AECI Ltd (AFE) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for the trading update for the 5-month period ended 31 May 2025. Our CEO, Holger Riemensperger, will be taking us through the trading update as was published in our SENS this morning. And after that, we will open for a short Q&A. So please type in your questions in the field provided on the webcast. And without further delay, I will hand over to Holger to take us through the trading update for the 5 months. Holger, over to you.

Thank you very much, Itu. Welcome, everybody. Welcome to our pre-close call. And please apologize. As you can see from the background, I'm traveling. I'm working from two screens and have to look to two. So I hope that works well. Basically, as you know me, most of you, I prefer direct engagements over specifically Teams, which is something that we have learned during COVID not being the worst thing, but still believe that direct engagements are better in any case. So from time to time, I'm not looking to the screen, but to my left, then it's because I'm looking to the other screen. So again, welcome, and what I want to do today is to provide you with an update on our first 5 months and also to where we are at in the moment, both with our strategy execution and also from an operational perspective. So looking to our strategy execution. Overall, I have to say that I'm happy with where we are at, but as I always say, I'm never happy because there's always an upside, and this is particularly true in the first 5 months this year. So looking to our four strategic pillars, and I will start with strategy, and I will then go into the operational side of the business. We have our four pillars, culture and people, building a high-performance culture. I've said that before and just to underline it, again, for me, building culture is for myself as the CEO of AECI most important because you can only build or execute a new strategy if you have your culture right. So building the new culture based on performance is number one. We will talk to the optimization of our business portfolio, which, in the moment, basically deals with divesting noncore businesses. We are talking to the internal value unlock and where we are at as well as our ambition to continue growing the business internationally. So what we have achieved in the different pillars in the first 5 months this year and can now already say 6 months is we have developed, as we announced earlier, a new culture code and leadership compact, detailing exactly how we want to manage the business as well as what we expect from our leaders how to behave and how to manage. That was rolled out end of last year, and we have made progress also through a comprehensive culture survey, where we had a very high participation of our employees. And that feedback gave us very important insights on how the lift experience of our new culture from our employees' perspective is. We, as you remember, even back into our strategy rollout '23, I mentioned that AECI out of its former holding structure had three different head offices, the corporate head office in Woodmead, the mining head office is in Modderfontein and water head office also in the Modderfontein area. So we have committed to you that going forward, we only want to have one head office. And I can report that we have basically completed the consolidation of mining head office into corporate head office, which will drive One AECI culture. And we are close to also consolidate our water head office, so that going forward, we will, as a normal company in a normal corporate structure will work out of one head office. We have, as you know, and as we have announced, successfully disposed our Much Asphalt business for ZAR 1.1 billion. And the other big issue within our managed businesses. And when I say issue, I mean, rather nonstrategic business, is Schirm. So you know that we have tried last year to sell the entire Schirm business combined German and U.S., which didn't yield price expectation that AECI had and that we believe that we should deliver to our shareholders. So we decided to separate the sale of the U.S. business from the German business. And as the German business in '24 to continue to underperform, we decided to run a substantial restructuring of the German business, which has continued, and I will give you a bit more context later where we are at. We also continue to work on our internal value unlock or as we sometimes refer to it as TMO. As you would remember, we announced end of last year or end of last year's numbers that we have delivered 800 million of MD5 and I really want to be clear on what that means. MD5, means [ Maturity Degree 5 ]. And that means that the projects are actually completed that does not mean that, that project does deliver full upside. So it starts to trickle into the P&L. Overall, from a business perspective, we can say that, and we are very happy that our internal growth continues -- sorry, international growth continues to deliver. Specifically in the Asia Pacific area, where our major operations are sitting in Australia and Indonesia at this point in time. However, there's always shades of gray. And we -- besides the fact that we are very happy with both from a core perspective view both the mining chemicals business and the international mining business, which all continue growing or deliver to expectation. We had very significant headwinds and challenges in our South African business. I will get a little bit into the details in a minute, but just jumping the gun here, that issues are not related to the market, but they are basically related to our Modderfontein operations, where we had a number of technical details. Again, I'll get back to that in a minute. From our financial performance, we have seen a slight decrease on the revenues of 2% to now ZAR 13 billion compared to prior period. And as I've said multiple times, revenue for our business is not necessarily the right KPI to look to because our revenues are usually impacted substantially by the commodity raw material input that we work with. On the other hand, in this case, there is an impact from the South African/Modderfontein business that also led or contributed to the decrease. Our EBITDA has increased year-over-year by about 12% to ZAR 1.25 billion and profit from operations has increased 17% to about ZAR 800 million. What is very pleasing is that our net debt position has reduced by about ZAR 1.3 billion compared to prior year. And just for the sake of being clear here, as you remember, there was a ZAR 1.1 billion of proceeds from Much Asphalt, which tells you that, that contributes the vast majority, but there was also another ZAR 200 million year-over-year that we have reduced out of operational performance. Going to the businesses, our core business in mining services. We have seen some adverse weather impacts specifically in our Asia Pacific and more concrete into the Australian business. But what we can say is that, that does not impact the total year business. As usually what happens, what we experienced in the past is that customers catch up after weather normalizes, which is something that we have seen already in the past weeks. What is important because we discussed that end of last year in November, in our November update that we have been impacted by a long-term ammonium nitrate supply contract, which was fixed on the prices. And we promised you that we are going to solve that, which we have done. And that is now impacting positively the profitability of the Australian business. Also, we have seen some negative impacts from adverse weather conditions in the SADC region in the earlier part of the year. But to really go back to what we promised to say we really focus on increasing and improving our international business. We have added in the first couple of months this year, four important new contracts; new means, new customer, new products or new geographies in this case. More concrete here, it's new customers in the DRC, in Australia, Ghana and Botswana. So within our core geographies. Our mining chemicals business continues to perform to expectations, while I will go back to some of the shortfalls that we have seen over the first 5 to 6 months, '25, predominantly related to bad debt provisions, but again, I'll get back in a minute. Where the biggest impact came from in the first couple of months and more specifically in the first quarter was that we had a number of external triggered manufacturing disruptions at our Modderfontein plant. So we had an unusual high number of power outages which we haven't seen for many years, as you may note is that Modderfontein is a national key point. Modderfontein is sitting at the same power supply than O. R. Tambo, which is why actually we felt pretty comfortable overall. But just picking out 1 month, in the month of April only. And to be clear, that was the worst month, we have seen 16 power outages which led to disruption of manufacturing specifically on the ammonium nitrate production. So to give you a little bit of a sense, even a power outages of about 5 seconds leads basically to a total 1 day at least loss of production because of ramping up facilities after that. Unfortunately, we were also faced with issues from our suppliers for lead azide which is the key component, the primary explosives for the production of our nonelectronic detonators. So that supply shortages led to a situation where AECI even had to declare force majeure, which is something that we almost, I have to say, at all costs try to avoid to not disrupt our customers. Unfortunately, reality is that there is only one supplier of lead azide in the country, and that is a product that one cannot import. So that led to further issues. Going back to the chemical side. Overall, the chemicals business, as you know, is very focused South African local business. So it basically goes along the industrial businesses and industry of the country. And we see a continued pressure on our customer side. All I wouldn't say that the business as such has underperformed, but we had a number of bad debts provisions that impacted the business. I wanted to add here that for us, we have taken a very conservative, probably a more prudent view than ever before with regards to bad debts and providing for that. So just to be 100% clear, albeit debt accumulates to a significant number, we are not looking into a situation where we have to say at this point in time that those debts are lost. Our water business specifically is performing well. It was impacted a little bit by -- by little rain in the earlier part of the year. But overall, performed well from a volumes perspective. Again, here, we had to deal with bad debts. On the managed businesses, so overall, the managed businesses are performing to expectation. And that's something I've said a couple of times with the exception of Schirm. And also that addition, I've said a couple of times before. This time, the exception of Schirm, specifically Schirm Germany is a positive exception and positive news. So we -- after we have decided to separate the Germany and the U.S. business with regards to the sales processes, we have initiated a very comprehensive restructuring program. And we did not do that in '24 because we were in a sale process, and we didn't want actually to invest at that point in time into a restructuring. We have done that in the first 6 months. And that business is now in a very different space, and we are actually looking for the first time since acquisition of Schirm in at least breakeven, if not positive cash contribution to the group. All on the divestment of the different businesses. All businesses are continuing to be in a sale process. However, we have started to prioritize some of the businesses because we are in advanced stages, and we are optimistic that over the next couple of days and weeks, we are able to announce some divestments, at least signings of those. And we have deprioritized some of the others, but all the businesses are in ongoing processes for divestment. Unfortunately, the sale and -- as you remember, we have signed the sale of Animal Health last year. That process has fallen through because we couldn't agree with the buyer on one of the conditions preceding of the business to close, which is very unfortunate, but I also can report to you that we went back to other interested parties and the process continues. But we did not want to close a business or a sale at a condition that is not favorable for our shareholders. So concluding, we are looking in a mixed bag. Year-over-year, the business has improved. Unfortunately, I am not happy, and I'm not happy because my expectation was a little more positive, probably so was yours. On the other hand, we are on track. There is no reason to not believe that we cannot deliver what we have promised. And so we continue to push hard for the second half of the year besides the divestments that we are continuing to push hard. From an operational perspective, our focus will turn significantly towards our mining business to push performance of that. And lucky for us, we can say that we have an isolated issue in Modderfontein, which we are going to address and already are on that. So with that, actually, I want to close my report back on the first 5 months. Again, of course, there are elements of already the first 6 months. And I will give it back to Itu.

Thank you very much, Holger, for the update.

We've got a few questions already. So I'll just read a few and then we'll just let you answer from there. First one from Marang Morudu from Northstar Asset Management. How should we view South Africa's mining volume progression going to the second half in the context of the challenges that we faced in the first half? And the second question, again from Marang Morudu is with the termination of the sale of Animal Health, where does this leave us in terms of expected time lines and proceeds from disposals? And does this shift our expectation on the balance sheet deleveraging? And how should we -- how should the market view the full year balance sheet? I think maybe, Ian, if you can just come in there as well. So those three questions. Holger, volume progression.

Okay. First to the mining business. So overall, as we all know, compared to global standards, the South African mining industry is a little lagging with regards to growth. But all the issues, all the issues we had in the first half and again, that is basically quarter 1, including April -- into April, first 4 months, I would say, our internal/internal in the sense of triggered from our suppliers, not from AECI as such. So there is no reason to believe that the performance of the mining industry is impacted. And thus, actually, we expect to recover provided that we can solve all or the majority of the supply issues that we were facing in the first 4 months. So for -- and just quickly, we have not seen any further power outages, and I've engaged myself with the CEO of the supplier. So we haven't seen any power outages after April. So we are now basically like 8 weeks further, and that problem seems to be solved, at least it seems to be improved. The lead azide, we have worked with our supplier. We have sent an expert team, technical team from our side to the supplier to support them on solving their technical problems, which also shows good progress. So I would be rather optimistic for the second half that those two issues should not repeat. With regards to the sale of Animal Health and then I'm happy to have Ian to top up what I'm saying. So with the sale of Much Asphalt, actually, AECI has reached its target debt level. Animal Health is a very small business and actually does not move the needle with regards to deleveraging the balance sheet. So if that comes a little later, that is not a in any way, a disruption to our ambition. So there is more important processes in the pipeline, which we hope to be able to announce soon. And back, I said we have reached our target debt level. And actually, what you could say now is that all the proceeds coming in the future, actually not necessarily required to fully deleverage the balance sheet. Ian, anything to add here?

Holger, thank you. No, not really. I think you've touched the points that I wanted to raise, and that is that the balance sheet -- we obviously continue to focus on the debt reduction. We are comfortable with the current debt covenant ratio we're sitting at. I think we've also initiated and flagged to the market before that we are looking at changing our dividend payout policy from a yield to a dividend cover in terms of free cash flow and in our full half year results announcement, we'll flesh that out a little bit further. And then we have a continued focus on working capital management, obviously, just generates sufficient free cash flow for those dividend payouts together with the business free cash flow generation. So I think all good, balance sheet is in a very good position and nothing else I want to add to that.

Next question. I'll just take two questions. So next question from Paul Carter from ClucasGray. Can you elaborate on the bad debt provisions. So that's referring to AECI Chemicals. What is the quantum and expected impact on the June result? And then the second question, which you can take first, Holger. Will you kindly remind how far we're -- AECI is on the Schirm asset sale? And what more needs to be done with this asset? And that question was from Yameen Hussain from Laurium Capital. So Holger we'll take the -- how far we are with Schirm? And what more needs to be done with the asset? And the second question is around the bad debt provision and AECI mining -- rather chemicals?

Thank you, Itu. You know I like to break the rules. So I also want to give a sentence to the first question, and then I leave the rest to Ian specifically on the quantification of it. But what is important to understand here is that we are taking a very serious, very conservative and a very prudent approach to debts, guided and of course, they are standards or rules to it. But we have decided to provide for a number of bad debts from different customers, so that it doesn't relate to a specific one. It basically relates to customers in our South African or SADC business. And that does not mean in any way that those debts are lost, but we are engaged and Ian will give more context. We are engaged customers specifically on that. Sorry, what was the second question? Just give me...

So the second question from Yaameen Gosain is regarding Schirm, how far are we with the sale process, and what more needs to be done?

Look, for those that know me better, I'm starting off with my meanwhile, famous sentence of M&A, M&A is casino. You never know. If you hang in long enough, the number comes, the color comes, we feel lucky, both comes at the same time. We are in processes as I said, for all businesses, which includes the Schirm assets. The U.S. business continues to perform to expectation, under, I have to say, a very difficult environment because, as you may know, the current changes of tariffs are creating somehow turmoils, not only globally, but also specifically in the U.S. In any case, that business continues to perform. So -- and yes, we have discussions. The German business, we have decided to halt the sale of the business and turn back for the first 6 months to restructure the business. And as I said earlier, we have been very successful. I'm very proud about what the team has achieved here. We are looking into a Schirm Germany business for the first time ever. to deliver breakeven cash and a positive EBITDA, which was not the case for a long time. And from that aspect, we believe that the business is in a much better position to go to market. I do not want to refer now to any time line, but we see expectation -- exception of one, I'm very optimistic that we will make significant progress during the year.

Thank you, Holger. Just before I hand over to Ian with regards to the bad debt provision, maybe Ian no numbers as yet as we're still in our process of finalizing the results, but you can just give a color of what those bad debt provisions actually look like?

Without giving specific and full details, we are busy finalizing our June results, but it is effectively in the industrial chemicals business, a specific major customer that went into business rescue. We are working together with the business rescue practitioners. We are providing to that specific customer on a cash advance basis at this stage. And we are looking at assisting the business rescue practitioners to turn that business around from a bad debt provision guided range somewhere between ZAR 40 million and ZAR 70 million. And we're looking at for half year. In terms of the water business, there is a customer there again that we're working with in terms of bad debts as well as a supplier for which we made a cash advance and he didn't receive product that went into business rescue. Again, from a recovery perspective, we're looking at numbers somewhere between ZAR 20 million to ZAR 40 million that we might need to provide against, again, some guidance in terms of ranges. We're obviously working with all of those to reduce the impact of that on our business.

Thank you very much, Ian. Then another question from Byron Jackson-Miller from Foord. Thank you for the pre-close call. Thanks, Byron. So the question is, please share some further information on the new mining contract wins? Can you give an idea of the type of wins and the scale of these wins? I'm not sure, if you want to disclose that now or if we want to do it at results presentation with more in-depth information.

Yes, actually you hit a point. We will not, at this point in time, just as we are so close to half year disclose exact details. But on a more general note, as I've said, where those contract wins are, and it is in our most important from a profitability perspective and from a strategic perspective, most important geographies. It is also businesses that are related to higher value commodities, which is also quite nice. I believe that is helping sustainability of the business. And again, it is on the back of existing customer relations. But when we -- when I referred earlier to new customers mostly coming to winning share of wallet of those customers on different mines, but there are also new customers in the mix. I just don't want to go in quantifying the wins at this stage. Give it another 6 weeks.

Thank you very much, Holger. So we'll address that at a later stage in full. Ian two questions for you from Tumisho Molanthe from Coronation Fund Managers. So first question is net debt is down ZAR 1.4 billion. Should the market be thinking about the net finance costs moving forward? And the second question is around the effective tax rate for the first half, how should the market be thinking about that?

So thank you, Itumeleng. On the net finance cost, obviously, with the proceeds from Much Asphalt as well as well as the very strong free cash flow generation in the second half of 2024, that net debt balance comes down quite considerably. And the net finance cost will -- you could expect a significant reduction based on the current numbers we have in front of us. We'll be in a better position in June when the results come out to give more color to that, but definitely a reduction there. In terms of the effective tax rate, I think we are, bar any potential managed businesses that we conclude before the half year that potentially has an impairment knock-on effect, we should be coming out at levels very similar to last year at June. Just to give you a guide, so back a significant pullback from the elevated levels we saw at year-end.

Thanks, Ian. And I think we have disclosed what the net finance cost movements for the 5 months have been in the trading update. So we have disclosed that significant delay. At this point in time, we don't have any more questions. Should we just give it another minute or so to see if there are any questions coming forward. So I'll just give participants another minute to see if there are any more questions. If not, then we will close. Ian, just a follow up from Tumisho again. Why is the tax rate not down from H1 last year? So why are we expecting it to be more or less the same as 2024 as was presented in the interim results?

So I haven't done deep full analysis yet. I think that is one of the things we will do for June and come back on that. So I do not want to hesitate to guess here, Itumeleng. So if I can just ask we will come back with the analysis for half year.

Okay. No, that's well noted, Ian. So we'll come back at interim results presentation on that. Holger, you're on mute.

I didn't want to say anything, it's okay.

Okay. So in the absence of any further questions, this brings the session to an end. I just want to thank our CEO, Holger Riemensperger; and our CFO, no longer group acting, but our permanent CFO now, Ian Kramer. Thank you very much for making the time to take the market through our performance for the next 6 months -- for the first 5 months. And we will reconvene again in about a month's -- exactly a month for our interim results presentation. So with that, we bring the session to a close. Thank you very much for attending all. Thanks. Bye.