Imerys S.A.

Good evening everyone. And thank you for joining our Imerys 2019 First Half Results Conference Call.

Joining me on the call today is Olivier Pirotte, our Chief Financial Officer. Today we reported our first half 2019 financial results.

Our H1 revenue of €2.3 billion was down 1.5% on a like-for-like basis against the strong first half of 2018. We have been operating in a challenging market environment since the third quarter of last year and this continues to drive down our volumes.

In this unsupportive environment, we delivered once again a solid price mix of plus 2.7%, positive in all of our businesses and more than compensating the inflation of our input cost. Our actions to deliver cost improvements and to improve our cash generation has delivered results.

They partly offset the lower contribution of volumes as well as the negative effects of the deconsolidation of our North America Talc subsidiaries and the temporary shutdown of our Willsboro plant in the U.S. Both events had a combined impact of €64 million on revenue and €20 million on current operating income, representing roughly half of the drop in COI in the first half of the year.

We generated a solid net current free operating cash flow of €77 million and we maintained a strong balance sheet with a net debt to EBITDA ratio of 2.0 before IFRS 16. Please note that this does not include the total of €271 million of operating lease liabilities under IFRS 16 representing 0.2 times debt to current EBITDA.

Like-for-like our revenues declined by 2.0% in the second quarter versus a decline of 0.9% in the first quarter as a result of a challenging comparison basis with prior year and weaker-than-expected sales in June. Our volumes in Q2 were down for the fourth consecutive quarter as the continued weakness in automotive has spread to broader industrial markets.

Iron and steel production has turned negative in Europe with production volumes worsening to minus 4.3% in Q2 from a decrease of 0.5% in Q1. Despite these significant headwinds we were able to achieve a positive price-mix in all of our businesses, up 2.7% at group level more than offsetting our variable cost increases.

Our strong pricing ability resulted in a €30 million positive price mix contribution to COI in Q2 which more than compensated the inflation of our input cost. We have seen some easing in our raw material inflation with our overall variable cost up 3.4% in Q2 compared to 5.5% in Q1.

Our year-on-year variable cost inflation has eased a little for items like energy freights and we have seen lower pricing for key raw materials like alumina. All in all the balance between price mix and variable cost is a positive €9 million in the first half.

As communicated at the beginning of the year we have set clear priorities to lower our cost and to improve our cash generation. This is starting to pay off with a net reduction of €19 million in our fixed costs and overheads in the first half year.

These cost reductions are split between €10 million from the actions to address the loss-making ceramic proppants and Namibia operations in the second half of 2018. Please note that this positive effect will not continue in the second half.

An additional €9 million from our various actions to adjust our cost base to our lower-trading volumes. We have also have seen some first benefits from our Connect & Shape transformation program.

Our strong focus on cash has resulted in a net current free operating cash flow of €77 million in H1. We have managed to more than offset the €40 million decline in current EBITDA, with disciplined CapEx spend levels and lower working capital requirements, thanks to improved inventory management across all of our businesses.

These were the highlights of the first half. I would now like to hand over to Olivier Pirotte, who will provide us more detail on our financial results.

Yes, indeed. And thank you, Conrad.

So if we first deep dive into our revenue, which for the first half of 2019, there are several observations I would like to highlight. First observation, as you can take from the left side of the chart, there has been a €53 million negative effect from the deconsolidation since mid-February of our North American Talc subsidiaries, respectively €18 million in Q1 and twice that amount in Q2, i.e., €35 million.

It means that restated for deconsolidation, H1 2019 revenues of €2.263 billion would have been up 4.3% instead of posting a reported decline of minus 2% versus last year. Let me emphasize on the specific situation that these subsidiaries are working under Chapter 11 judicial protection towards an efficient and permanent resolution of the liabilities as per schedule.

They have engaged in productive negotiation of a proposed plan of reorganization with both the representative of current and potential future claimants. Second canon.

As illustrated on the right side of the chart is Imerys succeeded to maintain a robust price-mix of 2.7%, €63 million, positive in its two business segments that had mitigated the impact of a decrease in organic growth by lower volumes that reached minus 4.2% over the period against challenging comparables and market conditions. Thirdly and finally, let me also draw your attention that H1 revenue benefited from a favorable exchange rate impact of plus 2.3%, primarily due to the appreciation of the U.S.

dollar versus the Euro that should smooth down, everything being equal in the second semester. Moving to the current operating income.

First half 2019, COI totaled €245 million, which is €40 million below the prior year semester. Half of the decline, €20 million is coming from the Talc and wollastonite discontinuities I just mentioned, respectively minus €11 million for the Talc-related subsidiaries deconsolidation and minus €9 million over the semester for the temporary shutdown of our U.S.

wollastonite plant in Willsboro. Excluding these two elements, the current operating margin was 11.4% in the first half of 2019, which is 60 basis points above the 10.8% positive of such.

Then, and as commented earlier by Conrad Keijzer, Imerys benefited from the following strong positive factors against the lower contribution from volumes over the period. First, the firm price-mix effect, the €60 million fully offsetting the €51 million carryover in shape of inflation in variable costs.

Second, the reduction in fixed costs and overheads by €19 million since the beginning of this year. And third, the tight management of our working capital and most practically our inventories that translated into a lower absorption of fixed costs for €17 million over the period.

Now how that translated into our two business segments and the related business area. Let's first start with the Performance Minerals business segment, which represents 55% of our revenues.

This business segment's revenue totaled €1,244 million in the first half of 2019. The reported change of minus 3% is totally related to a significant payment effect negative by €55 million mainly due to the deconsolidation of the North American Talc subsidiaries we referred on earlier.

On the like-for-like basis, Performance Minerals revenues was down 1.8% or half of that excluding the temporary shutdown of a wollastonite plant in Willsboro that has started according to expectations operation early June. Regarding geographies, this business segment has contrasted geo trends notably relatively soft market conditions in Europe and in the U.S.

to the country of impact, which is up on a like-for-like basis thanks to strong sales of conductive additives for mobile energy application, especially lithium-ion batteries in China and South Korea. Globally current operating income for the segment came to €144 million in the first half of 2019 resulting in an operating margin of 11.6%.

Excluding the North American Talc subsidiaries deconsolidation and the temporary shutdown of Willsboro this current operating margin was 12.5% in the first half of 2019. If we look at the second business segment, the High Temperature Materials & Solutions sales of €1,037 million in the first half of the year amounted for 45% of total revenues.

Like-for-like change in revenue trended down in the second quarter at minus 3.2% versus minus 0.5% in the first quarter. The business segment revenue was impacted by tougher market conditions in the second quarter.

Car production continued to weigh on the foundry and abrasive markets in Europe iron and steel production weakened as a consequence of capacity reduction of steel mills, but building chemistry had been better. The business segment's current operating income totaled €97 million leading to an operating margin of 9.3% in the first half of 2019 due to volumes down, partially offset by price increases and downward trend in alumina prices and fixed costs and overhead reduction.

Let's look at the full P&L below the EBIT line. Net income from current operations, which is down 10% to €159 million posted a lower trend on the current operating income.

Main reason is the group's opportunistic asset liability management, notably the full repayment on last March of its €56 million Japanese yen-denominated private placement maturing in 2033, which translated in Q1 into an improvement of €15 million of the financial results. Excluding the full repayment of this private placement, net income from current operations would have decreased by 10% -- by 17%.

The tax charge of minus €66 million reflected in a fixed tax rate of 29% versus 29.6% in the first half of 2018. Other income and operating expenses net of taxes amounted to negative €62.8 million in the first half of 2019 including €50.1 million restructuring costs related to the first phase of the transformation program and the €4.7 million, which is linked to the temporary shutdown of the Willsboro plant in the U.S.

Let's remind you, that the full year negative impact of this disruption is assessed to be around €25 million on the net income base. Consequently, net income group's share amounted to €96 million.

Our financial structure, net financial debt amounted to €1.519 billion as of June 30 2019, which represents a ratio between net financial debt and current EBITDA of 2 times. In addition, operating leases liabilities related to the right of use of the assets under the IFRS 16 represented €270 million as of June 30 2019 which is actually 0.2 times of net financial debt to current EBITDA ratio.

And that leads to a €1.790 billion net financial debt under IFRS 16. More importantly, the changes in our net financial debt over the six first months of 2019, plus €221 million raised notably from the following items: First, the payments on the dividends in May 2019 for €171 million.

Second, the purchase -- the repurchase of treasury share of €22 million. And finally the deconsolidation of the North American Talc subsidiaries cash embedded there for €29 million.

The Group's financial structure is essentially made of bond financing for €1.9 billion with an average maturity of 5.7 years. The Group also had €1.3 billion embedded in the credit lines.

And as a result, the resources globally totaled €3.2, billion with an average maturity of 4.4 years. And now Conrad, I hand it to you for the conclusion.

Thank you, Olivier. Before we open the call and take your questions.

I would now like to conclude with our financial guidance for the full year. Given that market conditions, continued to be challenging our focus on cost reduction and cash generation will remain a priority.

For 2019, after the forecasted negative impact of minus 7% on net income from current operations, of the deconsolidation of the North American Talc subsidiaries, the temporary shutdown of the Willsboro plant. And assuming no further deterioration in the market environment, we expect full year net income from current operations to decline by around 10% versus 2018.

This guidance factors in the sequential improvement of the current operating income, in the second half compared to the first half. I would like to reiterate our commitment to achieve our midterm targets, announced last June at our Capital Markets Day.

By 2022, we target a more than 200 basis points increase in our EBITDA margin over to 2018 level. This concludes our prepared remarks.

Now we will be pleased to take your questions.

Yes, hello. Good morning.

I had three questions please. The first one is on the current operating free cash flow.

Could you define the word current for the free cash flow? Does it exclude restructuring charges for example?

Still talking about this net current free operating cash flow, the decrease in CapEx. Where has it been, in which divisions?

Is it something that you believe it can impact operations going forward? And what is your guidance on CapEx for the rest of the year?

My second question is on your full year guidance for the net profit current net profit. I see that in H1 you published a minus 10% net income from current operations then you say that sequentially, you expect an improvement in H2 versus H1 and the full year guidance is still minus 10% for the current net profit.

So I wanted to understand how all this articulates, may be linked to that there is the question on the EUR 25 million of the wollastonite. Will it be fully impacted in H1 or there will be some of the amount in H2?

And my third question is, let's say still on these guidance on the current -- the accounting of the wollastonite. If I understand well, it negatively impacts also the current operating and current net profit meaning that you do not consider that as an exceptional.

What should we read from that? Thank you.

Okay Josep. Good evening.

So first is your question on the current operating free cash flow. We actually were quite pleased that our current free operating cash flow is in fact slightly up from prior year, even though we had about EUR 40 million lower EBITDA.

So what you saw is much more disciplined spend on CapEx indeed. But I would also like to recognize the better working capital management particularly on the inventories.

More specific to your question on restructuring, I will refer later that to Olivier. You also were asking on the details behind the CapEx.

I could say that we've been looking very critical, an environment of challenging market conditions. We said at the beginning of the year, we will focus on cost and on cash generation.

So we've been looking very critical at both our maintenance CapEx as well as our organic gross CapEx. Obviously in terms of maintenance, we're doing the right thing.

So we're not cutting any corners, don't worry. I will say that we will continue to be disciplined on our CapEx in the second half like we also will be on inventory as well as on our receivables and payables.

On your second question Josep, current net income the minus 10% this year, you saw that there is a sequential improvement. This is the statement that you used.

I'm not seeing it because your full year guidance is also minus 10%. Please keep in mind and I think it's footnoted somewhere in the press release that our current net income in the first half included actually a positive benefit from the repurchase of a Japanese bond.

If you correct for that our net income was actually down 17% in the first half. So there -- I think the answer -- the second half should be better and then we indeed expect to come out somewhere around minus 10% net income for the year.

Your question as it relates to wollastonite that minus 10% guidance includes a EUR 25 million full year net income impact of wollastonite. Finally, you had also question on the accounting treatment of wollastonite.

I would like to refer the question on the accounting treatment of wollastonite as well as the restructuring cost to Olivier.

Yes. Good evening, Josep.

Thank you. Congrats.

So on the current operating free cash flow definition as such is really the notion of current. So all the restructuring charges are not included that.

So it -- before other operating income and expenses so the restructuring charges are not included in that. That's clear.

Second on the treatment on the Wollastonite. So obviously we continue to bear, I mean, operating cost associated to that -- these activities whether there's been stops or restart and resume recently.

So all these costs are actually included in COI that's the reason why we mentioned that for the first half of the year this -- the COI or Current Operating Income were €9 million of the impact of the Wollastonite. They should have done as such I mean that's I know in the operation.

Then you have obviously some, let's say, exceptional costs and items that we support because of the specificities of the production shutdown that we faced. And you remember that it was something around €3.5 million in the first quarter that we mentioned.

As far as the half year results there is such a shock which amount to €4.7 million. So there has been obviously a reduced amount of let's say non-current items related to the operation from the first quarter to the second because obviously I mean we faced most of the costs during the first half of the year.

So I hope this answers your question that so yes, obviously already it's linked to the operation we continue to book that as -- on the COI line. So it impact us for 9 million and on the -- let's say on non-current line you have an impact of 4.7 million.

So total impact obviously then to deduct some taxes impact but that is the order for micromanagement so far. And so for the full year, we do expect that we're managing our assessment of the €25 million impact on net income so after the exceptional because we are still in the recovery phase after the shutdown.

And we'd like to have more visibility on how our customers will react after this shutdown.

Thank you.

Yes. Good evening, gentlemen.

Three for me as well. Could we have more color on the deconsolidation impact on the operating profit of your U.S.

Talc business for H2? I believe there has been some one-off in your Three Forks talc plant last year in H2?

So that is the first question. Should I continue?

Or...

Yes, please continue.

Yes. In Brazil, I understood there has been two major leaks on your Kaolin Barcarena site.

Could you add more flavor on that please? And if anything -- any provisions are booked?

And on your guidance, if I'm not mistaken Olivier, you were guiding for €500 million operating profit is that correct?

Could you repeat your last question, Sven. We didn’t..

I would like to more -- to better understand the guidance on the operating profit line. If I'm not mistaken you're guiding for €500 million for the full year, is that correct?

Okay. Yes we're not guiding for operating income.

Sven, we're guiding for the net income. So I can take that last question right way.

But as far as your first question -- on your second question the deconsolidation H2 effect of Talc, I'll defer that question to Olivier. Your second question leak in the Brazil river this is I believe an old story.

There's no developments in our operation in Brazil or any leaks reported to my knowledge. So this is new to us.

What's the source of this is, something that we are unaware of.

Okay. We will send the resource over to Vincent.

Okay, sure. But anyway, so, my answer on this to our knowledge no leak.

Okay.

And we would do corrections if there would be a leak of any significance, so you can imagine that there is…

No impact.

Nothing there, because we as management are unaware. So, there either is nothing or if it is minuscule in terms of what has transpired in there.

Perhaps, Olivier, you can answer the question on deconsolidation in H2 talc.

Yes. Sven, so, let's try to summarize what it is about I mean on the Talc subsidiaries.

Last year, the impact on our current operating income was € 80 million, if I'm right. I'm looking to that chart to make sure, because there are so many figures, these lastly, but it was the order of magnitude.

So -- and you can imagine that here indeed -- I mean, on the first half of the year, we mentioned that the deconsolidation of the talc activities has an impact of €10.6 million, €11 million to be very precise. Let's -- you can figure it out that actually -- I mean it's half-half partition between first half of the year and second half of the year as far as the impact is concerned.

So…

So, it's another €11 million in H2?

Probably, a bit less than that.

A bit less, okay.

Probably €7 million to €8 million.

Okay. Sorry, I didn't catch it.

Thank you.

Welcome.

Hello.

Yes, Jean-Christophe.

You hear me?

Yeah, we hear you.

Yes. Good afternoon.

I have a question regarding the destocking effect we had over the first quarter. Could you quantify it over the second seven quarter notably in the filtration business?

And what is your view for the second half please? This is a difficult story.

Also maybe some more flavor on abrasive business, which was hit over the first quarter what is -- what can we assess for this business over the second half of 2019? Many thanks.

Okay, Jean-Christophe. As far as your first question on destocking I think what we saw is an interesting combination of destocking both with our clients, but also at Imerys.

I'd like to highlight actually the impact on our P&L. As you saw in the bridge, that's Olivier presented €17 million -- 1-7 from lower contribution basically inventory reduction.

So, lower contribution to our fixed costs and overhead. So, there was definitely an effect of destocking inside the company.

But, indeed there also has been an effect some of our clients clearly have been destocking. The key thing indeed has been in the U.S., we saw some destocking -- significant destocking at the beginning of the year for our filtration business.

This was companies that are very active in terms of filtering their beer, so the big beer manufacturers. We also saw destocking in the, let’s say, corn syrup fructose filtration segment.

So our filtration business really was suffering quite a bit from destocking. We have unfortunately not seen any restocking.

Then, as far as your second question on abrasives. Yes, we had a weak Q2.

It's fair to say that it was weaker than Q1. If you look at the underlying dynamics, what we saw in the key segments for abrasives industrial and automotive in the first quarter, we saw automotive build rates in Europe down roughly 5%.

In the second quarter, they actually were down roughly 10%. If you look at Asia, first quarter similar minus 5%, second quarter actually high single-digit down.

So what we actually have seen in the second quarter is a further weakening in automotive. And also the second quarter was weak actually in the U.S.

So this clearly is impacting the abrasives business. I will say, we saw weakness in the second quarter in general in our high-temperature segment, our high-temperature materials also very much impacted by the weakening in iron and steel.

I don't know if you have these numbers, but we saw there actually negative production volumes of 0.5% in the first quarter and 4.3% in the second quarter. What happened in the Iron and Steel industry is that in the first quarter, the furnaces were all still running and actually there was an inventory build, basically across all of the major iron and steel manufacturers in Europe.

In the second quarter, you saw several announcements of -- indeed capacity been taken out of the market and that is explaining the lower production rates in the second quarter affecting our high-temperature materials business.

Okay, many thanks.

Thank you.

Yes. Good evening.

Just three quick questions for me. First one regarding the Talc, could you maybe give us an update on the ground process and the use of talc processed in the U.S?

Second question still on the talc. Could you remind us may be in your view what is the worst-case scenario regarding this talc issue?

And the third question is just to check if I understood properly this -- there's an impact of the repurchasing impact from the Japanese yen private placement repayment, it's one-shot positive in H1 and Q2 and will not have any further positive impact in Q3 or Q4, right? Thank you,

Okay, Eric, let me start with the last one. That's an easy one.

The Japanese yen indeed there was the impact -- the positive impact of this in the first quarter actually. So that's in the first half numbers.

There will not be any impact of that in the second half. Your question on talc, the situation there is actually proceeding very much according to plan.

So we're quite pleased with the progress that we're making there. A Tort committee has been formed where all the current claimants are being represented, a future claims representative has been appointed and we are actually engaged in very constructive productive negotiations with all of these representatives.

So, so far actually -- we're actually quite pleased with the progress. Your question as far as worst-case, let me remind you that we actually have ring-fenced our liability, our legal entities, our subentities have filed for Chapter 11 on -- starting February this year.

Since that date, we have not seen any new lawsuits, any new claims. So we're effectively being protected by the Chapter 11 bankruptcy law, which is actually a favorable treatment in the U.S.

for companies to resolve their liability and ultimately the objective is to emerge out of bankruptcy. Yeah, so that's basically our debt.

Thank you.

Thank you.

And Eric, I confirm to you the Japanese yen is up with the buyback actually of the private placement it took place in Q1. And this is kind of one-off as such because we don't expect to buy anything else I mean during the remaining part of the year with such a big a benefit or profit.

Thank you.

Hello.

Yes. Jean-Christophe, we hear you.

Yes. Jean-Christophe again.

I have a small follow-up question regarding the reduction of -- in the inventories. Should we assess that it will continue over the second half?

Or is that too difficult to answer to that question please?

Yeah. Jean-Christophe, I think the answer is that we started off the year relatively high on inventories.

We had actually relatively slow finish of the year last year that was the same actually with our clients. So, whereas we started all with relatively high inventory levels, I think it's fair to say that these have come down now to actually very decent levels.

We're actually quite pleased with current level we have. The discipline will be there in that we don't want to see it creep up again.

But no we don't expect significant further reductions in inventory in the second half if that was your question.

Many thanks for the answer, it’s very clear. Thanks.

Yes. In fact remark and a question.

The remark is that the minus 10% in net income from current operations in H1 that you put, if it's impacted by what you say it one-off linked to the Japanese yen and excluding that it would be minus 17%. I think that it would be fair to put minus 17% instead of minus 10%, I guess, but just my opinion.

Then on -- if we look forward to 2020, my question is, do you -- this minus 7% that have been impacting 2019 talc temporary deconsolidation. But I guess that as you -- as soon as you emerge from Chapter 11, you produce talc again in the United States and Willsboro temporary shutdown so two reasons of this minus 7% in 2019.

Do you believe that we should see in 2020 or at least in H2 this coming back and positively impacting the activity?

Yeah. Sure.

Well, let me first quickly answer your question on the minus 17% versus minus 10%. Yeah, the accounting rules are pretty clear on this.

We achieved a positive financial result on the buyback of the Japanese bond. So we need to include that in the net current income.

So the reality is it is minus 10%. It's a fair point you make that underlying we actually were doing minus 17%.

So I don't disagree with that comment. You see it also footnoted like that.

As far as the corrections let's say made for talc and Willsboro out of the minus 10% in the first half 7% of net income was indeed debt reduction was attributed to talc deconsolidation as well as Willsboro. What will happen next year, I think, it's really very very early to judge right now if at this point in time next year, we're actually having the entities emerged out of bankruptcy.

And it's also actually very early to speculate how they will emerge out of bankruptcy and what the scope will be. It's fair to say that the appetite in Imerys is not very high to reenter the business in the U.S., in the cosmetics segments with talc as you can imagine.

So, to right now sort of assess what the business will be next year and when we would emerge exactly out of bankruptcy is early days. As far as Willsboro, we are actually pleased that we're up and running again.

As you are aware, in early June, we reopened the mine and the plant, the processing plant so that was actually on schedule. We still see an impact in terms of reduced volumes.

And yes, so this is right now still for us an impact this year, a full year impact of €25 million on net income.

Thank you.

Yes, again, two very quick ones. Could we have please a bit on the Kerneos on the aluminate price because if I'm not mistaken, the operating profit for Kerneos would be up in H1 compared to the rest of the Group?

That's the first question. And on the talc, on the probable signature what would hear -- would it be like early 2020?

Or is it more likely to be end of H1, 2020? If you have a view obviously.

Yes. Sure.

Your first question on Kerneos, we actually were quite pleased if you look at the margin development that we saw in Q2. First quarter, we had still in the high carryover of raw material increase from last year.

If you look at the second quarter and what you saw is our year-on-year raw material increase is actually easy. We're still year-on-year up for items like energy, for items like freights.

However if you look at items which specifically are affecting Kerneos like alumina, but also for example bauxite, what you see is that these prices have come down. So for alumina, we're actually sitting around $350 per tonne right now.

That is a nice reduction. What you see is that aluminate is running both lines again in Brazil.

And yes, you see actually that the prices have come down quite nicely, result is also fully back in business. So Kerneos is actually -- in terms of the margin, we were quite pleased with what we saw in the second quarter.

Okay.

As far as your second question on talc, we remain as far as timing on our earlier guidance where we thought that somewhere mid-next year we should have made a significant progress here. But yes, it's obviously difficult to predict and we're certainly not going to rush into things.

We want to do this all in the right way. And like I said before, if and when we would emerge out of bankruptcy, the business needs to be de-risked in the right way.

Okay. Thanks.

Okay. Thank you once again all very much for your interest and for your time.

We're sitting here in Paris. It’s 42 degrees outside.

So, some of us are not looking for us. We need to go home right now already, but -- because it is nice and cold in the office.

But we will wish you very much a great summer and we look forward to reconvene on the 28 of October for the Q3 financial results. Thank you, very much.

Bye-bye.