Capral Limited (CAA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Capral Limited 1H FY '21 Results Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Dragicevich, Managing Director and CEO. Please go ahead.

Well, good morning, everyone, and welcome to Capral's 2021 Half Year Results Presentation. I'm Tony Dragicevich, the CEO of Capral, and I'm joined on the call this morning by our CFO, Tertius Campbell. We plan to present a similar format to previous announcements for around 30 minutes before we dive -- and before we dive into the results, I will start off by giving a brief overview of the business. So for those of you, I hope you have a copy of the presentation in front of you. Just turning to Page 2. So Capral is the largest supplier of aluminum extrusion and aluminum plate into the Australian market. Our core business is the manufacture and distribution of aluminum extrusion produced in 6 manufacturing plants, supported by a national sales and distribution network. Aluminum is a strong, lightweight metal and is the preferred material used in lightweight construction applications. Our largest market is residential and commercial building, where we supply fabricators of windows and doors and numerous other building products. We also supply into a wide range of industrial applications, including truck and boat building. Our annual sales revenue exceeds $500 million. Our market share is around 26%. There are 7 local extrusion competitors and with imports making up around 1/3 of the market. We currently employ over 900 people. So that's just a brief overview of the business for those that are new to Capral. So the agenda this morning is that I will take you through the first half highlights, then I'll hand over to Tertius to go with a more detailed look at the financials and then back to me for high-level strategy and a discussion on the outlook and guidance. So the 2021 highlights. I'd just like to say that when lockdowns were lifted last year, our industry came out of the blocks fast due to pent-up demand, and since then, government stimulus and import supply chain disruption has increased momentum in our key market segments. So turning to Page 5. We have a very first -- very strong first half result, which is well ahead of our previous guidance which we gave at the AGM, and we'll update it at the end of the presentation for the full year. So volume was up 33% on the first half last year to 36,000 tonnes with our plants operating close to capacity throughout. This led to sales revenue being up by a similar percentage to $261 million for the half year with a trading EBITDA result of $15.7 million, which was nearly $10 million ahead of the same period last year. We must remember that the first half of 2020 was disrupted by COVID restrictions, with an EBITDA -- with a statutory EBITDA of $26.2 million for the first half of this year and the main difference between the 2 EBITDAs is the statutory EBITDA doesn't include rent expenses as per the new accounting standard and -- but it does include a positive LME and FX revaluation of $1.5 million. So we peel those 2 things out to give us a trading EBITDA, which we consider to be a more relevant, measurable number based on historical accounting standards but still a very, very pleasing result and the best first half result for many, many years for Capral. So net profit after tax, $15.7 million, included a $2 million deferred tax recognition benefit for the half year. We took up a similar amount at the end of the last financial year in December. That led to an earnings per share for the half of $0.93 compared to $0.29 in the first half of last year. We had strong balance sheet with net cash of $33.8 million, and this has led to our first interim dividend for some time that we declared at $0.20 per share fully franked. And also just to note that the DRP will be active through this period. So these results were driven by buoyant market conditions, leading to high sales demand, improved operating leverage in our manufacturing facilities and the benefits of the restructuring that we undertook in 2019 in our largest plant at Bremer Park. They all combined to lift profitability to high levels in the first half of the year. We saw strong market conditions prevailing in residential building and key -- and the key industrial sectors, or a lot of them were assisted by the government stimulus. We also increased share against imports, and that's been maintained through the first half of the year. We had good safety performance, considering the level of activities in all of our operations at 6.3 total reportable injury frequency rate. So turning to Page 5 -- Page 6. We look at our volume breakdown and a bit more detailed look at where that growth has come from. So many of you will be aware that -- what our channels to market are and how -- and our diverse industry exposure, but just quickly, around 40% of our business is through our own distribution centers, both aluminum rolled product, which is sheet and plate, and aluminum extrusion; and around 60% of our business is aluminum extrusion directly from our manufacturing plants to our large customers. In terms of industry exposure, our largest markets are residential and commercial construction, combined representing around 55% of their total volume; and then a group -- and our industrial markets representing the balance, around 45%, which -- including transport, marine and a significant number of other manufacturing applications. The split by product group in terms of our -- out of our total volume, 85% is extrusion with 15% in aluminum sheet and plate. On the right-hand side of Page 6, at the top there, you'll see our volume seasonality, which shows our half year volumes. You'll see that typically, the second half year is stronger than the first half, given the seasonality of our business particularly in the construction -- residential construction industry. But this year, the first half has been the strongest in many years, in fact outstripping our second half volumes in our peaks. And we do expect this to continue subject to the COVID restrictions particularly in Sydney at the moment. So our first half volume, 33% above last year, which I said earlier was impacted by COVID, and 7% above the second half of 2020. This volume growth has been driven by a buoyant housing market, obviously helped by the government stimulus packages, market share gains from imports due to supply chain disruptions and increased shipping costs, positive antidumping outcomes over the last few years and a growing Australian-made sentiment. We're also seeing investment in infrastructure, which has also been stimulated by government as well. So turning to Page 7, which is we talk a little bit more detail around the residential market. So the residential market continues to grow. In 2021, the latest forecast shows housing starts at 211,000, up 16% on 2020. As I said earlier, the residential starts is assisted by not only government stimulus but record-low interest rates, home -- federal government HomeBuilder program and also state government first homeowner initiatives, so all combining together to see a 26% increase in detached housing, which is one of the key market in -- for us, Capral, in this area. In 2022, the market is forecast to soften a little bit. We do see a soft landing. There's a lot of work in the pipeline, and the current restrictions that are operating in parts of Australia will also see this carry into -- well into 2022. On the right-hand side is a chart of dwelling commencements over the past 10 years. Capral's volume in the residential market is mainly aligned with detached to low-rise dwellings, which is shaded in green on this graph on Page 7 there. And you'll see that the detached and low-rise dwellings are forecast to be at the highest level in the last decade. The high-rise apartments are at a relatively lower level after going through a boom through 2015 to 2018, but there's a lot of -- predominant players in the high-rise apartments are imported aluminum windows. So the local manufacturers of windows and doors represent a small proportion of the aluminum that goes into those high-rise apartments. So we've had a very, very strong start in the year in this market segment. There's a little bit of uncertainty about what the COVID restrictions will bring in the second half of the year, but we do expect the volumes to continue to be strong. On Page 8, just some examples of recent residential and commercial projects that we've undertaken. Top left-hand corner there is a high-end house in South Australia. This house was constructed using the Schüco window and doors systems, which are the top-end range, which is a German European window and door system. We're the sole Australian agent for them. We produce that aluminum here in Australia. Top right-hand corner is another up-market home in Melbourne, featuring Capral's high-thermal performance systems, which is called Futureline, combined with Schüco doors in that particular house. Bottom left-hand corner is The Marsden Brewhouse in New South Wales, which is a good example of commercial projects using our commercial glazing systems. And then bottom right-hand corner, something a little bit different, is Coastal Luxury home in Victoria. It's clad with aluminum decorated -- deco cladding. We're doing it with our large customers in Sydney and also using Capral's architectural glazing systems and window and door systems in the home. So turning to Page 9, where we talk about the industrial sector, which we have seen to be very strong in the first half of the year. The chart in the top left-hand corner depicts Capral's sales over the past 10 years. It's an index of our volumes, and you can see that in 2021, we've had a strong lift. And just talking about those markets quickly, those major markets within our industrial sector. So the marine market has improved conditions this year. Last year was a little quiet due to the timing of boat builds with our major customers, particularly Austal Marine. The manufacturing and general fabrication markets this year have come out of the block strongly. We've also gained share against imports in this area. The solar market, where we supply aluminum solar rails that sit under the solar panels on residential and commercial roofs, we're seeing strong growth in the sector, and this is once again as a result of antidumping activities that we've initiated and taking share of imports. In terms of resellers, we also -- while we have our own aluminum distribution business here at Capral, we also sell to other aluminum distributors in the market, and that volume was lifted over the last 12 months due to the import replacement volumes that we put in there. Infrastructure continues to be strong. We've seen good, strong underpinned -- good, strong growth both in infrastructure and the transport sectors, particularly with infrastructure investment underpinned by government stimulus. The largest sectors in our industrial market is the transport sector, and that graph on the right-hand shows -- on the right-hand side shows the new truck and van builds over the past 11 years. And you can see there in 2021, for the first half, those truck builds are up 1.2% on the same period last year. So we're anticipating good growth continuing, and we've certainly seen our large transport customers, which are mainly truck builders, delivering good volume to us this year. On Page 10 -- turning to Page 10. Just some examples -- good examples of recent Capral industrial projects. Top left-hand corner there, a 41-meter catamaran ferry produced by the Austal shipyards in Vietnam. This vessel features Capral marine-grade plate and extrusion supplied here out of Australia. Top right-hand corner, HVAC platform mounted on top of a commercial building roof produced by Con-form Group. So we supply them with all the aluminum extrusions for that platform. Bottom left-hand corner, a good example of a trailer unit produced by Muscat Trailers here in Sydney with -- using Capral plate and extrusion. And bottom right-hand corner is a bit of a unique industrial project for us in commercial infrastructure. This is the ventilation shafts at the M5/M8 Tunnel, which is due to open sometime later this year. So it's Capral extrusion gold anodized. So some very nice projects and good examples of where our products end up in a variety of industrial sectors in which we deal with. So I'll now hand over to Tertius to take you through the detailed financials for the first half of the year, then I'll come back and talk about the outlook later on. So over to you, Tertius.

Thanks, Tony, and good morning, everyone. I agree with Tony. It's a very pleasing result, indeed. Capral delivered a very strong performance and above earlier expectations. Our integrated value chain benefited from higher volumes, better asset utilization, strict cost control and disciplined capital expenditure. Overall, the key financial outcomes for the first half were very strong earnings, solid balance sheet and a comfortable cash position. So if you turn to Page 12. Capral results for the first half was significantly better than both the first and the second halves of last year. Sales volumes were 33% up on first half '20. This led to revenue growth of a similar magnitude, delivering a $7.1 million positive impact on our EBITDA. In addition, a slight improvement in the margin boosted profit by a further $1.5 million. The higher demand led to better utilization of our production and warehouse facilities, providing operating leverage gains in the order of $4.4 million. These gains were partly offset by cost increases in line with the higher activity levels and the non-repeat of the reduced salaries due to COVID last year. Trading EBITDA at $15.7 million is significantly better than last year with the second half expected to continue this trajectory. Bremer Park, after the 2019 restructure, produced positive earnings in line with expectations and will continue to deliver improved outcomes. EBITDA of $26.2 million is $9.2 million better than half year '20. In line with the expectations of sustained future earnings, Capral started recognizing additional deferred tax assets in FY '20. A further $2 million was recognized in this half. Net profit after tax of $15.7 million represents earnings of $0.93 per share, more than 3x the first half '20 earnings per share. Turning to Page 13, the balance sheet. Overall, Capral's financial position remains strong, and we ended the period with a solid cash position of $33.8 million. Higher sales and increased global aluminum input cost led to higher selling prices and drew higher receivables and also a requirement to hold increased levels of stock at these higher costs. This substantially increased working capital requirements. As foreseen in our full year '20 presentation, overall working capital requirement increased around $15 million this half and will continue at this level or higher, depending on the sales levels and aluminum input costs. Capral still has $15 million franking credits available for distribution, of which $1.5 million will be distributed with the interim dividend next month; also, a further $243 million of accumulated tax losses that are still available for future recognition. On Page 14, the cash flow shows strong cash earnings offset by working capital increases, as explained earlier. This led to a reduction in operating cash flow. In addition, a net $5.4 million was paid as dividends during the first half as well as around $10 million for the Smithfield acquisition, which included plant, spares and inventory in addition to the actual asset. These outflows reduced net cash flow by around $16 million. In closure, flowing from the strong first half outcomes, this FY '21 interim dividend of $0.20 will be paid in September with the DRP again being active. Thanks, Tony. Back to you.

Thank you, Tertius. Certainly nice to be able to present such a good set of numbers for the half year. So turning to the strategy and outlook. Our overall drive is to get a return on the recent investments that we've made not only in terms of the plant at Smithfield that we acquired earlier this year but also the investments that we made in our other manufacturing plants and then also into our distribution business to help us keep improving our long-term competitive position. So turning to Page 16. The key focus is to improve productivity and competitiveness and to retain the market share gains against imports that we've enjoyed over the past 12 months. So in the manufacturing business, our focus is on delivering the benefits of the Smithfield acquisition. We aim to -- we're currently up running at 2 shifts. We aim to run it up to 3 shifts by the end of the year and to run at capacity in the first quarter of next year. A significant amount of work has gone into integrating that plant into Capral's extrusion operations, and we're now starting to see the benefits of that acquisition, which I think would be an excellent one for us in the years ahead. We continued process improvement programs at all extrusion plants. All our plants are operating very, very well at -- pretty much at full available capacity. The restructuring we undertook at Bremer Park in the second half of 2019 is paying dividends, and it is generating the returns that we expected. Just to remind everyone that, that restructure took out $8 million worth of ongoing cost of that site, and that plant continues to -- is now delivering strongly to Capral's bottom line, and we expect it to do so and continue to improve over the years ahead. We need to spend maintenance capital to ensure the ongoing reliability of our plants and improve our efficiency, and we have quite a heavy and strong capital program around maintaining our facilities to high standards. Our extrusion plants can operate efficiently and effectively for up to 30 to 40 years and -- provided we maintain them to good standards and update them as required. We're progressively upgrading the shop floor control systems to a common platform right through our manufacturing operation, which we hope to complete through 2022. In our distribution business, we're nearly finished completing the upgrade to Capral's -- our own proprietary window and door systems and product range and also our system software to support that product range, and we hope to have that complete in the first quarter of 2022. Those products are being rolled out as we speak. We're also looking to increase warehouse capacity in our 2 main markets in New South Wales and Victoria. In New South Wales, we've signed a new lease at a building in Huntingwood, which is nearly twice the size of our current facility. And we'll also be moving the Parramatta head office into that site later this year. So we hope to be in that, all things being equal and COVID permitting, over the Christmas break. We've also taken on some additional warehouse capacity, overflow capacity in Victoria to help us improve our customer service levels and hold a bit more inventory given the higher demand. Our long-term goal with our distribution business and for Capral is to increase the volume and profitability of our own direct distribution channel and be less reliant on other volumes coming from other distributors. In terms of sales, our ongoing technology investments to improve our sales effectiveness include EDI. So we continue to ramp up our EDI engagement with our customer systems; CRM, with our sales force running on Capral CRM system and enhancing and growing our digital marketing campaigns. We've upgraded our website recently, and we're currently upgrading and we're building out our e-store to provide more information and ease of interactions for our customers, both direct customers and our specification -- and specifiers in the architectural community. And we recently implemented a new sales reporting software tool to help us manage and improve our margins and manage our customer database. In terms of market development, the key focus areas in the year ahead are, firstly, solar. As I said previously in an earlier slide, the antidumping outcomes have provided the opportunity for local manufacturers to compete in this large solar rail market. We signed -- last year, we signed an agreement to become the exclusive local supplier to the largest solar rail and component distributor in Australia, a company called Clenergy. So we're working with them, and those volumes are growing quite nicely. We expect that to continue in the years ahead. In the government defense areas, we are a preferred -- an approved supplier to all the major defense contracts, including the frigate submarines and also the [ land ] components of those defense contracts. The biggest ones for us are the frigate programs where we have a fair shipment -- a fair component of aluminum in those -- the aluminum in those frigates still being built mainly by Austal in Western Australia. In terms of cladding, this is a growing opportunity. We're working with a number of cladding system suppliers to address the new fire standards and re-cladding opportunities that have resulted as a result of flammability with those cladding systems in a number of buildings, both in Australia and worldwide. In terms of import replacement, retaining the market share gains that we've enjoyed over the -- or we won back over the last 12 months, focus on that through service differentiation. Our shorter lead times are very important to the market, particularly in the current environment and also -- and providing competitive local pricing. We certainly have been able to do that now that we've got more of a playing field in terms of getting real antidumping outcomes and also the higher freight costs that are being imposed upon imports over the past 12 months. Okay. Turning to Page 17, just talking about some key industry influencing factors and, firstly, antidumping, which is briefly mentioned a minute ago. Capral has taken the lead on behalf of the aluminum manufacturers in Australia -- or aluminum extrusion manufacturers in Australia, and we've been at this for over 10 years. The original case was taken -- the one in 2010, and I won't go through all the details here because many of you would have heard it before. But the most important ones recently have been the extension of measures on Chinese imports for a further 5 years until 2025. And this year, earlier this year, measures were imposed on some exempt Malaysian imports. It's currently under appeal by those importers. And also, we're just about to initiate a continuation case against -- to see continuation of duties against Malaysia and Vietnam, which we have to do every 5 years. Border Force continues to have an increased focus on -- between shipment and misclassification, which is very important to us. In this year alone, a Border Force report that came out last week, they issued -- they recovered $3 million in additional duties as a result of misclassification this year alone, the majority of that being in aluminum extrusion, so a very important initiative and one that we will continue on working both with manufacturer in Australia and other key supply partners to -- in the Australian aluminum community here in Australia. Now aluminum price. So turning to global aluminum prices here. You'll see a chart on the right-hand side of Page 17. The price we pay for -- this is the price we pay for aluminum billet, which is our key raw material input. And we pay the global LME price for aluminum plus a regional premium that applies, what you call the MJP, which applies in the markets of Asia. As you can see by the chart there that we've seen -- that both the LME and the premiums have escalated this year. The regional premiums have been relatively stable for around 6 years. However, the first half of this year, they jumped 67% and will continue to rise in the second half of this year. LME, which is the largest component of our -- of the aluminum raw material cost, increased 18% during the first half of the year from AUD 2,660 a tonne to over $3,100 at the end of June. The -- and significantly above what it was in June 2020 at $2,200. As we speak today, the LME is at AUD 3,600 a tonne. This week, that's up 35% on where it started the year from -- significantly up on the same time last year. So that's going to be challenging for us particularly in terms of our working capital levels. So turning to the outlook on the Page 18, which is the final page of the presentation. We have -- we will be announcing, as part of this results presentation, an upgrade to our guidance. Before I go through that, just it'd be remiss of me not to talk about the -- how Capral is coping and how we're operating in the current COVID-restricted environment. So we have fortunately been able to continue to operate as an essential business during all of the COVID restrictions over the past 18 months. And at this stage, we do not expect that the new restrictions will have a significantly material adverse impact on demand in the second half like this. It's probably a big quarter to make at this stage. We are seeing an impact in our New South Wales business -- we're starting to see an impact in New South Wales business with a good portion of the construction industry being under -- being locked down under restrictions. One of the benefits of being a national business is that we've got good volumes still being generated out of there, out of Western -- WA, Queensland, South Australia. Victoria has also been really strong. Tasmania is strong. And so we do expect that while there will be some impact on the New South Wales construction close-down -- we're part of the close-down, we don't expect that to have a significant adverse impact on the second half results. Smithfield plant, we acquired earlier this year. We'll continue to ramp up production levels. It's a big focus for us at the moment to reach capacity by the first quarter of 2022. In the second half of this year, we expect residential building to continue to grow. As forecast, nonresidential construction is also forecast to recover in this year. That may be impacted in New South Wales to a degree, but overall, we still expect to be relatively strong. And the industrial sectors all around are anticipated to remain strong even here in New South Wales, as we speak. Many of our customers, particularly in the transport sector, are very busy with very high order books in front of them. LME, as we spoke about, is forecast at higher levels in the second half of the year, reaching 10-year highs and some 30% plus above where it was at the start of the year. So taking all this into account, and absent any major unforeseen events, we expect the full year 2021 trading EBITDA to be in the range of $31 million to $33 million, which would be a very, very strong year for Capral and probably one of the best -- or certainly the best on record for the past 20 years as opposed -- compared with our previous guidance range here, we can see $25 million to $27 million, and also resulting in a statutory EBITDA of $51 million to $53 million. Obviously, that number excludes the impact of rent costs. On this basis, Capral will be in a position to continue the payment of a fully franked dividend at year-end. So very pleased to be able to present what we consider to be an outstanding set of numbers for the first half. And all things being equal, we should have a very strong year. So handing back to the operator for questions.

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

Congratulations on a great result. I'm just curious how you would have us interpret the dividend on 2 levels, firstly, its modest size relative to your current profits; and then secondly, your decision to DRP some of it or potentially all of it given the strength of your balance sheet.

Simon, I'll answer that one. Look, Capral's major objective here is to be -- really is to become a solid dividend payer, and the introduction of an interim dividend is a key component of that. It's modest because we're very cognizant of the fact that we want to be able to maintain a consistent level of dividends through the -- through high periods of the peaks of market demand and also through the troughs. So it was important to us -- at this stage is our first interim dividend for, I think, somewhere around a decade or more to pay -- to signal to the market that we are -- we intend to play -- pay interim and final dividends on an ongoing basis, and the volume of those -- or the level of those will be -- obviously, we'd like to see consistent through the period. It's our first one that is modest, given the current -- given the earnings for the first half of the year but also a step -- a strong step in the right direction. In terms of the -- and of course, we still got the final dividend to be declared at the end of the year. We're also very mindful of the fact that this will also come to the DRP activation. We've had the DRP in place now for a few years. It's been well received and well contributed to by a number of shareholders, and the Board felt that just want to be consistent in having that DRP available to shareholders should they wish to undertake it. And one of the key thoughts in our minds at the moment is that with the significantly rising LME, which drives -- which really drives our working capital levels up significantly, is that our -- while we've got strong cash earnings, we've also got strong outflows this year, in particular, with the rising LME in terms of the investment in working capital as well. So just on the cautious side, I think that we've been modest in terms of the dividend that's been announced as an interim. And we're also -- I guess for consistency, also looking to maintain that DRP as well. So hopefully, that answers your question, Simon.

It does. That's quite clear. And well done again.

Okay. Thanks, Simon.

Your next question comes from [ Simon Samuel ] from Delta Asset Management.