Capral Limited (CAA) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Capral Limited Half Year '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Dragicevich, Chief Executive Officer and Managing Director. Please go ahead, Tony.

Good morning, everyone, and welcome to the 2020 Half Year Results Presentation for Capral. And at the scene here, I got myself and Tertius Campbell, our CFO. I'm going to do a brief introduction on the business, although most of you will be aware of who we are, then I'll run through the highlights and the business overview and then pass over to Tertius to run through the financials. And then I'll be back online again to look at our key strategies and the outlook for the balance of the year. So for those of you who aren't aware of who we are, Capral is Australia's leading supplier of aluminum products and solutions. Our core business is the manufacture and distribution of aluminum extrusion, but we also import and distribute around 10,000 tonne of aluminum sheet and plate to complement our products into the market. 5 extrusion plants with 8 extrusion presses in total. Annual capacity 65,000 tonne. And 18 distribution centers across Australia, giving us a national footprint. Our key markets. Our products are sold to fabricators who produce a wide range of products sold into the residential and construction market and also a number of different industrial applications. And as we go through the presentation, we've got some examples of where our products end up. So overall, Capral employees are around 850 people, all in Australia, and turn over a bit over $400 million. So turning to our first half highlights. And as you will all be aware that we run a December financial year, so this is our half year. We produced, I believe, an excellent result in the first half against the backdrop of a slowdown in building activity exacerbated by the COVID-19 pandemic. So our half year results, we turn to Page 5 in terms of the performance highlights. Our half year result was well above the prior period and also ahead of the guidance we provided in our 2019 annual report, and that's prior to any impact of JobKeeper. So the trading profit or trading EBITDA of $10.2 million as opposed to $2.4 million in the corresponding half last year, significant improvement, and an EBITDA result of $17 million. Now the major difference between trading EBITDA and EBITDA is the lease accounting standard. The rents are now excluded out of EBITDA. But from a trading EBITDA perspective, our trading EBITDA includes our normal rent costs. And also there's an LME revaluation that we normally do. So overall, a very strong profit result at the trading EBITDA level and an EBITDA level, with a net profit after tax of $4.8 million, a $13.2 million improvement on the first half of last year. And as you'll recall, the first half of last year included restructuring charges around $7 million for our plant up in Queensland at Bremer Park. This result includes JobKeeper payments of $4.4 million, and overall volumes were on par with the prior period with a solid first quarter pre-COVID being on plan and above last year. And however, the second quarter was impacted by COVID, although Capral traded right throughout the period, was able to trade, our second quarter was significantly impacted, particularly April and May with a slowdown in demand. We ended up at the end of 30th of June with a very strong balance sheet, net cash of $24.9 million. Our Bremer Park restructure, which I mentioned earlier, which we announced in this time last year -- or we actually announced in June 2019 and was substantially completed in the second half of last year, delivered a profit improvement turnaround of $3.7 million as we planned. The cost-saving measures that we put in place in response to COVID mitigated the lower volumes in the second quarter. We qualified for JobKeeper in May, allowing retention of all Capral jobs throughout this period. We increased our market share against imports over the past 6 months and particularly over the past 3 or 4 months. And our safety performance improved significantly in the first half of the year. So they're the performance highlights. We turn to Page 6. I'd just like to run through with you our response plan to the pandemic and the initiatives that we've undertaken within the business in order to mitigate and safeguard the business and its employees from the impact of COVID. So as with a lot of -- as with every company in Australia that operated and continues to operate through the pandemic, a strict range of protocol -- health protocols in place from day 1. Business travel curtailed and restriction imposed on visitors; work-from-home arrangements for all nonoperational staff; risk plans for operating sites, particularly for high-risk sites, Victoria; temperature testing and face masks, et cetera. In order to manage our way through and maintain our bottom line intact, we instigated a salary staff remuneration reduction by 20% for the period from April through to July by utilizing either paid or unpaid leave. And directors' remuneration was also reduced by 25% during this period. All discretionary spending on nonessential CapEx was deferred. And based on our reduced sales forecast that we saw towards the end of April until the beginning of May, we applied for JobKeeper in May, and we received JobKeeper payments in this half year for May and June totaling $4.4 million. We've taken into account $4.4 million in these results. And that's allowed us to keep all Capral employees and their jobs throughout this period. So turning to Page 7. And those of you who have seen our presentations before will have seen this slide. For those that haven't, we concentrate on the left-hand side of the page, our channels to market. So within Capral, we sell direct from our extrusion plants and 46% of our total volume to our large -- I think large customers who buy direct. And the other -- the balance of our sales and more volume is done through our distribution centers, which make up a bit over half of our total volume. And you can see the split there between extrusion sales in green and rolled product or sheet and plate sales in blue at 17%. In terms of our industry exposures, the residential housing market is the biggest. And if we add together with that the commercial construction market, you'll see that construction, both residential and commercial, make up around 60% of our total volume, with the biggest volumes being window and door systems, window and doors, but there's also another -- a large number of other applications as well. And then the industrial sector, representing 41%. The biggest sectors for us there are the transport and marine sectors and a whole pile of steel and metal fabrication customers as well. In terms of volume seasonality, typically, our second half is higher than our first half in terms of volume. And you can see there the corresponding half years for the last 5 years to substantiate that. We're expecting the second half of 2020 to be similar to the second half of 2019 and to see a lift in volume. So our first half volume, as I said earlier, was on par with 2019 with a solid first quarter, as I mentioned. April and May are very soft due to the COVID restrictions that were placed throughout Australia. By June -- but once those restrictions were eased, volumes rebounded very strongly in June and have continued to do so up until today. Turning to Page 8. Spend some time with the residential market as our single largest market. And this is quite interesting to see what's developed over the last few months in terms of the residential housing market in Australia and how we see it going forward. The left-hand graph there shows the actual dwelling commencements split between detached housing, the dark green part of the graph; multi res low rise, the light green; and then the high-rise multi res apartment market in the blue. As you can see that the housing starts have come off from the peaks of 2016, '17 and '18, come off during 2019 and a forecast to fall to around 150,000 starts 2020. Capral's volume in this market is mainly aligned with detached housing and low-rise dwellings, as you can see, which is the green shaded areas in this graph, and you can see that they have come off. But certainly, the highest decline or sharpest decline has been in multi res high-rise, the apartment market, which will be no surprise after being very large commencements over the previous 4, 5 years. The detached dwellings forecast is to decline 21% in 2020, but positive signs as a result of the government-announced homebuilder stimulus, and there's also a number more recently state government initiatives as well. The chart on the right-hand side of that page show how the housing forecasts have changed since December last year. So this is BIS Oxford Economics that we use primarily for our forecasting. And you'll see that in December 2019, they were forecasting a bit under 160,000 starts total dwelling commencements in Australia for the 2020 year. When the pandemic hit in late March, they revised their housing starts down to 126,000 and as time has gone on through May and then into June, they have increased those forecasts to where it sits today at 150,000 starts for the year. And obviously, this was done in June prior to the level 4 or Stage 4 restrictions in Victoria. But certainly, a change in sentiment, and that will largely because of the pent-up demand and also the housing stimulus packages that are being announced by both federal and state governments. So we think the market is going to remain relatively flat throughout 2021. Obviously, the first half during 2021 -- in the first half being slow, but certainly picking up towards the second part of the year. Turn to Page 9. It's just some recent projects we've completed, both residential and commercial, just to give you an idea of where some of our products end up. On the top right-hand picture there, you'll see Gregory Hills Town Centre in Sydney. We supplied all of the decorative and sound attenuation battens to that project produced by one of our large customers in terms of Knotwood. The apartments on the lower level apartments on the right-hand side contain Capral commercial products. And the Hindmarsh Island Boat House in South Australia showcases some Schuco product. We're the sole distributor of Schuco Window Systems, one of the largest European producers of window systems. And in the bottom right-hand page there -- of the page there, a residential home showcasing our high-end residential products. So turning to Page 10, we talk about the -- our industrial sector represents but over 40% of our total volume, so a significant part of our business. On the left-hand side, that graph represents an index of Capral sales over the last 8 years. And you can see that we've had growth through 2016 and continued growth and steadiness right through this year. The biggest segment -- individual segment for us here is transport. The transport sector actually slowed in the first half of 2020, and the graph on the right-hand side represents new truck and van builds over the past 8 or 9 years. And you can see the first half of 2020 significantly down, down 13% on the first half of 2019. However, in the month of June, the -- on a month-on-month basis, June grew 14%, and we're expecting that, that -- we're already starting to see that sector start to lift as a result of the government stimulus package allowing up to $150,000 tax write-off for businesses with under $500 million revenue, and that's been extended through to December 2020. And that started to certainly see a lift in new truck builds in the second half of 2020. The manufacturing and general fabrication markets have been pretty steady through the period. Obviously, declined a bit -- declined in April and May but have rebounded quickly. Defense sector continues to grow. Our major benefit for us in our industrial sector this year has been import replacement volume due to COVID and the supply chains disrupted earlier in the year out of China and the subsequent drop in the Australian dollar and then the -- and also positive anti-dumping outcomes, which were put in place last year. So the major areas that we have got growth out of -- from import replacements is in terms of solar rail. I'll talk a little bit about that later in the presentation and the fencing market. So overall, extrusion imports fell 8% in the first half of the year. We grew our share against imports and representing 7.5% of our first half volume and also representing a 2% shift in market share during the first half of the year. So that certainly helped offset the weakness in the domestic or the local market here in Australia during that first half, particularly in the second quarter of the year. And we saw good sales growth in New South Wales, Queensland, Victoria and South Australia. We actually went backwards a bit in Western Australia, but that's mainly to do with our store and timing of the projects, but good growth in all states, particularly New South Wales. Okay. Turning to the next page, Page 11. Here are some examples of -- interesting examples of some projects we completed during the first half of the year. Top left-hand corner there, you see solar panels. The part that we supply sits under those solar panels, that's called solar rail. This particular installation was done at our Capral's own distribution center in Sydney at Erskine Park. And the company that we supply to is -- supply those solar rails to is Clenergy, the largest solar rail distributor in Australia. Top right-hand corner is the Anzac Class Mast upgrade that was actually completed, not by Austal but actually by BAE in W -- Western Australia. The truck and trailer you can see there on the bottom left-hand side was built by Arends Trailers in South Australia for animal transport purposes, and we supplied all of the large extrusion profiles and -- to produce the internal wall, floor and gate sections, produced at both our Campbellfield site in Victoria and our Angaston site in South Australia. And on the bottom right-hand corner, another industrial project. You see there the West Connex Project in Sydney. We supplied 36 tonne of sheet product, which is used as decorative and sound attenuation on that building. Okay. So I'll now hand over to Tertius Campbell, our CFO, to go through a little bit more detail our financials for the first half of the year.

Thanks, Tony. I must agree with Tony. It's a very pleasing result despite our difficult trading conditions due to this COVID-19 impact. Capral's earnings for the first half is well above prior year and ahead of the guidance provided in the 2019 annual report. The significant slowdown that we saw in sales in April and May was offset by the solid first quarter and also the strong recovery starting in June. This recovery was supported by our ability to keep all our staff onboard, thanks to the JobKeeper payment. The Bremer Park restructuring and automation projects also delivered as expected and will continue to drive improved outcomes into the second half. If we can just have a look at Page 13. We'll see that the half year sales volume were in line with the first half of '19. The reduction in the revenue was mainly a function of the price due to customer mix and lower LME price. This had a $1.1 million impact on our EBITDA. The trading EBITDA for the half was $10.2 million, $7.8 million better than the first half of last year. Bremer Park delivered profit improvement of around $3.7 million in this half, and that's in line with the expectations. In the spirit of the government's JobKeeper initiative, Capral retained all employees throughout the second quarter, costing us around $2.8 million. JobKeeper payments subsidized this retention, allowing Capral to bounce back very strongly when the economy started to reopen in June. Other cost savings throughout the business, such as manufacturing efficiencies, travel, rent and salary reductions through the accelerated lead utilization, delivered a further $3.6 million. EBITDA of $17 million is $13.6 million better than the first half of '19, leaving us with a net profit after tax of $4.8 million representing earnings of just under $0.01 per share. On Page 18 (sic) [ 14 ], balance sheet. Overall, Capral's financial position remains very strong, and we again ended the period on a solid net cash position of $24.9 million. Our trade receivables are all insured and days sales remained below 50 days throughout the pandemic. $18 million of franking credits still available for distribution, and $291 million accumulated tax losses is available for recognition. Turning to Page 15 shows that the cash invested in working capital has decreased. This is primarily due to the very strong debtors collection in June and also lower inventory. CapEx spend for the first half was limited to maintenance and life cycle replacement items. The full year '19 final dividend was paid in March, and as you remember, we initiated a DRP early on in the year, and very pleasingly, the participation rate of that was just over 50%. I think that's all the key items on the cash flow as well. So with that, I'll hand back to Tony.

Thank you, Tertius. I'll quickly talk about our strategy, our key initiatives going forward, anti-dumping and then a bit of a discussion on the outlook for the balance of the year. So our key strategies are building on what we're good at, optimizing what we do and growing for the future. So turning to Page 17. In terms of our manufacturing business, our focus is on delivering cost savings from our recent automation and CapEx projects, which we completed during 2018 and 2019, where we had quite large capital programs, and also the streamlining of our Bremer Park operations post the restructure. So we continue to focus on delivering those savings, and we've still got a bit to go. Selective maintenance capital spend to ensure the ongoing reliability and efficiencies of our plant. So with our extrusion plants, we have a very long life, providing we continue to spend money on the reliability and improvements to those plants by relatively minor spend relative to the cost of putting in a new press. In our distribution business, we're a long way down the track of developing and improving our market offer and particularly in terms of our windows and door -- Capral's window and door offer to market and our service and our aluminum distribution business. Our longer-term -- or medium to longer-term goal is to increase the volume and profitability of Capral's direct distribution channel and -- so that we have less reliance on the high-volume, low-margin customers that we supply on a mill-direct basis. This is a real organic growth opportunity and is a key focus for the business over the next couple of years. In terms of new market development, and we've spoken about this earlier this year. Solar, we see solar as a real growth opportunity for the local industry. Anti-dumping measures have provided the opportunity for Capral and other local extruders to compete in the $60 million-plus solar rail market. We have entered into a supply agreement with the largest solar rail distributor in Australia in the second quarter of 2019. And we're starting to see those volumes come from offshore back to onshore and to our extrusion plant. Defense, we're -- Capral is approved supplier to all major defense contracts. As you can see from one of those previous industrial slides, we're already supplying into a number of projects with others in tender stage. Cladding. This market has the potential to be reasonably significant as yet to the state -- as to date, it's relatively modest. But as you will be aware, it's well-publicized building fires have led to the banning of certain composite panels. Over 1,000 buildings in Australia need cladding replaced and new buildings must meet new standards. We have a license to supply and a supply agreement with SmartFix to meet these standards. And while it's a slow process still to ramp up, this represents a good opportunity going forward. In terms of sales, our focus here is really to -- continuing to invest in IT and systems development, ongoing investments in technology to improve our sales effectiveness. We've implemented CRM in the business a couple of years ago. We continue to improve that, including flexible EDI interfaces with customer systems to reduce the cost to serve. We've expanded our E-store presence and continue to develop our E-store to provide customers with more flexibility in terms of online ordering. And our online sales are up over 250 -- sorry, 250% on the first half of last year, but it's off a low base. We launched a new website earlier in the year, and I'd encourage you all to get on, on www.capral.com.au. If you look at our website, we were awarded the silver medal in the recent Melbourne Digital Design awards. We introduced a new sales reporting and margin management tool for our sales management and sales teams during the year, which is certainly giving us a lot more flexibility and timely management of our margins. And there's a host of other IT initiatives within the business that we're using to supplement and tack on to our core SAP ERP platform. Okay. Moving on to influencing trends within our industry. On the left-hand side, I'll talk about anti-dumping, and I'll talk about that first. As you will be all aware, Capral has been very active in the space since 2010, representing the Australian Aluminum Extrusion Association in taking cases initially against Chinese imports in 2010. That has continued, and we've also added a couple of other Southeast Asian countries to that activity over the past 10 years. I'll focus primarily on what's happening in 2020. We made an application to extend the Chinese duties for a further 5 years past October 2020, and we know are due to expire. That -- we're a long way down that process, and the Statement of Essential Facts was published by anti-dumping Commission in July, and they supported our position. They found continuing dumping and continuing subsidy of Chinese extruders by the Chinese government, and we're very confident that those measures will remain in place for another 5 years post October 2020. And we've got 3 new cases underway focusing on Malaysia and Vietnam. Going forward, we continue to monitor import activities, take action as required. We are supporting and working with Border Force on compliance. It's very important. There's been a large number of -- the Border Force has been quite successful in catching and stopping transshipment and also misclassification of product. And one in particular, the solar rail market, it's been 1 area that's now become available to the local extrusion industry as a result of work that was done by Border Force in uncovering the misclassification of solar rail coming into Australia. The challenges with anti-dumping continue to be very limited information available on imports from the Australian Bureau of Statistics. They seem to think that the privacy of importers and exporters is more important than the local manufacturing industry being able to compete on a fair playing field, and we continue to battle that. Transshipment, we believe, still continues to occur. And while we stamped out the most of it, that's really up now to Border Force to enforce that. And we're continually looking at new import sources that are possibly dumping. Just on that subject, Capral is one of the founding members of an organization called Manufacturing Australia. Together with 12 other large local manufacturers, we lobby government and particularly around anti-dumping and also energy and gas in particular. Some of the other companies involved -- we're involved with include Dulux, Rheem, BlueScope, Brickworks, Incitec Pivot to name a few. What we have seen over the past 4, 5 months, particularly with the wake of the COVID pandemic, is an intensification of the campaign to support Australia made and we're certainly adding momentum to that. We've written -- during April, I personally wrote to all of the major importers of aluminum extrusion into Australia, asking them to support local industry, and we've had a really good response to that and that's partially helped our volumes and also local industry volumes in the first half of this year as we've gone through very difficult times. On the right-hand side of that page is just an update on LME. You can see the overall metal cost, which is made up of, obviously, LME plus the MJP, which is the local premium. You can see that in the quarter of 2020, a significant drop in our metal costs. LME declined 18% during the first half of the year, offset by a weaker Australian dollar meant that, that decline was 14%, and the reduction in LME fell from about AUD 2,600 down to AUD 2,200 during that period. And as you'll see on the next page, that is now back up to pre-COVID levels again. So now turning to the outlook on Page 19. Just continuing on with the discussion on LME. LME is now, as of today, back up to where it was pre-COVID in U.S. dollar terms after hitting 4-year lows in May 2020. The Australian dollar, as you'll be well aware, fell sharply towards the end of the first quarter, but that's -- it's also recovered to pre-COVID levels during July. So overall, metal cost having weakness over the last quarter is now -- the last 3 or 4 months, is now back to where it was -- returned to levels pre-COVID going forward. And we should have a reasonable amount of stability, we hope, for the rest of the year. As I said earlier, residential commencements are forecast to have bottomed during the second quarter of 2020, and the outlook is improving with the current expectation around 150,000 starts for 2020. The industrial sector is anticipated to remain solid and can keep at current levels or better for the balance of the year going forward. We continue to operate our businesses in Victoria, our business in Victoria, during the Stage 4 restrictions, and we do not expect any material impact on our FY '20 earnings as a result of the restrictions that are currently enforced in Victoria. There will be a -- some drop-off in demand. Our Victorian sales represent about 20% of our total volume. However, over 80% of our customers are still operating in the Victorian market, and we are fully operational as of this week. We will continue to play a leading role in the pursuit of Fair Trade, as we've just discussed. However, given the ongoing uncertainty of the impact of COVID during the second half and the potential positive impact of the government stimulus packages, particularly in relation to housing, it's too early to accurately predict demand and results of the second half. However, Capral will, as it has done -- has shown its resilience through the first half of the year, there is no doubt that we will remain profitable right through the second half of the year. And certainly, the receipt of JobKeeper payments to -- through to September will ensure the continued employment of our workforce. So absent any unforeseen circumstances, Capral fully expects to be in a position to consider the payment of a final dividend relating to the FY '20 year, in line with our dividend policy. However, any dividend would be from earnings that exclude JobKeeper. Okay. That's just from me. On the final page of our presentation is just a footprint of our operations. And I now like to hand it over back for questions to the operator.

[Operator Instructions] Your first question comes from Simon Mawhinney from Allan Gray.

Just on your -- Page 13 of your presentation, I'm curious how we should view the combined impact of the staff retention and JobKeeper. So, I guess, this time next year, is it right to look at the difference between those 2 offsetting impacts, the $1.6 million and assess the first half 2021 relative to first half '20's trading EBITDA less that $1.6 million?

That would be a fair assumption, Simon. There's a lot of moving parts in all of that. But yes, yes, we were -- our volumes came off significantly in April and May, very significantly, which is why we became eligible for JobKeeper in May. Clearly, that had a cost to us in terms of retaining people through that period. But obviously, it was offset by the positive impact of JobKeeper for which we received for May and June.

[Operator Instructions] There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.