Capral Limited (CAA) Earnings Call Transcript & Summary

Good morning. I'm Rex Wood-Ward, Chairman of Capral Limited. On behalf of the Board, welcome to Capral's 2021 hybrid AGM. To meet the requirements of Capral's constitution, a quorum of 3 shareholders is physically present at the Parramatta venue today. Capral's Managing Director, Tony Dragicevich; Capral's CFO, Tertius Campbell; and a Capral employee shareholder. Other members of the Board, Kathy Ostin, Philip Jobe and Graeme Pettigrew are present online. Accordingly, I declare the 2021 AGM open. Today's meeting is also being held online by the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies can ask questions and submit votes. The notice of the meeting and Capral's 2020 Annual Report have been provided to shareholders, and copies are available on Capral's website. The notice sets out the items to be considered at this meeting and will be taken as read. If a shareholder or appointed proxy has a question about the annual report, a resolution or any general matter, these can be submitted at any time. [Operator Instructions] Please note that while you can submit questions from our time of the meeting. There is a delay from when you submit a question and when we receive the question. So it is better to submit your question ahead of the item of business to which it relates. Also note that your questions may be moderated or if we receive multiple questions on one topic, amalgamated together. Finally, due to time constraints, we may run out of time to answer all your questions. If this happens, we will answer them in due course via e-mail or posting responses on our website. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open the voting for all resolutions. The actual voting results for each resolution will not be covered at the end of each resolution, but generally at the end of the meeting. At that time, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. I now declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time. I will give you a warning before I move to close voting. Prior to considering the first agenda item, Tony Dragicevich, Capral's CEO and Managing Director and myself would like to take the opportunity to address the meeting. Capral faced many COVID-19 challenges during 2020. The 2019/2020 restructuring of Bremer Park proved to be a critical contributor to the company navigating the consequences of the pandemic. In addition, Capral's qualification for JobKeeper allowed the company to operate through the second quarter without drastically cutting staffing levels caused by the severe drop in demand and the prevailing volatility uncertainties. The various governmental programs then enable the company to rapidly respond to improving market conditions, by increasing and leveraging its workforce to meet the unexpected surge in demand, which gained momentum over the second half of the year. Capral benefited from a strong shift to import replacement, as the effects of renewed antidumping measure took hold during the second half of the year. In addition, disruptions to import supply chains as a result of the pandemic, shipping congestion and increasing sentiment towards local supply added to demand. Governmental assistance targeted to the residential construction market through homebuilder and other incentives began to take hold in the last quarter of the year, and the resultant demand has flowed strongly into 2021. When Capral reported its full year results in February, there were clear signs of the successful initiatives undertaken in the prior year to turn around the performance at Bremer Park and the ability of our people to respond to the new opportunities before them. Capral's financial results for the year ended 31st December 2020, were outlined in our full year results presentation released to the ASX in February as well as our annual report, which has been sent to shareholders. Some of the financial highlights reported includes total revenue for the year of $432 million, an increase of $13 million over the prior year. Excluding JobKeeper, Capral recorded trading EBITDA of $90.7 million, $8.7 million higher than the prior $3 million arising from the recognition of deferred tax of $10.8 million or $0.66 per share. In 2019, we showed a loss of $4.2 million after normal charges of $6.7 million. We are committed to growing a sustainable business, which is aligned with all of our shareholders and stakeholders through balancing the use of free cash between funding internal growth, investing in Capral projects and paying dividends to our shareholders. Our strong cash flow and balance sheet allowed management to take advantage of the opportunity to acquire the G James New South Wales extrusion facility, which was completed on the 1st of February 2021. We add additional people and enhance operational capability, this facility should become earning accretive in the year ahead. Capral has also set aside additional JobKeeper funds to invest in Capral projects that will create new jobs. The company paid a fully franked dividend of $0.45 per ordinary share to shareholders on the 26th of March 2021. This dividend, and all incentive payments to employees, is based upon and is paid out of earnings and cash flow, which totally exclude the JobKeeper benefits. Our safety performance produced a record low of 5.8 lost time injuries per 1 million hours worked in 2020. And Capral's management will continue to focus on safety and prioritize awareness thereof in our business. It is most encouraging to see positive signs of recovery in our economy. The strong demand for our product which gathered momentum over the second half of 2020 has maintained its strength into the first quarter of 2021. As a result, of 13th of April 2021, Capral announced a guidance upgrade for the 2021 financial year. Tony will expand on this in his address. On the 14th of April 2021, the Board announced that it had entered into a process to progress a nonbinding indicative proposal by Allegro to acquire 100% of the outstanding shares in Capral at $7 per share per the scheme of arrangement. The Board believed that this was in the company's best interest to provide a liquidity opportunity for shareholders at a price above the then market price. The Board received strong feedback from a number of shareholders who overwhelmingly believe that the proposal significantly undervalued the company. As a result, it was clear that the proposal would not receive sufficient shareholder support to succeed. And on the 20th of April 2021, the Board announced that it had terminated the process deed with Allegro. I would like to repeat our welcome to Kathy Ostin to the Board and as chair of the Audit Committee. Kathy replaced Ian Blair who retired after 40 years of invaluable service as an independent nonexecutive director. Finally, I wish to extend the Board's appreciation to all of Capral's stakeholders for their support during 2020. And to all of my Capral colleagues for their wisdom and assistance throughout the year. Thank you. I'll now hand over to Tony, and he will address the meeting.

Thank you, Rex. Firstly, financial review. And some of this Rex has already covered, so bear with me. [indiscernible] Market conditions varied significantly throughout 2020. After a solid start, demand for Capral's products plummeted during the period of COVID lockdown restrictions. However, conditions rebounded strongly in the second half, resulting in higher-than-expected demand. In response, Capral operators manufacturing plants at close to capacity, leading to good operating leverage in the second half has grown increased earnings. As COVID restrictions were imposed in April, demand fell sharply with economists and other commentators forecasting dire conditions in key markets. Capral accordingly developed plans to reduce its workforce. Capral subsequently qualified for JobKeeper in May, which allowed the business to retain all 798 Capral employee jobs. This means Capral was well placed to respond to increased demand when restrictions were finally lifted. The residential market improved in the first -- in the fourth quarter of 2020 on the back of low interest rates and government housing stimulus programs. Commercial construction was adversely impacted by COVID restrictions as were our key industrial markets. These markets rebounded when restrictions were lifted. The biggest impact on second half volume was a shift to local manufacturer away from imports. This growth was driven by: import supply chain disruption, enforcement of antidumping measures and a growing Australian-made sentiment, recognizing the benefit of shorter and more reliable lead times. The LME price of aluminum declined 40% in the first half of the year, but strengthened the year-end to finish slightly up on where it finished in December 2019. The average LME for 2020 was 5% below last year. In the second half of 2019, Capral completed -- second half of 2019, the year before, Capral completed a significant restructure of its largest manufacturing operation at Bremer Park in Queensland. This restructure successfully transformed Capral's operations, resulting in an impairment reduction of around $8 million in costs with $5 million of those cost savings flowing in 2020. So Capral delivered an increased profit in 2020 with a trading EBITDA of $19.7 million, up from $11 million on the prior year on 8% higher volumes, with an EBITDA of $47.2 million compared to $19.9 million the prior year, which includes a JobKeeper benefit of $11.9 million. Capral ended 2020 with a net cash balance of $49.4 million. This was assisted by abnormally low working Capral levels as a result of record debtors collection performance and reduced inventory levels due to high fourth quarter demand. Capral paid a fully franked dividend of $0.45 per share on the 26th of March 2021, higher than 2019, which was reduced due to restructuring costs at Bremer Park in line with 2019. So turning to our key initiatives and strategies. As Rex mentioned, we negotiated and acquired the G James extrusion operation in Smithfield, taking control on the 1st of February 2021. The plant has annual capacity of 9,000 tonne and is in excellent operating condition. The strategically important acquisition provides Capral with an expanded manufacturing presence in New South Wales, savings on freight cost and improved quality and service to our customers in the state. A 12-month toll manufacturing agreement with G James allows a smooth transition and covers fixed plant operating costs during this period. The total acquisition of cash reserves, the Smithfield plant is expected to provide incremental earnings in 2021. Capral is also planning to install a new paint line in New South Wales during 2022 at an approximate cost of $3 million. Over the next few years, we will focus on growing Capral's aluminum distribution business. We plan to launch new product ranges and service initiatives to assist this growth. Capral continues to lead the local extrusion industry in the pursuit of fair trade. During 2020, the key outcomes were: Firstly, the renewal of measures on Chinese imports for a further 5 years; secondly, increased surveillance and prosecution by Australian border force against anti-circumvention activities by importers. And thirdly, measures imposed on certain imports from Malaysia. While import volumes reduced in 2020, they continue to represent a substantial proportion of the total extrusion market in Australia, imports continue to suppress prices and injure local manufacturers. Safety. Safety first is one Capral's key values. and we continue to focus on risk assessment, training, systems and safety culture. Capral returned to spin safety performance on record in 2020. Sustainability. Capral advanced its commitment to environmental obligations by creating a National Sustainability Committee with employee representation across Capral's various operations and regions. A sustainability order was completed during 2020 to identify improvement opportunities for consideration and action. By way of update to the disclosure in Capral's 2020 annual report, Capral has received customer claims relating to the supply of nonconforming marine grade plate. The plate was manufactured by a third-party, independently certified and distributed by Capral. As stated in the annual report, Capral has supplied replacement marine grade plate to affected customers and the replacement product was fully provided for in Capral's 2020 accounts. Some claims included a property damage component, which was submitted to Capral's insurer. Management is in ongoing discussions with the insurer, supplier and certifier in this regard. Those claims together with potential liability and recourse against third parties are currently being assessed. Capral will continue to update the market in accordance with this continuous disclosure obligation. So turning to the outlook. External forecast for the residential market has lifted, as government housing stimulus takes effect. With starts now expected to reach 190,000 in 2021. The nonresidential building and industrial markets are also forecast to rebound after a COVID-disrupted year in 2020. So on this basis, the overall market for Capral's products is forecast to grow in the year ahead 2021, and we expect to retain a proportion of the market share gain from imports. As Rex said, we announced an upgrade to our earnings 2 weeks ago. Our trading EBITDA is now forecast absent any unforeseen events, to be between $25 million and $27 million, with EBITDA between $38 million and $44 million. And on that basis, Capral would be in a position to continue the payment of a franked dividend. I wish to thank all Capral employees for their flexibility, resilience and contribution to the 2020 results, which were produced under unprecedented personnel and working conditions. Thank you. I'll now hand back to Rex.

Thank you, Tony. The first 2 items of business relate to your consideration of Capral's 2020 annual report. Mr. David White of Deloitte, Capral's auditors is available online to answer any questions you may have about the conduct of the audit. We did not receive any written questions on the audit ahead of today's meeting. We will now address any questions on the annual report or the audit, all questions regarding the management of Capral's business. Just a reminder to please insert the agenda item at the front of your question to enable us to collect questions quickly. At the moment, we have 3 questions, 2 from Delta Asset Management and one from Mr. [ Dion James Bailey ]. The Delta Asset Management questions are: firstly, now that the company is generating meaningful profits, can you reinstate dividends on a half yearly basis? The company historically has paid one dividend a year. 2 years ago, we did a special dividend in the middle of the year. The Board is considering its policy at the moment and will be considering the possibility of paying a dividend midyear. But at this point, we are not firm on that. The second question was, am I right in thinking that any successful takeover of the company would cause the substantial prior tax losses to become unavailable to be utilized in the ongoing company? That's not 100% correct. The significant tax losses that we have would be possibly intact, depending on the same business test. And that's the critical thing, whether the acquirer conducted a similar business or the business was refinc-ed and there was no additional change in its operations. So those questions would have be answered specifically depending on what the actual acquisition was about. I think I'll give the next question to Tony.

Okay. addressing Mr. [ Bailey's ] question, which is quite a [indiscernible] one actually, which is, has the management team or Board considered moving the Parramatta office to one of your Sydney manufacturing or distribution sites, which may be more cost-effective. That hasn't been an option in the past, because we just physically don't have room. But the company has recently signed a new lease on a building for its new South Wales distribution center in Sydney. And it is our intention to relocate that new building. The existing building has space to accommodate the team at Parramatta, and it is our intention to relocate there later this year once the New South Wales distribution center relocates as well.

Okay. Thanks, Tony. Those are all the questions received on the annual report. So in the absence of any more questions, we will now consider the items which require voting. As indicated in Capral's Notice of Meeting, voting on each of the resolutions being put to the meeting will be conducted by a poll. Majority of shareholders who submitted proxy forms appointed the Chair of the meeting as a proxy. As indicated in Capral's Notice of Meeting, the Chair will vote undirected proxy votes in favor of all resolutions. As I am the subject of the next agenda item, I can't chair over those proceedings, I now hand over to Tony for agenda item 3.

Thanks, Rex. The first voting item is the reelection of Rex Wood-Ward as a director. The wording of the resolution is shown on the screen. The total number of valid proxy votes is displayed on the screen. Yes. I now hand back to the Chairman for the remainder of the meeting.

Thank you, Tony. Next item of business is the reelection of Katherine Ostin as a director. The wording of the resolution is shown on the screen. We haven't received any questions on this item. And the total number of valid proxy votes received is displayed on the screen. Agenda Item 5 is the adoption of the remuneration report. The wording of the resolution is shown on the screen. There are no questions on this item. The total number of valid proxy votes received on this item is displayed on the screen. We move to Agenda Item 6. Last item of business seeks shareholder approval to issue share rights under Capral's long-term incentive plan to Tony, Capral's CEO and Managing Director, and is subject to the vesting of those share rights on the 1st of March 2023 to then issue ordinary shares to Tony. The wording of that resolution is shown on the screen. There are no questions on that item. The total number of proxy votes received is displayed on the screen. Ladies and gentlemen, that concludes our discussion on the items of business. In a couple of minutes, I will close the voting system. Please ensure that you have cast your vote on all resolutions, and I will now pause to allow you time to finalize those votes. [Voting]

Ladies and gentlemen, voting is now closed. The provisional results of voting indicate that all resolutions have passed. This will be verified and released to the stock exchange later today. There being no further business, the 2021 Annual General Meeting of Capral is now closed. On behalf of the Board, we thank you for your attendance today.