved trends, with like-for-like revenue up 17.6% versus Q3 in 2020. The group faces some persistence, logistic constraints, especially in the Americas, with an order of backlog remaining quite.
If we look at our different markets, on the positive side, the overall rebound activity was supported by sales of paints, rubber, polymer and ceramic products in the construction industry, the better performance of filtration and agriculture markets in the consumer goods sector. We note an improvement in the paper and board demand.
Sales in Asia-Pacific region continued to be strong with 30% organic growth in the third quarter. Thanks to the continued high demand for carbon black and synthetic graphite for mobile energy. On the other end, the automotive market continued to suffer in particular from the global semiconductor shortage.
Looking now at our High Temperature Materials and Solutions, our second business segments, which recorded sales of 1.5 billion in the first nine-months of 2021, representing 44% of Imerys consolidated revenue. This business segment was more severely impacted by the weakness of its underlying markets for 2020.
In the last quarter, the recovery continued to be solid in all geographical areas, with Q3 sales of 21% year-on-year while growth is 17.5% over nine-months. The business continued to benefit from dedicated commercial initiatives and from the strong underlying market recovery. The rebound was supported by high demand of the iron and steel, abrasive and foundry segments.
Demand of specialty binders for construction also increased. In Turkey, Haznedar integration continued to perform above expectations and in India, the new greenfeed plans in Vizag continued to ramp up and serve the dynamic domestic repertory and construction markets.
Now, how does it look like for the group profitability as a whole. Current EBITDA for the first nine-months of 2021 reach 594 million up 31% year-on-year. This evolution reflex strong volume contribution of 205 million, with an average ratio on sales of around 60%.
The positive perimeter effect of 11 million due mainly to bolt on acquisition, which performs well as I just said. The continuing positive price mix 39 million which compensated for the 32 million increase in variable costs the consequence of extremely high inflation on freight, raw material, energy and packaging costs. We note an increase of plus 75 million of fixed cost overhead in line with the sustain level of activity.
Currency has a negative impact of 18 million. As a result, current EBITDA margin improved significantly from 16.2% for the first nine-months of 2020 to 18.2% in 2021. One important reference points is also 2019. Profitability for the first nine-months is better than the one of 2020 and also better than the nine-months of 2019 pre crisis levels. The combination of positive factors gives the group a strong operating leverage.
The positive effects of cost reduction that took place in 2019 and 2020. And the ongoing discipline price mix enables Imerys to take full advantage of the volume recovery. In spite of mounting inflation Imerys EBITDA in the first nine-months of the year exceeded 2019 level, both in absolute terms and in percentage of sale.
If we look now again at 2021 and the other elements of our income statements, the increase of current EBITDA in absolute terms drives the sharp increase of current operating income. Net financial results was negative at 30 million in the first nine-months, below last year. Thanks mostly to ForEx and assuming impact.
Income tax expense of 90 million corresponds to an effective tax rate of 27% to be compared with 28% in the same period last year. Net income from current operation versus last year reaching 2033 million.
Finally, net operating income and expenses booked were very low at 17 million in the nine-months of 2021, stable versus last year, I mean, lower than last year and stable as compared to the first half. Net income from current operations per share is at €2.75 and also almost double, compared to the first nine-months of 2020.
Now back to Alessandro for the conclusion and outlook.
Thank you, Sebastien. So now let me rapidly wrap up this presentation, by saying that the Group is confident that the business will remain strong in the coming quarters. For the comparison basis, it would be a different one, as big recovery is behind us. I remind you in this regard that Q4 last year was already positive. So, we posted organic growth of almost 2% in Q4 2020, compared to 2019 prior to COVID.
Still, we do expect demand for our specialty minerals solution to remain sustained across most markets, hoping also in the recovery of automotive next year, and therefore, well into 2022. Pricing discipline, tight cost management, should continue to offset the impact of higher input costs, inflation, input has been probably never seen before in terms of rapidity of the increase of these high environmental, high efficient environment, sorry.
In this context and under the current market conditions, Imerys confirmed its guidance. And to be precise, we target to achieve revenue, probably above €4.2 million and current EBITDA in a range of €735 million, €755 million for the full 2021, significant improvements compared to the €630 million recorded last year.
We will continue to serve our customers in these challenging context and in a durable way. Imerys just had the first five diversity day in October on the Group wide basis globally, worldwide, which underlines our - and reaffirms our commitment to responsible development.
Thank you for your attention. And I now open the floor to your questions.
Thank you. [Operator Instructions]. And your first question comes from the line of Sven Edelfelt from Oddo Securities. Your line is open. Please ask your question.
Q - Sven Edelfelt
Yes. Good evening gentlemen, good evening Alessandro, good evening Sebastien. So three questions for me, if I may. Firstly, I would like to come back on the guidance. I would like to understand why you are giving around 7.35 to 7.55, knowing that your consensus is already at 7.50, why not just saying that consensus is, in your view consistent with market expectations. It seems to me that you are not very comfortable with these consensus and therefore, you might expect the low end of your guidance as the first question.
The second one, can you remind us new hedging for 2021 on possibly for 2022 and also, it seems to me with that regard, the future of pointing to a lower energy cost in 2022, compared to H2 2021. Is it something that you see as well, that is the second question. Maybe a third one on, you see the volume has been very impressive margin a little less, if I may say. I understand that it is lag between pricing and energy costs. So why not going for an automatic pass-through to avoid this slug?
Thank you Sven. I will ask Sebastien to comment on the hedging for this year and for next year. I start with your first question, we never commented on consensus, and therefore we will continue not to comment on consensus. We issued a guidance in July which was around in EBITDA margin close to 18. Between 17 points, I would say 6, which was our past 2019. So for me 17.6% and 18% was our target on revenue around close to 4.2 billion. We have précised it, now that we have more visibility, which if you do the math transforms into the range I have mentioned.
Yes, I do target to be on the upper sides of this range. But for sure the events of the last two three months have led us to be more cautious. The increase in energy, in general on the energy factor has been extremely rapid, unexpected and it does take time to pass-through which partly answer and I use it to answer your last question.
We are not a commodity fortunately and therefore you don’t pass through automatically you don’t have index formulas, you sell a specialty product that as a value for the customer. And there is a relationship with the customer. Customers today are understanding and receptive of price increases.
Well explainable with energy raw materials, logistics, but we do care to explain to see them, to negotiate and implement which in a normal world allow us to do it without impact in Q3 specifically. It did cost us some time effects, some phasing effects because energy, nobody calls you get it in your bill next week. Being electricity, oil, gas, which is not the way we do with our customers.
I see our capability to pass it through with the required time, and I see the advantage going forward with this approach. You will turn around one day, because I don’t believe that these levels of pricing for energy are sustainable in the long-term, for probably past winter or past peak, there will be a reversal then we will enjoy the very same treatments.
The potential reduction that we will have to grant our customers will not come on the same day as energy goes down. But it will come after the negotiation after a due time for implementation. And if you look back historically, when costs turn downwards, Imerys typically makes a lot of money because of the lag effect.
So we might pay some now and Q3 probably was the most difficult one. And convinced were the better Q4. But all of these will come back one day in the other direction. So, no commodity pass through is not an automatic transaction, it is a cooperation and collaboration with our customers.
In terms of energy itself, we are preparing for the worst, and be happy for the better. We are planning these energy prices to last in the future. Therefore, we are equipping our team informing our customers, that is the new normal and therefore we have to recover these costs through pricing in the market, then I would be very happy to have a good surprise sometimes next year to see a drop.
But logistics, we said it in July, it is going down, we see no increase anymore, but no signs of a downturn. Now people have pushed it to December and even into Q1. Semiconductors, we said after the summer, it would be better, at the end of the year would be better. Today everybody expects no improvements before well into 2022.
So yes, I do believe we are leaving a peak but we are preparing for this peak to stay and that is the way we go into 2022. Looking forward to good news but to be protected on the bad news.
On the hedging side, Sebastien.
On hedging, I mean, we, for Q4 this year we are hedged around 80%, I would say as normal, it means that we still have a portion of our expenses that are on this book. As you know we have a systematic and policy version.
So who else next year, we have the Q1 of next year, which is already for energy edge depending on the counties around 60% to 70%. And when we go forward throughout 2022, it goes down and it averages close to 50% for the full-year or a little bit less on some counties.
I’m not 100% sure your view that the forward normal. When we look at that in very much detail, we still see extremely volatile movements not only this, but also the firewall. And right now we have forward rates for energy that are still very high for the second part of 2022.
And that is why we are working at protecting ourselves also commercial commercially and not only financially because we also do not want to look ourselves and our customer with very higher rates overall.
Thank you very much. That is very clear.
And maybe want to complete on your last questions. You mentioned the margins. There is a slight deterioration on the margins, which is more than mechanical effects of the pure cost increase price increase, which raises the denominator and the numerator. But, I would say that, in the past, the translation of the inflation into cost and prices, that has a likely impact on the percentages themselves.
Thank you. And your next question from the line of Mourad Lahmidi from Exane BNP Paribas. Your line is open. Please ask your question.
Yes. Thank you. Thank you gentlemen for taking my questions. Three please. The first one is on the variable cost inflation. I think that when you talk to in July, you mentioned 60 million inflation in the second half of this year. Where do you stand now? Can you just give us an update on this figure. The second question is on the fixed cost increase that we have seen in Q3. I was just wondering, what is behind that wages of the costs. And finally, a question specific to freight costs. Can you share with us how much of your freight costs are contract based versus spot based, please? Thank you.
You are correct. In July, we announced that we do see, a potential increase of variable costs on the full-year between €60 million and €70 million, kicking in after Q1, because Q1 was still, let’s say, neutral compared to our assumptions. This number, if you have done the same math now, this number has become €120 million.
So there has been an increase of approximately €50 million for the full-year in our views, compared to July which is I would like explain that this split, the vast majority of this is relating to energy, probably half of it or more. Logistics has not moved much, few million.
So, what I said before, logistics has probably reached a bit. The remaining part is mainly around certain raw materials, which did not move need so much on the first part of the year and catching up now.
The best example is around aluminum. If you look at the aluminum metal, has increased 30%, 40%, 50%. And of course, alumina, which is one of the key raw materials for the Group has increased almost 80%. So, this is the big change.
In terms of rates, we do have parts which is contracted, part which is bottom to spot and part which is hedged over the year. As always, and as Sam was explaining before, when you went into the year, you were mostly covered, the coverage decreases as you go through the year, because you tend to be cautious on long-term commitments.
So, today, and to give you an a figure, which I think is key, compared to our original assumptions for the year. Legit freight costs have a higher impact of approximately €30 million for the group, which again, we are trying to pass on to our customers typically through surcharges. So significant, but not in the magnitude of the increases this position has worldwide this year.
In terms of fixed costs, Sebastien.
Fixed costs, we have two major impacts, one is a mechanical, you remember that Imerys did not take last year control and measure to reduce its capacity. And I think we really enjoyed this season, by having the ability rebound. On the other hand, we took advantage last year up to Q3 of the different governmental supports that were in place throughout 2020 and that we have a mechanical reversal of that.
The second impact that we can highlight is mostly around maintenance. We have done very large last - approx last year when we were not using our facility in the fluent to contain maintenance cost. Obviously now that we are running, I would say even full speed fair amount of sites it has mechanically increase both the usage of maintenance and also the price.
As you know, we speak a lot about the types of costs, but also there is some tension on the maintenance whether it is labor, subcontracted labor and spare parts - so that is second main driver of the increase of fixed costs, which is really linked again to the increase of activity that we have encountered throughout the quarter.
Okay thank you very much. I have a follow-up one. As we go into 2022, is it fair to expect some carryover effects of the variable cost spike that we see in the second half of this year. These things should be sticky. Can you basically speak a little bit about that?
If I give you my opinion, I do believe that will be sometimes mid of next year and inflection of inflation. So a reduction past winter, past Chinese New Year a reduction, hopefully and probably in all sectors and components. These being said, currently, we are planning to live with this inflation for the full-year.
We are entering 2022 assuming once again the worst and therefore being equipped and then be surprised if it gets better. So we are considering this is the new normal and that is what the group has to face. And that is what we are working on in collaboration with our customers and with our sales teams.
Okay. Thank you for your answers. It is very helpful. Thank you.
I think hoping today is not the right word, it is only effects and effects today’s ages inflation has never seen before. And that is what we have to face. And frankly, I’m glad that we still manage quite rapidly to pass it through with steel relatively good volumes as you have seen in the growth that we have posted steel with good demands and cooperative customers.
[Operator Instructions] And next question comes from the line of Jean-Christop Lefèvre from CIC Securities. Your line is open. Please ask your question.
Follow-up question regarding that as well. Can I assume that or think the equal the EBITDA margin you guided 18% full-year in July. Will be enough to hit in seven leads. Can we assume further price hikes announcements over the first quarter that should 3.6% of the third quarter? Thanks.
Jean-Christophe we know you so you don’t worry. The name also my name was not properly pronounced. We still thank our assistant here for the help. And if you recall, our guidance was close to 18% and above 19%, 19% was 17.6% that is why our targets was 17.5% to 18%. That was our targets that we see coming in. There might be a mechanical effect of higher costs, higher sales purely relating to inflation, which might cause some dilution in points after the comma percentages.
What is key is that the business remains solid. And we pass through these costs hope fully a bit more as we go forward. And that is why we do not see any need to correct our pervious guidance, although inflation is really impacting the industry in the world today.
And second question clearly yes. What we have implemented in Q3 which is 3.6 is not a full scale impact. There is more to come, it is launched, it is being implemented. If you asked me to do, to give you my best guess, I think it would be close to 5% or above 5% in Q4. It should give us between 3% and 3.5% on the full-year percent and we will need another step in 2022, considering that we assume the world to remain at this level of inflation.
Too early to finalize 2022, we are working on our budget on our assumption, but in principle we will need to further push to cover the full scale impact of inflation in 2020.
Okay. Many thanks for this answers. It is very kind.
Thank you. No question at this time. [Operator Instructions] No question at this time speakers. Please continue.
Okay. Then, I think it is time to close this call and I do thank you for the time this evening. Once again, we are proud of what this group is doing, in terms of organic growth and in term of resilience of the model. We do expect the business to remain strong going forward, in a strong inflationary environment. But with the proper adjustment of our prices, we will continue to deliver growth and profitable growth into 2022. I’m convinced.
Thank you. And have a good evening. Thank you. Bye. Bye.
This concludes today’s conference call. Thank you for participating. You may now disconnect.