Arabian Cement Company reports strong top-line growth in 9m 2014

Bya897204973

Updated 2014-11-24

Arabian Cement Company (ARCC.CA on the Egyptian Exchange), a leading Egyptian cement producer, reported its consolidated results for the first nine months of 2014. Revenues in the period rose 17 per cent to EGP1,788.5m as compared to EGP1,532.1m in 9M 2013, on what management believes are early signs of recovery in both the economic and security situation in Egypt.

Net Profit dropped 35 per cent y-o-y to EGP200.4m, while Net Profit Margin was down 9 ppt to 11 per cent on the combined impact of the expiration of the company’s tax-exempt status — ACC is now taxed at the newly increased corporate rate of 30 per cent — and non-recurring expenses associated with ACC’s listing earlier this year on the Egyptian Exchange.

Chief Executive Officer, Mr. Jose Maria Magrina, commented, “Despite the impact of challenges including fuel scarcity, I am pleased with both our operational and financial performances in the first nine months of the year, even as we suffered some erosion of our bottom line due to the planned expiration of our tax-exempt status and of charges related to our IPO. The greatest challenge we have faced in the first nine months of the year has been that of energy availability. Our production and utilization rates have been adversely impacted by the ongoing fuel shortage, although both are now on the rise following our successful conversion of our facilities to run on alternative fuels.”

“Fuel shortages in the first nine months of the year led to a 20 per cent y-o-y drop in clinker production and a 62 per cent utilization rate of those facilities as compared to 9M 2013. Similarly, we are reporting today a 2 per cent drop in bulk cement production (with a 78 per cent utilization rate). Despite these challenges, rising market demand and our aggressive marketing efforts combined to allow us to pass along many of the price rises to consumers; revenues per ton have accordingly risen 19 per cent y-o-y,” he added.

“This has, of course, had an impact on our gross margins, as COGS have risen with our need to import clinker to meet market demand. Gross margins accordingly eased 3 percentage points to 42 per cent compared with 9M13. The top-line increases have yet to filter down to the EBITDA and Net Profit levels, unfortunately, as increased expenses, FX pressures and a new national tax regime put downward pressure on those line items,” he concluded.

“Our May 2014 initial public offering was not only the first-such listing in Egypt in the years since the 2011 Revolution, but also remarkably well-received, at 18.5x over-subscribed. Non-recurring fees associated with the IPO, amounting to some EGP23.8m, combined with an aggressive marketing campaign saw SG&A spending surge 74 per cent year-on-year in 9M14 to EGP76.6m. While management will work to minimize one-off SG&A expenditures going forward, the ratio of SG&A to sales in 9M14 is nevertheless a comfortable 4 per cent,” he indicated.

“Together, these factors saw EBITDA ease 3 per cent y-o-y to EGP598.8m in 9M 2014. EBITDA margin also dropped, but remains at a very healthy 33 per cent. As noted previously, our tax-exempt status has expired and we are now corporate income tax at the increased corporate rate of 30 per cent, with the result being the company having incurred total income tax expenses of EGP185.3m in 9M14 against EGP15.4m in the same period last year. This, together with the decreased EBITDA results and ongoing foreign exchange expenses, led to a 35 per cent y-o-y drop in our net profit to EGP200.4m, while net profit margin registered at 11 per cent in the period,” he further added.

“Our Balance Sheet, meanwhile, is quite strong, with a 15 per cent reduction in outstanding debt and an improvement in debt : equity ratio to 1.05. In sum: So far this year, Arabian Cement Company has faced and overcome operational challenges posed by the nationwide energy crisis that have hobbled others in our industry; executed the first IPO in Egypt since the 2011 Revolution; outfitted our facilities to operate using alternative fuels; and absorbed the impact on our earnings caused by an unfavorable FX climate and the expiration of our tax exempt status. While doing this, we laid the groundwork for the early Q1 2015 launch of a joint venture with Cementos Relampago, an affiliate of Cementos La Union (our majority shareholder), to establish a cement grinding facility in Northwest Brazil. In short, it has been a very busy nine months for ACC,” Chief Executive Officer, Mr. Jose Maria Magrina said.

“I look forward to reporting more here in the period to come on the development of our overseas operations and the ongoing enhancement of operations in our home market of Egypt,” he added.

Recent Corporate Developments

Expansion into Brazil

In early November 2014, Arabian Cement Company announced that the Board of Directors has unanimously approved a joint venture with Cementos Relampago, an affiliate of Cementos La Union (ACC’s majority shareholder), to establish a cement grinding facility in Northwest Brazil with a total production capacity of 230,000 tons per year. Total investment in the new project is approximately EUR 23m, 50 per cent of which will be financed with the remaining provided as paid-in capital. ACC’s contribution is EUR7m, representing 60 per cent of the total paid-in capital.

Outlook

Management is confident that the Egyptian market offers significant growth potential and guardedly optimistic that the country is on course for a continuation of economic growth, political stability and a steady security environment. Stability of this form, coupled with ongoing GCC-backed infrastructure spending and early signs of a return of corporate investment, sees Management anticipating improved performance in 2015, particularly as our conversion to alternative energy is nearing completion. ACC’s energy mix at time of disclosure was 21 per cent natural gas, 4 per cent refuse-derived fuel (RDF), 4 per cent petcoke, 1 per cent diesel with the balance (70 per cent) being coal. Management is targeting a mix of 30 per cent RDF and 70 per cent coal for FY15.

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