AECI Ltd (AFE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to AECI's interim results presentation for the period ended 30 June 2026. I'm Alan Dickson, the Group Chief Executive. I recently joined the group on the 1st of July this year. I'm extremely proud to be a member of the AECI team. AECI is one of South Africa's industrial giants. Its legacy, its technology, its people, its manufacturing capability and its customers position the group as a leader in the global mining, explosives and mining chemicals market as well as the regional chemical market. I look forward together with the leadership team and the employees at AECI to driving our performance along a positive trajectory commensurate with these attributes. I'm joined today by Ian Kramer, our Group CFO, and the two of us will be presenting our results today via this prerecorded webcast with a live Q&A session immediately after the webcast, where we will be taking your questions. At the live Q&A, Ian and I will be joined by Stuart Miller, the EVP for our Mining business and Dean Murray, the EVP for our Chemicals business, to engage with our shareholders. Ladies and gents, we are pleased to report that the group has performed well in the first half of the 2026 financial year. In February, at the year-end results, the group articulated its 3 key focus pillars. And these are, firstly, leveraging the core strengths of the group, our mining and chemicals businesses; secondly, prioritizing the resilience of the businesses; and finally, enhancing the quality of our earnings. Across all 3 of these pillars, the group has continued the good progress made in the 2025 financial year and delivered demonstrable progress against all 3. The group grew EBITDA by 2% over the prior year to just over ZAR 1.6 billion. This growth does, however, include the continued disappointing performance of Schirm Germany. Schirm made operating losses in the period despite the restructuring of the prior year, which coupled to the impairment of all the remaining goodwill and IP of ZAR 320 million dragged the group result down. Ian will provide more detail on the Schirm impairment in his presentation. Outside of the Schirm challenges, however, the rest of the group's performances were extremely positive. The core group assets of AECI Mining and the Chemicals core, which excludes Schirm, performed well. Mining increased EBITDA by 6% and the Chemicals core increased EBITDA by 14%. Importantly, the higher profitability was underpinned by improved margins and assisted in improving the group's quality of earnings as measured by return on invested capital to 13%. Whilst improved profitability and earnings quality are critical outcomes, ensuring that the group delivered on its pillar of business resilience was of equal importance. In the first half of 2026, the global geopolitical events increased the complexity of AECI's external operating environment materially. The supply of raw materials, specifically from the Middle East became more complex and raw material prices increased significantly across the board. Pleasingly, the group operated largely uninterrupted throughout the reporting period despite this more volatile external environment. At an operational level, significant efforts were invested into proactively managing the supply chain, implementing alternative sourcing strategies and securing critical raw materials. The capital investment into the core assets, specifically at our facilities across the country resulted in steady and reliable operations across all of these facilities. The investment into operational reliability is evidenced by the increase in the percentage of CapEx when measured against the depreciation value of those assets. Importantly, the complex engineering required for the medium-term Modderfontein optimization program progressed very well. These focused operational efforts did, however, contribute to a reduction in free cash flow in the first half of the year. The group's working capital increased primarily due to the higher cost of raw materials, the intentional decision to invest into strategic raw material stockholding to offset those global supply chain risks and the seasonal nature of the Plant Health business prior to the summer planting season. Importantly, the group continues to focus on the safety of all of our employees, and we were pleased to report no fatalities during this period. Our sustainability activities continued, which resulted in a decrease of 4% in our carbon footprint despite the increased production volumes. Importantly, the focus and intentional efforts on these 3 pillars delivered increased shareholder value as earnings per share increased by 18% to ZAR 3.48 per share and headline earnings per share increased by 8% to ZAR 6.53 per share. The 4-year CAGR of the share price is now 10% per annum and the improved profitability during the period and the expectation of some working capital unlock in the second half of the financial year enabled the group to increase its return to shareholders via dividend by 16% to ZAR 1.16 per share, which is in line with the lower limit of our dividend policy. I'll now hand over to Ian to take us through the detailed financial performance of the group.

Thank you, Alan, and good morning, everybody. As indicated during our 2025 financial year-end results presentation and following the completion of the sale of substantially all businesses earmarked for sale as part of the group's strategic portfolio optimization program, the AECI Managed businesses segment has been incorporated into the AECI Chemicals segment. As a result, we will report on the following segments: AECI Mining, AECI Chemicals and AECI Property Services and Corporate. The AECI Chemicals segment now consists of the previously reported AECI Chemicals segment, which was made up of the Specialty Chemicals, Industrial Chemicals, water and Plant Health businesses, now referred to as our Chemicals core businesses and Schirm and other businesses consisting of Schirm Germany, SANS Fibers and Animal Health. References to our Chemicals portfolio relates to the Specialty Chemicals, industrial chemicals and water businesses. However, it excludes the Plant Health business. Annexure 2 of the presentation provides a visual depiction of this. Comparative information has been restated in accordance with IFRS 8 operating segments to ensure comparability with the current reporting structure. Revenue from continued operations declined by 4% to ZAR 15.1 billion compared to ZAR 15.7 billion for the comparative 6 months ended 30 June 2025. The comparative 6 months results included revenue of ZAR 1.1 billion from the Food and Beverage and Schirm USA businesses that were disposed of in the second half of 2025. If comparative results are adjusted for this, group revenue reflects a period-on-period increase of 3% -- increases in ammonia prices over the period, mainly the result of the ongoing Middle East conflict impacted revenue for the period favorably. However, was more than offset by unfavorable foreign exchange movements in the group results due to the strength of the rand relative to the comparative 6 months. The Mining segment revenue contributed 62% of total revenue with the increase in revenue mainly driven by higher volumes across most product categories. Within the Chemicals segment, performance was mixed. The Chemicals core businesses recorded a marginal increase in revenue during the period. However, this was more than offset by lower revenue generated from Schirm, SANS Fibers and Animal Health. Profit from continuing operations increased from ZAR 699 million in the prior 6 months to ZAR 837 million for the current period, driven by increased volumes, better operational efficiencies, product mix and cost management as well as the reduced depreciation and amortization charges, reflecting the benefits of our ongoing optimization initiatives and portfolio actions. Depreciation, amortization and impairments decreased by 13% to ZAR 760 million compared with ZAR 870 million for the comparative 6 months. The reduction was primarily attributable to a decrease of ZAR 103 million in depreciation and amortization with ZAR 65 million thereof relating to the Food & Beverage and Schirm USA businesses disposed of in the second half of 2025. During the period, the group recorded an impairment charge of ZAR 330 million, mainly relating to an out-of-period goodwill impairment assessment at Schirm Germany. This led to the impairment of goodwill and intangible assets at Schirm Germany of ZAR 320 million. All remaining goodwill and capitalized IP costs relating to Schirm Germany have now been impaired. Net finance costs from continuing operations decreased by 23% to ZAR 140 million for the current 6 months compared to ZAR 182 million. This reduction was primarily driven by lower debt levels. EBITDA from continuing operations increased by 2%, mainly supported by an improved operational performance at AECI Mining and a strong performance by the chemicals portfolio, mainly the specialty industrial chemicals businesses, bouncing back from the comparative 6 months impact of expected credit losses raised. The impact of the business disposed of in the second half of 2025 should be mentioned again. The comparative 6 months period's EBITDA included a contribution of ZAR 133 million from these disposed businesses; after adjusting for this, EBITDA increased by 11% period-on-period, reflecting our stronger underlying performance. The Schirm Germany negative EBITDA contribution of EUR 663,000 partially offset the group's overall progress. The tax expense for the 6 months was ZAR 333 million, reflecting an effective tax rate of 47% compared to 41% from continuing operations for the prior period. The effective tax rate remained elevated mainly due to the impairments already mentioned, unutilized assessed losses and foreign withholding taxes on dividends received from foreign subsidiaries. Excluding the impact of impairments, the effective tax rate would have been 38%, in line with levels previously indicated to the market. We are continuing our longer-term objective to implement the necessary structural changes to decrease the effective tax rates to levels below 35%. Pleasingly, basic earnings per share increased by 18% to ZAR 3.48 per share compared to ZAR 2.94 per share for the comparative 6 months. This increase was driven by higher operating profitability in combination with lower net finance costs. Headline earnings per share rose by 8% to ZAR 6.53 per share from ZAR 6.04 per share for the comparative 6 months after the add-back of the impairment charges of ZAR 350 million. Net working capital increased to 19% as a percentage of revenue in comparison to 17% for the comparative 6 months, above the group's target range of 14% to 16%. The increase was partly driven by a deliberate decision to hold additional buffer stock to mitigate supply chain risks and ongoing geopolitical uncertainty in combination with a higher inventory valuation due to increases in raw material input costs. While this supports business continuity and customer service, we are continuing to carefully manage these heightened inventory levels. Capital expenditure for the 6 months was ZAR 417 million compared to ZAR 351 million for the comparative period. Of this amount, ZAR 295 million related to maintenance capital expenditure compared to ZAR 277 million for the comparative period, while ZAR 122 million was directed towards growth projects, up from ZAR 74 million. Maintenance and optimization capital expenditure equated to 0.8x of the depreciation and amortization charge for the 6 months, which is within our guided range of 0.8x to 1.2x. Return on invested capital increased during the period, driven by our efforts to improve the quality of earnings in combination with a lower invested capital base following disposals of noncore businesses and impairments recognized. The group maintained its balance sheet strength during the period. Cash and cash equivalents increased by 14% to ZAR 2.5 billion, while net debt reduced significantly to ZAR 1.7 billion compared with ZAR 2.9 billion as at 30 June 2025. As a result, gearing improved to 15%. Although the gearing level has increased from 31 December 2025, it remains below our guided range of 20% to 40%. When compared with 31 December 2025, net debt increased during the 6 months, primarily due to the utilization of internal cash resources to fund higher working capital requirements. Higher levels of working capital lockups resulted from a combination of cyclical trends repeating, especially in Plant Health as well as elevated levels of inventories due to an increase in critical raw materials inventory and higher raw material input costs, as already mentioned. Movements in receivables and payables largely offset each other. This also impacted free cash flow, resulting in a free cash outflow of ZAR 952 million. Despite this, given the strength of the group's financial position, available cash resources, our projected cash generation in the second half of 2026 and our overall balance sheet capacity, the Board resolved to declare an interim dividend of ZAR 1.16 per share. At a dividend cover of 3x, this dividend payout level falls within our guided range of 1.5x to 3x and effectively mirrors the increase in earnings per share achieved. Our level of total dividend payouts for the full financial year will be informed by our level of working capital release in the second half of the year. The level of working capital release in the second half of the year will be dependent on the status of continued supply chain disruptions resulting from the Middle East conflict as well as any adverse impacts on our Plant Health business due to the Super El Niño cycle that has taken hold. Thank you. I will now hand back to Alan.

Thank you, Ian. We will now present a deeper analysis into the segmental reviews and provide insight into the group prospects for the rest of the financial year. The Mining segment delivered an excellent performance with revenue increasing by 6% to ZAR 9.3 billion. Importantly, this increase in revenue was driven by higher volumes across almost all of our key product ranges. The segment's EBITDA rose by 6% to just over ZAR 1.4 billion, driven by strong operational execution in Asia Pacific and Southern Africa, ongoing operational efficiencies and an improved product mix. Pleasingly, the EBITDA margin remained steady and within the group's target range of 15%. Working capital as a percentage of revenue remained stable at 16% despite the higher ammonia and other input costs, reflecting the strong focus on disciplined execution by the mining teams. Free cash flow decreased by 30% to ZAR 273 million, which was primarily due to the movements on the working capital driven by the higher input costs that I've just described. The segment continued to generate strong returns with return on invested capital remaining at healthy levels and was supported by the improved profitability of the segment. The Southern African region delivered a resilient performance despite slightly softer demand across certain customer segments. Growth in bulk explosives and emulsifier volumes was partially offset by lower shock tube and metallurgy sales, which reflected a competitive market condition and the customer maintenance activities in certain areas. Pleasingly, the region delivered strong EBITDA growth through operational efficiencies, disciplined cost management and improved product mix. Progress on the Mine optimization initiatives remained on track. The investment into the existing assets increased, thereby improving reliability and efficiency in the period that passed, while the complex engineering work, which is a precursor to the larger CapEx projects progressed well. The Asia Pacific region delivered a very strong performance, underpinned by robust volume improvements and stable operations across its key markets. Profitability was driven by higher bulk explosives volumes, together with a once-off benefit of competitively priced ammonium nitrate in Australia. EBITDA growth was further supported by operational efficiencies and disciplined execution. Although margins improved in the period, they were impacted by the timing of cost recoveries on the pass-through model, which we expect to be recovered in the second half of the financial year. The rest of the Africa and the world region operated in a more challenging environment during this period with earnings impacted by slightly lower volumes across the region and margin pressure caused by higher operating costs. Across the segment, however, we continue to see a robust pipeline of contract opportunities, providing a strong foundation for sustainable growth and long-term value creation. If we look forward, the prospects for the Mining segment remain very positive. The predicted volume growth is underpinned by the safe and successful ramp-up of recently secured contracts across both Africa and Asia Pacific. Importantly, supporting future recovery and growth, the segment secured new contract wins in Mali, Zambia, Burkina Faso and South Africa, while successfully renewing key contracts throughout the continent. These achievements underscore the segment's strong client relationships, competitive service offering and the consistent ability to deliver value across a diverse portfolio of operations. In the second half of the year, we also expect our margins to improve as cost recovery mechanisms normalize and the timing effects experienced in the first half of the year unwind. And finally, we will continue to drive our cost and margin optimization initiatives with a clear focus on further improving earnings quality and strengthening profitability across the Mining segment. The Chemicals segment delivered a resilient performance in what remained a challenging operating environment. As Ian pointed out in the financial review, it is important to note that the year-on-year comparison is significantly impacted by the disposal of certain businesses during 2025 and the negative performance of Schirm, which together resulted in revenue for the period decreasing to ZAR 5.6 billion. The segment EBITDA declined to ZAR 407 million, but despite these lower earnings, the segment maintained an EBITDA margin of 7%, reflecting the benefits of disciplined cost management. Importantly, the Chemicals core delivered a very pleasing improvement in performance during the period with both revenue and EBITDA increasing. Revenue increased by 1% and EBITDA increased by 14%. Industrial and Specialty Chemicals delivered an excellent result, supported by favorable commodity product pricing, improved market conditions and the nonrepeat of expected credit losses that were recognized in the prior period. The Water and Plant Health businesses delivered stable performances, although demand, specifically within the public water business was subdued and weighed down somewhat on the growth for these two businesses. Pleasingly, the Chemicals core team were also able to make continuity of supply to our customers through effective sourcing strategies and the buildup of strategic stock levels on critical raw materials. As a result, working capital was negatively impacted by these business resilient actions, which were further amplified by the seasonal buildup of stock for the agricultural sector. We do expect these to unwind over the second half, although the rainfall patterns related to El Niño and the global geopolitical situation may have an impact on the exact extent of that unwind in the second half. The full year prospects for the Chemicals Core remain positive. We expect the continued benefit of strong demand for our sulfur product derivatives for the full second half, which should provide ongoing support to both revenue and for earnings. Performance is also expected to be supported by improved demand from key customers and growth within our export markets, specifically within water and specialty chemicals businesses. In the Plant Health business, the upcoming planting season is expected to support an improvement in performance as customer activity increases in line with normal seasonal patterns. Although as mentioned before, there is some uncertainty about the extent of the projected El Niño impact on rainfall, which may inject some uncertainty into the timing of volumes towards the back end of this financial year. From a cash flow point of view, we anticipate a gradual unwinding of working capital, which will contribute to an improved free cash flow, not only in the segment but across the group. We remain focused on addressing the challenges within Schirm and implementing the necessary actions to improve performance. Overall, the segment remains focused on executing its operational priorities, strengthening profitability and delivering sustainable value creation. Ladies and gentlemen, to recap on the first half performance, I would like to highlight the following. Firstly, our core businesses continue to deliver growth while maintaining the execution discipline required to maintain margins and improve quality of earnings. We expect this to continue going forward and will remain a key management focus. We have seen volume growth across our operating regions, further demonstrating the strength, the relevance and the sustainability of our businesses. Secondly, we focused on enhancing the resilience of our business, which has enabled us to adapt to a changing external environment and to respond effectively to that operating environment. We do not expect external volatility to decrease materially, and hence, these actions will continue to serve us well in the second half. And finally, we have focused intently on improving quality of earnings, and this has led to improved returns and stable margins. The metrics on this slide reflect the positive developments across most of our drivers and are a testament to the efforts of the AECI team on achieving execution excellence and to deliver on our market commitments. As we look forward, the prospects for the group remain positive, and we expect the improvement in profitability that was achieved in the first half of the year to continue to the year-end. This improvement in profitability will be driven by our core businesses. In AECI Mining, we expect the growth to continue, underpinned by improving volumes, the successful ramp-up of recently secured contracts and disciplined execution across our operations. This segment continues to strengthen its position in key markets and remains focused on delivering operational excellence and consistent value to customers. Within our Chemicals core, we expect growth to be supported by the upcoming planting season in Plant Health, sustained demand for our products in our industrial chemicals business and the continued steady growth across our other chemicals core business. We also anticipate an improvement in free cash flow generation during the second half of the financial year as some of the working capital unwinds. This improved cash generation will support our disciplined capital allocation framework, enabling the group to continue investing in strategic growth and maintaining business resilience projects while maintaining sustainable dividend payments to our shareholders. In closing, ladies and gentlemen, we have made meaningful progress in strengthening the group's portfolio, enhancing operational performance and improving the business fundamentals. These efforts position AECI positively to deliver steady and predictable growth in profitability and quality of earnings. Thank you for your attention, and we'll now move into the question-and-answer session.

Good morning, ladies and gentlemen, and welcome to the AECI half year presentation of our results that ended on the 30th of June. We appreciate you joining us today from a very chilly Johannesburg. I'd like to start out today just by introducing you to the 2 team members that weren't part of the prerecorded set of results. On my right-hand side, we have Stuart Miller, who is our EVP in charge of our Mining business. And over on the far left-hand side is Dean Murray, who is in charge of our Chemicals business. By way of process, I will be reading out each question and then passing it over to the relative member of the team or respective member of the team who will then answer that question for us. So I'll start out just on the first question. The first 3 questions, in fact, come from Avior Capital Markets. I'll deal with them one by one. The first of those is which countries outside South Africa are showing the most promising growth in volumes for mining? And Stuart will deal with that one, please.

Alan, thanks for the question. I think in general, across the business, we saw a 14% increase in our bulk explosives demand for the half, which is extremely promising. And coming with that is the pull-through of some of our value-added products like electronic detonators. Outside of South Africa, which did perform very strongly, the key contributors were Francophone West Africa and in particular, Mali, followed by Asia Pacific in excess of 10% growth year-on-year, driven by a strong performance in Australia. Thanks, Alan.

Thanks, Stuart. The second question is, please explain how a super El Niño affects the business? Does it create a problem for pricing or for volumes? And Dean will take that one first, please.

Thank you. So I think at the moment, there's a lot of talk about the El Niño that is expected to hit South Africa in the latter part of the year, early next year. So obviously, this could have an impact on volumes and effectively your cash unwind in your Plant Health business. But it's something that we monitor very closely. And I think at this stage, we've still got good full dams, and we'll wait to see as we go into the planting season. But I think there's more of a concern about thinking about it in the new year.

Thanks, Dean. The third question, please remind us where AECI supplies ammonia from what changes did AECI have to undergo for sourcing ammonia since the start of the Iran conflict? And again, Stuart will take that question for us, please.

Great. Thanks, Alan. Obviously, ammonia is a key raw material that we use in the production of our explosives products. We prioritize sourcing from African-made sources, and we've continued to do so. About 90% of our total demand comes from domestic sources. Whilst we have been investing in supply chain resilience and the capacity to import more, that strategy at this stage hasn't changed. So 90% out of South Africa with the balancing 10% of our demand coming from imported ammonia.

Thanks, Stuart. The next question comes from Laurium Capital. AECI team. Well done on your results. Please provide us with some color on your revenue growth of 6%. I would have thought that higher ammonia prices passed on to customers and the expansion of offshore would have resulted in materially higher sales numbers. And again, Stuart can explain the dynamic that we faced in the first half.

Sure. Thanks, Alan. Primarily, yes, the underlying assumption is correct as the ammonia price increases, which it did, our revenue will follow suit. What we've seen, however, is a strengthening rand, and that has impacted our revenue on the downside as well, effectively seeing ammonia and FX negating each other. In addition to that, we started seeing ammonia increasing in quarter 2 this year. A large part of our business is linked to quarterly rise and falls. Therefore, some of these increases we're expecting to see come through in H2.

Thanks, Stuart. The next question comes from Titanium Capital. Please can you provide some clarity on the regulatory changes and how these impacted Plant Health? Dean, can you take that first, please?

Alan. Yes. So I think it's been coming for quite a number of years now. And what's really happened in the industry, there's been the shift from the harsher chemical products that are used in crop protection to the more softer greener products, and we started to see that. I must say, though, that our Plant Health business is in a good position in terms of the, let's say, the technical development work that has been done in this regard. But of course, it takes a little bit of time to get these products approved and get them into the field, which we've been busy with now for the past couple of years. So at the end of the day, we'll have to see how long that will take as we're working with the various regulatory bodies in South Africa.

Thanks, Dean. Next question is again from Avior Capital Markets. You mentioned that one of the reasons for the increase in working capital is due to strategic inventory holdings aimed at safeguarding business continuity. Can you please add some color to this? Does this mean you are holding higher inventory levels? I'll deal with this one. So there are 3 primary reasons for the inventory holdings that we have at the moment. The first of those is due to inflated raw material prices that are caused by the geopolitical situation that we find, particularly in the Middle East. The second is to the strategic decision to build up some working capital to offset the supply chain risks that we have. And the third is due to the seasonal impact of the Plant Health business where we build up stock holding in anticipation of the summer season. So those are the 3 reasons for it. If we look across those 3 reasons, there is some slightly inflated stockholding because of the strategic decision to hold some critical raw materials in stock and because of the Plant Health seasonal environment on it. And if we look across the business in terms of that, in the mining side, our days are more or less the same. So it's primarily only to the higher cost of raw materials. In our Chemicals business, we do have slightly more from a critical stockholding point of view and from a seasonal point of view in Plant Health. The next question comes from Rosenthal Partners. The question is the return on invested capital for mining is at 23%, but the group level is at 13%. How do we close this gap, meaningfully reducing central costs and/or selling the Chemicals segment? And why has the Board not been more aggressive in unlocking this value? I'm going to ask Ian to deal particularly with the first part of that question.

So thanks, Alan. Just with regards to ROIC, I think we are very pleased with the performance of the Mining segment. In terms of the group performance, we did see a significant increase from a 10% level, the comparative 6 months to 13%. So again, a sizable step-up. 13% for group is slightly below the guided range that we have for the market, and we're continuing to focus on our efforts in reducing central costs through a dedicated plan in doing so to unlock further of that value. I think everybody needs to continue to understand that we have a very diverse portfolio, and that includes the strategic property division that we have that comes off a much lower ROIC base.