BUA Cement Plc – H1 2020 Results conference call transcript

Kay:

Good day and welcome to BUA Cement Half Year 2020 Conference Call with investors and analysts. On this call are Yusuf Binji MD CEO, Finn Arnoldsen, GCOO and Chike Ajaero CFO. There will be a question and answer session at the end of today’s presentation Please, go ahead Gentlemen.

Yusuf:

Good afternoon everyone my name is Yusuf Binji and thank you for taking the time to be part of BUA cement’s half-year 2020 Conference Call. Presenting with me on this call today are Mr Finn Arnoldsen, Group Chief Operating Officer, and Mr Chike Ajaero, the Acting Chief Financial Officer. I trust you are all keeping safe and observing all the preventive measures and protocols advised by the health authorities.

Over the next few minutes, I will share with you insights covering BUA Cement half year operations. Therefore I will request the lines to be opened for your questions afterwards. I’m sure you’ve been given a copy of the presentation that I am going to go through and I hope you have gone through so I will be very brief and also just focus on some of the main highlights.

If you kindly turn with me to slide number six. I provide highlights of our activities during the review period. Our value for rented and focused strategy continues to pay up underpinning the resilient performance we continue to showcase. The Cement volume dispatched increased by 7.91% from 2,282,000 tonnes in the first half of 2019 to 2,463,000 tones as at the first half of 2020.

EBITDA margins remain resilient at 46.8% during the first half of 2020 with EBITDA margins increasing to 48.1% in Q2 from 45.6% we had during Q1 of this year. The free cash flow balance increased from N5.8 billion in H1 2019 to N20.62 billion as at H1 2020. If you recall, we reported a negative free cash flow balance in Q1 2020 of N3.90 billion which was attributed to the payment for parts and supplies in the wake of the global pandemic.

During the Quarter, we signed two strategic partnership agreements for the supply of liquefied natural gas and also the management of our mines respectively. Through these, we leverage on unique competences that will both drive costs efficiency. Despite the uncertain global economic outlook, our optimism is void by resulting opportunities from the pandemic, the resilience of the Nigerian environment led by the private sector while also focusing on the recovery framework being instituted by the government.

Please turn to slide number seven. You will see how we have created value amidst the low GDP per capita and the market compression. The inflation in Nigeria 2014 growing at the rate of 2.53% with a very high rate of urbanizations but also with a big deficit in housing and infrastructure. In general, cement consumption in Nigeria remains very low even when considered from a population and infrastructural deficit standpoint which are the major drivers.

However, through our value-oriented approach alongside our service offering supported by the continued focus on governance, continued improvement and sustainability, these are enduring an applause, we will continue to endear customers to our products thereby guaranteeing increasing margin, acceptance and profitability. Turning to slide eight you will get an overview of BUA Cement. Today, we are the largest producer of cement within the South-South, South East and North West regions of the country.

We operate across two states in Nigeria, Edo and Sokoto using best in-plant production facilities and continue to maintain a capacity utilization rate above 60%. During the first half of 2020, the total volume dispatched was 2,462,000 tonnes of cement which translated to N101 billion in sales. Furthermore, we are the third most capitalized company on the floor of the Nigerian Stock Exchange with a market capitalization of N1.31 trillion.

Sustainability is pertinent to our operation and gross strategy, ensuring our footprints record minimal impact on the environment while opening up economic opportunities for communities and positive impact to the society. Additionally, our sustainability initiatives are guided by (blocking 5:47) standard and our sustainability governance framework. As we course through this presentation, we will share with you some of our scorecards on some o these activities.

Slide nine showcased our evolution over the years and for those of us that we were with us during the first presentations, we have gone through this in which we adopted a disciplined approach to flawlessly execute our growth up to where we are now. Coming to slide number 10, we also highlight our strategic positioning across Nigeria, both in Sokoto and in Edo State using four production plant with a total installed capacity of 8 million metric tonnes per annum. However, plans are underway to increasing the existing capacity by 3 million metric tonnes in Kalambaina, Sokoto State which will be commissioned during the first half of 2021.

Thus bringing intended capacity to 11 million tonnes per annum. Given this gross positioning effort, we are not only well placed to satisfying the demand but also able to showcase the value inbuilt in our product offerings which remains the hallmark of our brand. Slide 12 is an overview of the macro environment during the first half of 2020. Brent crude was up 80.96% from $22.74 a barrel in March 2020 to $41.15 a barrel as at June 2020.

This is supported by productive costs from Opex and its allay along with with renewed demand for oil due to an uptake in production activities globally. The Naira further depreciated by 0.1% in the month of June to N385.84 kobo to a Dollar from the N385.50 kobo per Dollar in March 2020 due to increased demand for the Dollar. While we await the release of economic data from the second quarter, we will point out that the manufacturing and non-manufacturing purchasing manager’s Index PMI released by the CBN points to continued contractions even in the month of June.

Turning to slide 13, we showcased the result of our resilient performance for the first half of the year. Main volume dispatched increased by 7.9% from 2,282,000 tonnes in the first half of 2019 to 2,463,000 as at first half of 2020 resulting to 85.7% increase in sales revenue from N89.86 billion in first half 2019 to N101.26 billion as at the first half of 2020. EBITDA and operating profit rose by 5.8% and 7.0% year on year to 47.36 billion and N40.81 billion respectively.

Though EBITDA margins declined to 46.8%, despite the reported decline, a quarterly review reveals EBITDA margins rose from 45.62% in Q1 2020 to 48.08% as at Q2 2020 due to the cost-containment efforts and higher pricing during the second quarter. The net financing costs decline 33.5% from N2.47 billion in first half 2019 to 1.64 billion as at first half of 2020, a result of lower borrowing costs.

The profit before tax was up 9.8% to N39.2 billion from increased operational activities while profit after tax also increased by 13.7% to N34.82 billion. Amidst the uncertain economic environment, slide 15 highlights how the fusion of discipline and execution was supportive of our performance. On the per tonne assessment, EBITDA expanded during the second quarter by 8.16% or 1,512 per tonne as at Q2 2020 compared to the first quarter of 2020.

If you now turn to slide 16, we highlight the costs component of our operations. Cost of sales per tonne increased by 10.87% to N19,968 per tonne as at the end of the first half of 2020, if you increase output capacity and higher energy costs. Given the devaluation of the Naira, we recorded a 9.32% increased energy costs to N9,234 per tonne as at the end of the first half of 2020. Having recorded an exchange rate movement from N306.5 to N360.50 kobo.

With the intended changes to our energy mix as earlier highlighted, we expect the efficiency gains to improve our cost profile and margins. Expectedly our distribution costs rose by 1.95% to N2,596.72 kobo per tonne during the period under review. In line with our strategic purpose of increasing and sustaining foothold in the existing markets, price also moving in the new market.

On slide 17, what we have shown here is the evolution of the cash flow and net debt as at the end of the first half of 2020. Free cash flow balance increased from N5.88 billion in H1 2019 to N20.62 billion as at the end of the first half of 2020 led by a 141.20% increase in net cash flow from operations to 63.82 billion. If you recall, we recorded a negative cash flow position of 3.9 billion during the first quarter of 2020.

Consequently, the net debt balance recorded a revision from a positive debt balance of 5.84 billion at the end of the full year 2019 to a negative net debt balance of 12.99 billion as at the end of the first half of 2020. During our last Conference Call, we highlighted the identified priorities for the year. If you go through slide 18-21, our scorecards on these priorities are highlighted. Slide 20 focuses on the sustainable development goal pillars guiding our sustainability initiatives alongside the achievement for the period.

We remain an (?) conscious institutions and through our modern plants and best practices, our activities remain below international standards. For instance, our particulate matter emission remains below the prescribed limit. On societal impact, some of out activities cut through health care and education with the funding and equipping of hospitals, health care centres and schools, providing scholarships to students, electrification and access to clean water for the communities.

Training of members of the communities under our skill acquisition program, and providing start-up grants to some of these individuals under our empowerment program. It may please you to note that in Sokoto State, we have taken the responsibility of fully funding a primary school, just ensuring these children are not only taken to school but have a pathway to a desired future.

Focusing on other priorities, we continue to make good progress. The development on our Kalambaina line 3 plant is just on schedule. We earn traction in our push to new markets while receiving an export permit for limited quantities of exports. Synergy gains are gradually coming together. Currently, we’re benefiting from an enlarged entity in terms of revenue synergies. We are not working on the operations synergy space. We will continue to provide you with updates. Looking ahead we remain upbeat despite the weight of our uncertainties.

Primarily because of the opportunities inherent in moments of crisis. If anything else it enables us to step up our value and service offering. This concludes the first half of the year 2020 performance review. I will now request for the lines to be opened so that we can take questions. Thank you very much for listening.

Kay:

Thank you very much We will now open the lines for questions. To ask a question, please press “0” on your phone’s keypad. That’s “0” to ask a question and “7” to cancel your question request. Your first question is from Janet Ogunkoya. Please, go ahead.

Janet:

Hello, Goos afternoon and thank you for picking my questions. I have about two or three questions. The first is, Hello can you hear me clearly? (?)

Yusuf:

Go ahead. Go ahead.

Janet:

All right. Thank you. My first question will be on export. I don’t know if you could give us an update on that, if you’ve been doing export? I leant that maybe BUA has actually at least in the North, that you’ve started exporting, that you’ve resumed export again. If you could please give us an update on that. And then also would be …

In the liability, we saw that there was an increase in liability due to a related party loan. I don’t know if you could also give details on that as well. And then also you mentioned complains about optimizing your energy mix, I don’t know if you have any plans on that. If you could just share with us like considering the impact of the devaluation on that site, if you could give an update like what your plans are like to optimize your energy costs going forward. I think that will be all. Thank you.

Yusuf:

Okay. Thank you very much. You have asked three questions. I will answer two and then I will ask our CFO to answer the second one which is one of the liabilities due to related parties that has increased. Regarding the export, during the month of June, we received an approval for limited export to the Niger Republic from our so-called Plant through the Illela border which we carried out successfully. The Nigeria Borders land borders still remain shut.

So this was a one-off thing we received but we hope to get more subsequently during this quarter. Regarding the optimization of the energy mix, we have signed a contract with a company called green (?) energy to convert our production facilities in Sokoto to be using liquefied natural gas. This is going to come from Port Harcourt in LNG tankers and we are bidding a re-gasification plant in Sokoto that will convert the liquid back to gas and that will be used in both our power plant and also our kiln. The kiln is the furnace that produces our intermediate product called clinker. So these two areas we will use LNG in the very near future. Chike you respond to the question.

Chike:

On the increase of due to related parties, if you notice from our PPE schedule, you will see that we have brought in our Kalambaina Line 3 under capital work in progress, about 40 billion was capitalized and we have earlier said that the financing will come partly from equity and partly from shareholders loan. The shareholders’ loan comes from BUA international that happens to be a related party. So part of the financing that BUA international granted for the construction of the Kalambaina Line 3 that was brought in within the half-year. So that’s what accounted for the issue. Thank you.

Kay:

Thank you. Your next question is from Oluwaseun Arambada from Meristem Securities. Please go ahead.

Oluwaseun:

Good afternoon and thank you for this call. I just have three questions here to ask. The first one will be on Prices. Could you please give us an idea of what average average ex-factory prices were in the first half of the year. My Second question will be as regards taking advantages of the low interests environment. Should we expect the company to be coming to the market to raise some Capex especially now that you have an ongoing expansion? Should we be expecting the company to come into the market to take advantage o that low-interest environment?

Also, I have a question on the -we saw new some time ago intends on building a new plant in Adamawa. I would appreciate if we could just guidance as to where the company is with that. I also have a question on Exports. and I need to clarify it. I wanted to ask that would if the company would be getting authorization for further exports going forward into the second half of the year? I think that’s actually my questions. Thank you.

Yusuf:

Okay. Thank you very much. I didn’t get your name correctly. Did you say Segun or Seun? The acting CFO will give the ex-factory prices and also the no-interest loans. Regarding Adamawa, I would like to direct your questions to BUA Group, they are championing these initiatives for the expansion in Adamawa. For the exports, yes, we are very hopeful we are going to get more permits to carry our spares to the Niger Republic. Like I mentioned earlier, we were given a one-off thing for a limited quantity which we exhausted in June. But we are optimistic it’s going to continue during Q3 through the land border of Illela from Sokoto State into the Niger Republic. Mr Chike can you respond on the prices.

Chike:

Yes. The ex-factory price is around N44,000 per tonne within the first half of the year. Then on the financing, for now, we have already structured the financing for our Kalambaina Line 3. The financing will come partly from equity and partly from shareholders loan that is BUA International, and we equally have a four-year loan from one of the banks at a very good interest rate that we are using to finance the construction. So if like you mentioned Adamawa project, if eventually it’s approved for construction, we will explore other cheaper funding for financing our expansion. Thank you.

CONTINUED…..

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