Steppe Cement (LSE:STCM) — Half Year Results

0:01 Good morning, and welcome to the STEPPE CEMENT LTD Half Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and they can be submitted at any time using Q and A tab situated on the right hand corner of your screen. Just simply type in your questions and press send. Before we begin, I would like to submit the following poll. And I would now like to hand you over to Executive Chairman, Javier Delcer. Good morning to Good morning. I wish to first apologize to everybody for the Internet glitches. We are in the factories at the moment in different places, so we don't have a very good connection. I hope this is gonna be okay. If later we cannot see me well, we will just turn off my screen, but probably the most important is to pass the message. So to those listening or that will listen in the future, the objective of this presentation is to tell you how was last year in numbers with the final accounts, what happened on the first half and how is the project going and what are we doing, what we are doing.

1:01 So we hope that this is going to be an interesting presentation. And if later after the presentation, you have any questions, please feel free to submit them to Investor Meet and we'll continue to answer them in the future. So we are going to introduce here the people who are the main executive team at the moment. Apart from myself, you have Piotr Durniev, who's been with the company for the last twenty eight years. And basically, he's been working in all positions from Marketing Director to General Director and now CEO in charge of operation. And in addition, he does an important job with government relations and regulations. Victoria has joined us recently, he's the new Financial Director, very active from CEMENT LTD, very experienced and he's been very useful in navigating and restructuring of the bonds and the debt. And George has been with us for another twenty years and he's basically a person driving the improvements in the factory as well as the production.

2:02 The factory for those who are not familiar with it, the factory was built in 1930 at the beginning. It was improved in 1940 and then the drylands were built in 1970 and 1978. It is now the biggest cement complex in Kazakhstan. We are the leader on the center of Kazakhstan and our order as a factory, we are the biggest single factory in Kazakhstan at the moment in terms of production. We serve a market, which at the moment is approximately 2,500,000, up to 3,000,000 people in the region. And last year, we managed our record sales, which were 2,000,000 from the dry line, taking the production to the absolute maximum of what we can do. So we already been looking at this matter for years about the best way to increase and that's the reason we started the period one, we reached the maximum production, which we are going to do the same this year.

2:51 We have our own limestone, we have our own clay, we have nearby coal and iron ore and slag, so we are very well placed in terms of raw materials. We have low transportation cost to the factory and low transportation cost to the clients in Astana, Caraganda, Temertao, the center of Kazakhstan. The company itself has approximately $290,000,000 shares in issue in the stock market. And today, we think the replacement value of the factory will be not less than $250,000,000 if we were to start again. To talk about the market in 2025, maybe Piotr can give us more presentation on this, so you are familiar. Piotr has been it's the first time he does a presentation, so he's familiar with the company as much as I am. He will just brief you a little bit on what was the market last year and what we are intending to do next year, okay?

3:47 Yeah. Good afternoon or good morning, shareholders and potential potential investors. So a little bit about market last year. Kazakhstan cement market is grow up to 14,500,000 ton. This one is about 20% of the growth from previous three years where market was at the level about 12,000,000 ton, and we able to sell more than 2,000,000 ton to 70,000. This one also is our record. This one is done also due to create forward stock of the clinker. And we this level, we also able to maintain this year.

4:44 We may sell about 2,000,000 ton of cement. So our market share is 15%. We sorry. With increasing demand in Kazakhstan market, we also are able to increase our sales this year in first half of two thousand six, we the sales is achieved 979,000 ton. It is 15% more compared to the previous year.

5:39 Our turnover also increased by 43%. It's due to increase of the volume and price as well. Our export price is reached 28,000. It's allowed us to cover increasing cost and high inflation in Kazakhstan. Okay. Thank you. So basically, we have to present a fairly good picture for 2025 compared to 2024, which is a bit surprising for us, but it's clearly due to the increase of the market size driven by increased government expenditure and high natality in Kazakhstan. We are now facing 2026, which although the market is kind of stable because of discipline we are seeing high end prices, we took advantage of that to increase even more our prices and the volumes. So we produce significantly good cash flow in the first half and we think the second half is going to follow in this line. So we are basically more confident in terms of growth of the company now because we can see that the cash flow is going to be sufficient at the moment and this gives us a lot of confidence for the future.

6:52 How are the economy in Kazakhstan last year and this year? Well, we are seeing a little deceleration of growth in Kazakhstan because it was 6.5 last year. So it's now predicted to be somewhere between 4.55% for this year. Inflation is persistently high, although it has lower from it has been lower than last year, where it was 12%. So the government first increased interest rates when initially was higher and recently decreased. So we went 16%, 17% and back to 16%, 18% and back to 17%. Maybe because of interest rates, maybe because of the strong CASAC economy, we have got something which is very unusual, which is a revaluation of the currency, which has happened sometimes when there was a big sudden devaluation.

7:37 But at the moment, it's already persistent high tenge at around appreciation of 7%, which is not in the budget. We saw a budget north of 500 around $5.30 or 140 for the year, but we are now seeing and I think at $4.80, $4.75, which is strange. Probably the government wants it to be down. In the meantime, we are profiting for it, because for us it's a good thing, particularly for the project as we are signing most of the contracts in U. S. Dollars. And therefore, we are making more money in U. S. Dollars to pay for the project. That is a good help for us as well as for future dividends this year. The Kazakh Bank, the Kazakh National Bank decided to maintain 2017. I think they want to take it down, but for the moment, and as as they don't rain on inflation, they probably going to stick to this rate for the next few months.

8:25 The market for this year, as we said, we had a big surprise last year when the market went up to 14,500,000 tons. We think even the figures we have for the first six months that the market will remain stable this year, both in production and worse in volume, probably because people last year realized they do not actually enjoy enough prices. They need a bit of discipline. This year, starting on the South and then coming from the North, where people have increased price systematically given the company's much higher EBITDA margins. So this is normally the case when the volumes increase, but when they increase last year, we didn't see so high prices because probably there was spare capacity on the system. Now the capacity is being constrained and therefore, the discipline is starting that started in January and is being consolidated towards the month of May when we see that everybody has actually increased prices because they feel comfortable with the volumes they are selling.

9:17 So imports and export well balanced is done basically on the distance to the next factory in the next country. So people import and export really according to our radius of 200, two fifty kilometers from the factory. So where there is a factory in another country, which is closer, people buy from that factory as there are no barriers to import or exports. And when there is no factory, people just buy locally. So and this is it happens as well in the South when there is a lot of markets out of Kazakhstan where lots of factories are there and people still selling Kyrgyzstan and in Uzbekistan where the imports are mostly from Russia and a little bit from Uzbekistan in the area of Chinquen where there is a lot of it's like an open market Chinquen that's going to becoming a combination of two cities together. So next one, what are we trying to do now for the Line 6?

10:09 Well, Line 6 for us has been a big testing ground. For the last three years, we did small investments to see how we could improve the production. And the big test was for us last year, when we managed to extract 300,000 tonnes more from Line 6. So we suddenly went from a stable market of 1,700,000 tonnes, 1.65 to suddenly doing 2,000,000 tonnes. That was the combination of a lot of little investments we did for three years that we managed to put together at the end of twenty twenty four and the result was filled in 2025. This gave us a lot of confidence to continue these changes as we have a very big kiln that we can maintain rotating at a slower speed, we can maintain that kiln and by touching the pre kiln and the post kiln, we managed to increase production, we think up to 50%.

10:55 That is from 3,000 tonnes per day we achieved and this is coming from previously 2,200. So we went from 2,200 to 3,000. Now we think we can do 4,500 tonnes per day. That will translate in sales for the company of 2,500,000 tonnes once the project is fully running in 2020. This is going to be basically done with the same amount of workers and the same equipment, we are going to be saving in fixed expenses a lot. We have no more fixed expenses. And in addition, we have better recovery of heat and lower electricity consumption. That means that our overall cost per tonne of the factory will be lower by approximately $2,000,000 And we think this will allow us to increase our sales to approximately $125,000,000 if we don't do anything else. EBITDA margins, I think will be maintained at least 50% to 20%. So we are fairly confident that as market stands at the moment, we can maintain this EBITDA margin.

11:54 The other thing we are focusing at the moment is the ecology. We took initiative even without government pressure to install filters in all the factory, back filters will remove basically all the electrostatic precipitators. And this allow us to have next to new emissions. We had made an agreement with the government two years ago that we will complete the areas which are still not operating, which were basically the clay crusher, which was electrical electro filter and the clinker area of the cooler of Line six. The clay crusher was commissioned in May, is now in perfect condition. And we are going to commission in October the new filter for the cooler of Line six. That means that the company will be left with very little, very few emission points. And the remaining ones will be done in a stage if there are much smaller filters, import.

12:45 The other point of interest for the Ecology is that we are going to intensify the use of what we call fillers or additives that can be added to clinker to produce cement with the same amount of clinker. So we are actively exploring the increase of limestone, clay and particularly slag. So we are exploring our new project that will allow us since we have still a high intensity of clinker compared to other markets, we think it's possible for us technically in the next few months to device systems to increase even more the production by adding more fillers and more slack to the test. We are now running a number of tests and plans and we'll be briefing the investors in the next conference call. But we think it's possible for us to really lower the intensity to European standards.

13:38 Now, the project, which is at the moment what is consuming all the energy of the company, because we need it we don't want to lose any sales. We chose to basically not stopping any of the lines until the last minute. And we are pre preparing the projects to have everything done in a very short period of time. So we are doing what we can offline. We will be working offline in all the projects that we have. We have 17 projects that will be run concurrently until normally the April 1 next year. We need to do it with the weather is a bit better because we need to do lot of works outside. So we're preparing the factory to then start down in April next year, line number six, number five. We choose April because at the moment that is where we'll have a lot of stock of clinker for the winter. So hopefully, we will sell the clinker we stock in the winter months from April from until June.

14:30 And the idea if we have no delays, no problems and no issues is that we will start the summer season of 2027 with little stock, but with two lines producing three thousand and four thousand five hundred tonnes per day in normally in good shape. The site has been organized. We have approximately 150 contractors in site, which are spread all over the factory. We will see a little number a number of photos later, so people see the size of the equipment, which is quite impressive. We have seven supervisors now that we brought to run the project. We have meetings with the contractors, which is cinema from China plus a number of local contractors for different areas.

15:15 And at the moment, we nearly finished the civil works. We are now starting the structural works And the equipment is being is arriving literally. We are expecting a lot of signals of equipment before the winter of this year. We are actually we are lucky because of the sales have been good and the cash flow generating has been good. So we although we have the money available from two banks, we have been to avoid paying too high commitment fees. We are actually not avoiding to sign the loans because we have enough cash flow to carry us at least we think until the winter. And then we'll decide later whether it's worth ordering or not. So we'll the Board will be deciding the balance whether we borrow something or the amount of dividends we will be paying. That will be a decision to be made based on the balance of the cost of debt plus the amount of cash we generate in the next few months.

16:10 In terms of those who are curious about the main project, these are the projects that represents more than $1,000,000 We are doing a full new mill. We have two mills feeding Line six. So we are commissioning a third mill. The building was there. So basically, have to change the body and the things surrounding the mill. It was the most economical way to add additional 120 tons per hour of product to go from 3,000, which is two mills to 4,005, which is three mills. We are going to continue optimization of the preheater. We know that we can save probably 100 kilocalcals on the preheater. So we are going to modify the top part of the preheater plus the riser duct. We did that already last year. We added another 60 meters to the riser duct that will allow us to save maybe 50 kilocalcals. So we are using these modifications that we have done before and we know we can done in probably a month, a month and a half during the stoppage.

17:03 That will help us really improve the burning. These are areas that give us a lot of savings in terms of heat consumption. We are going to modify the gas flow as well. We need to connect the filters. We need to modify the filter bags. We are going to use the opportunity we've been postponing for many years to correct the So if I can say mistake the kiln original defaults, were some misalignments for us. So we need for this to cut the kiln. This is a good opportunity because we have a time to replace those sections that have not been replaced in twenty five years. And because the sections are quite thick, we have up to 90 millimeters thickness of metal. We need to basically we'll cut the clinker like a sausage in certain areas and we will dwell the gain with new kilns that the new section will guarantees better concentricity and less deviation on the kiln. It's an important job. One of the major ones we needed to do anyway, but we've postponing for many years is to change the cooler. Our cooler is a very old design cooler from the 70s. We upgrade a little bit on 2005, but it's not efficient. So we've been thinking about changing this cooler for the last ten years. But because of the cost of the cooler plus the fact that we have to stop a long time, the cooler is the critical path of this project, because we cannot do anything on the cooler because we have to remove the existing one which is online and install a new one. So that is the critical path in terms of construction.

18:28 In terms of having a bigger cooler, it will be more efficient. We will recover another kilo another probably 20 to 50 kilo cash on the cooler with this new design and we can make it much bigger. So this is this was one thing that partly increased production, partly needed to be done, because is the mechanical area of the factory can give us more failures. Some years, we are up to ten to fifteen days lost because of cooler mechanical failure. And because it's online, we cannot do anything about it. So this is an important project. And in addition, as we mentioned before, we are going to continue our commitment of $5,000,000 to Ecological. And we are hoping to sign with the government in the next few weeks, what we call a VAT, best available technology agreement, where the factory will be taken in accordance with the government to a standard to a European standard of technology compatible with the age of the factory.

19:21 And that will guarantee that they will give us this agreement will be signed for ten years and will guarantee us for then it's a commitment for us to keep investing money in ecology and for us is a commitment to limit the amount of tax we appear on ecological. So it's important for us to be part of this program and so that it can be done. So that's an important part of the project for us. I will just show you some pictures to understand the site. This is just a kind of a slide show for those who are interested, I don't want to bore you too much with details. So this is as I said, some of the abilities like STCM are moving. So here you see the new clay crusher filter, which these pipes are approximately three meters in diameter and they have to take all the flow of gases and they are not connected. We have a new raw mill. You show on the picture below, you see the mill being removed with a gigantic 200 tons crane. And then we have to have a new mill coming in with new technology. And the technology you see on the drawing on the right, this equipment is arriving at the moment and will be installed, we think before the end of December.

20:22 This roaming, because it's offline from the factory, we can do the full installation without boarding the existing factory. We only do the connections from the mill to existing strings April in twenty seventeen. Other areas of the factory, this is the top of on the left upper you see the top of a preheated tower on Line 5. This is approximately 75 meters high. The crane there is 100 meters high and we are going to raise this tower by 60 meters. Because the ducting is so big, we have built our own fabrication yard for ducting, which is on the right. And here you can see the cooler that I mentioned to you at the bottom that is being built and will be finished, I think, in October and November this year to remove all emissions from the cooler of Line six, which an important part of our ecological commitments.

21:13 Here you have more pictures of the filter parts that have been already at the moment on the assembling part of this filter. And on the right, you see the new preheated duct. As you can see, the bottom part of the factory is working its existing duct. This duct is approximately, I think is eight by four meters. So it's a huge ducting and it's going to be increased by another 16 meters up and down. So it's a major job, but we did it already once we know it can be done in approximately four weeks. We are confident of that project. Here you have the silos. We have at the moment eight active silos of 4,000 tons each. We are going to commission in the next eight months another four silos, because sites are going to increase. We are going to commission another four silos, which we already have, but they've been unused for a number of years. So that will give us additional storage capacity for approximately 16,000 tons in the factory.

22:02 On the bottom right, you see the kiln sections where we bought from China and they are actually all in stock and they are waiting to put them. We will weld them first together. We leave them in sections of maybe 10 meters each and then we'll lift them with a big crane to weld together with existing queues. So everything is in place waiting for the right time to do it. And we do as much surprising as we can. At the top right, I cannot have any picture because it's the new cooler that has been bought, but this is the cooler setup that we need to dig in place of the existing cooler and that will be the critical path of the factory and we'll keep you informed. Here you have the way that the top of the preheater will look that will save us a lot of power and efficiency on the factory. This design is quite similar to the one we have in Line five, no surprises there. We have calculated we need a new fan as well that is being already ordered, a new ducting to make sure that the air exchange with the heat from the rest of the factory in a more efficient way. That was not done in Line six, but it was done before in Line five, so we're basically just following the design of Line five.

23:03 These are all the little things we are doing, which for those interested is that we are putting a new system to feed the kiln. So we are bringing a new kiln feed, because at the moment we are using a pneumatic system, we are going to use a standard bucket elevator to feed and when a weight beam to feed the kiln. And we are going to install a new hot air line for the coal and a tertiary air duct to recover the heat for the cooler into the kiln. So basically, we are bringing the factory, let's say, from the 1975, 1980 to somewhere more in tune with what is done today. We cannot change everything, more the kilns have up to five, sometimes six stages and the kilns are much shorter. Changing the kiln will be a gigantic investment, but within this money we are investing at the moment, this probably is the most efficient way at approximately $60 per tonne to increase capacity by €05,000,000 So we look at this matter in detail. Some of this investment will have to be done anyway because the factory needed this investment. So probably the real effective amount of money in Spain is closer to $40 per tonne of increased capacity, which is considered quite cheap knowing that new factory will not cost you less than $100 Well, for those who just to finish this presentation, the main shareholders have not changed. You have the family of ASME one, Hamza, we have the family of David Clayton one, Apollo, we have my family and we have fiber. These are the main shareholders of the company, has not changed for a number of years. We have a stable and loyal shareholder base.

24:32 And I think they are we've been we always depend on the market, but we have got a fairly loyal following of shareholder. This allow us to plan the factory for the long term. Thank you very much to everybody. That's the end of the presentation. And now we are willing to take questions from the people present there. And if you have any questions, then I will answer them. I have at the moment a number of questions on the list. Yeah. I so sorry. Yes. Yeah. I can see one question about competition. I can comment. Yeah. Kazakhstan is like it's very competitive market. Kazakhstan market is represented by 15 cement plant and, 11 cement, companies.

25:22 Competition is, strong, and from this 15 cement plant is, three cement plant is not working anymore due to strong competition in the previous years. In same time, we have two new project which is going on in a region, and we're expecting that first of these two projects will be started beginning of next year. These two cement plants is located quite far from us more than 1,500 kilometers. And what is our strongest position compared to in competition? So first one, we have very good source location, like, source of all raw material belongs to us. And, also, we have quite short distance for main source of fuel.

26:20 It is coal granulated slant slag from Kermit also giving us some advantages. We cannot stop competitors to come to Kazakhstan market, and our target is to protect our position in the market is to increase capacity. It's will allow us to reduce the cost and be much stronger at the market. One question is I have a particular competition, which is active in listed in Singapore and is operating factories in Kazakhstan. Like anything, main barrier to anybody coming is that, a, when they can, they have to have debt to build the factory. We don't have any debt and that we have all raw materials nearby. So at the moment, our basically, production cost is quite competitive. We're able to fight and improve the last few years with anybody coming to our market and we have no debt.

27:21 So if people decide to fight with us, they need to we've been able to provide and hold these advantages for the long term. So we proved we have four years where cement prices were extremely low in the region of $40 $42 And therefore, nobody in the industry was making really any big margins. And then at the end, eventually people realize it's not a future because you cannot pay very much investment or pay dividends. And then people sometimes tend to agree and then increase prices a little bit and then you have a chance to produce more dividends. In our case, we are going to basically do both. We are going to have dividends and we are going to have a factory better, because a factory better allow us for the longer term to fight better with anybody. So the factory has no debt, has low cost and it has high capacity, you can fight with anybody. They know. So basically, we are not afraid to actually if people want to fight with us, we lower the prices in one market and it's difficult for them to come. So everybody knows that whenever we decide to take most of the external market, we just lower the price to a level we make as comfortable and between the advantage of production plus the distance to the market, we are comfortable there.

28:28 There is a person asking as well about major shareholders and market discount. Unfortunately, we as managers cannot control what the stock market price looks like. We had a theory on the past that basically the price of the stock tends to be related at least on aims to the deal people get on the dividends. So when we pay higher dividends, price goes up and when we pay lower, price goes down. It's a way to look at this like a simple bond on a market. We have I mean, I think we prove to people that we have paid a lot of dividends when we could, unless when we cannot. We try to pay dividends. We have been paying dividends over the last few years through we're actually bigger than the net profit of the company, because we have a substantial devaluation. So we have proven sorry, depreciation.

29:17 We have got a commitment on the past years to even pay a dividend and maintaining when the company was not really making accounting money, accounting profits, and we will continue to do that. At the same time, this now we have this chance probably of taking the factory to a bigger mode. We are it's like Cacasso, we have a bigger mode by having low production cost and higher capacity of production and we intend to take advantage of that. So we will split these additional cash flows we are generating between partly dividends and partly depending on our position towards the long term. Next question I got here is about sales from 2026. Are they going to be bigger or smaller? I mean, we don't tend to predict the success for the year. We are basically telling everybody last year was exceptional because we have a lot of stock. This year production is doing very well, but we don't have as much stock. So we are working hand to mouth in terms of production. We hope there is no production issues. Last first half was very good in terms of price and volume. You see in the announcement better than last year, much better. So this year, in absolute terms, normally, we'll have bigger turnover than last year. We'll have less volume, but higher prices. Therefore, our turnover this year will be higher than last year and our EBITDA as well. So we expect if you look at the tenancy and the price we announced a few days ago, the result this year are expected to be significantly better than last year. It's just an extrapolation of what you see in the market. We saw at the moment expected volume of 1,950,000

30:48 tonnes. This year, the point does not affect production, production will be affected next year. And then and we will be positive if we see any delays or any changes to what we're planning at the moment. There is another question here about how much will be lost next summer during the plant upgrades. So at the moment, the plan is to stop the factory for three months. Line six at the moment is producing approximately 75,000, 80,000 tonnes per month. That means that we'll be losing theoretically this 240,000 tonnes in volume. But there are two caveats here. One is that the factory service maintenance, so we anyway we start the factory every year for at least a month. So we are going to try to postpone the typical maintenance for changing brakes and maintaining the factory to do within these three months to reduce the space. And second, we cannot forget that if things go well and we really manage to stop the factory at the three months, we are going to have an additional capacity of 50% on this line for the remaining months of the year. Not all of them are going to be useful, but at least until October for probably July, August, September and October for four months, we'll enjoy extra production. So our calculation at the moment that in any case, we like not to go below 2,000,000 tonnes in sales in the year 2027.

32:05 So we plan to not lose any production overall, no sales in that year, given the big advantage for 2020, where we can probably sell if the market is there at least €2,500,000 there any these are the questions we got at the moment the participants. Is there any other questions in that anybody wants to just present or share with us or from Investor Day directly Investor Meet, sorry. Javier, Peter, that's great. Yes. No, you have addressed all those questions for investors today. And of course, the company can review your questions submitted today. We'll publish those responses on the Investor Me company platform. But Javier, before I redirect investors to provide you with their feedback, which is particularly important to yourself and the company, could I please just ask you for a few closing comments?

33:03 Yes. So I mean, contrary to the last few years where we were quite in a fairly difficult market in terms of competition pricing and we chose to maintain the factory maximum at the maximum level, this year, we see a cyclical turnaround where the prices are better and the productivity is higher. Therefore, we are enjoying enjoy a very good first half. We think we are going to have a very good second half as well. So financial results are on the improve, and this will allow us to continue the dividends. And at the same time, to do this expansion plan that will be a protection for the future. And luckily enough, we will not reach the future of the company by taking too much debt. So we will continue to work on the project. We will keep you updated. And I think for the moment, the prospect of the company, at least for this year, is fairly optimistic.

33:56 That's great. Harriet and Peter, thank you once again for updating investors today. Could you please ask investors not to close this session as you will now be automatically redirected to provide your feedback, which will help the company better understand your views and expectations. On behalf of the management team, we'd like to thank you for attending today's presentation, and good morning to you all.