Capral Limited (CAA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Capral Limited FY '23 Results Webinar. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Dragicevich, Chief Executive Officer and Managing Director. Please go ahead.

Good morning, and welcome to Capral's Full Year 2023 Results Presentation. I'm joined this morning by our CFO, Tertius Campbell, and very pleased to present another very positive set of results for Capral for the past year. So just turning to the agenda. So this morning, we're going to run through -- I'll run through the business overview, the 2023 highlights and a little bit about the markets in which we operate. Tertius will then cover off in more detail the financials and then it'll come back to me for the strategy and outlook and guidance and then finish up with some Q&A at the end. So, turning to just a general overview of our business, and I'd like to start this off by just talking a little bit about aluminium itself. So Aluminium is a very -- is very important to the Australian economy. Australia is the largest exporter of alumina globally and with the local smelters combined, make the aluminium industry one of the largest export earners for the country. The industry itself employs over 3,000 people, both upstream and downstream. So Capral, where does Capral sit? Capral is downstream from the smelters, and we extrude aluminium. And extruded and rolled aluminium play a very important role in global decarbonization. Aluminium is both strong and lightweight, unlike other metals, and this makes aluminium the preferred construction material in many building, transport and industrial applications. So aluminium has been around a long time. It has a bright future in terms of its usage around the world and will play a significant role in the decarbonization of the world as we proceed over the next couple of generations. In terms of Capral itself, forgive me for those of you that have been on the call a number of times and know Capral well. But this morning, we have quite a few -- and I'd welcome, it's quite a few new people that are listening in this morning. So, talking about Capral, we're Australia's leading supplier of aluminium extrusion, which we manufacture locally through our plants, and we also are the largest distributor of rolled products. We are the #1 aluminium manufacturer, the largest supplier of industrial aluminium extrusions, the #1 supplier of value-add services in terms of aluminium, which is something we've really focused on growing in the last 5 or 6 years, and we also are the #1 largest distributor, importer and distributor of aluminium sheet and plate. We are #2 in the commercial window and door framing market; provision framing, that market. So, turning to the next slide, where we show our business at a glance. So we have 6 manufacturing plants spread around the major capital cities of Australia with 8 extrusion presses with a total extrusion capacity of 65,000 tonne per year. In total, we have 20 distribution centers around Australia, including 12 trade centers. Our key markets are residential and commercial construction, and a wide variety of industrial applications. And our overall market share in the aluminium supply market is around 28%. We are the only national extruder and national supplier of aluminium. Our footprint is included in the appendix for those that [ pushed a ] bit more detail. So in the last 12 months, our annual turnover, around $660 million; total assets, $425 million and in excess of 1,000 employees. So turning to the next slide, I just want to discuss the journey we've been on over the last 6 years. We significantly derisked the business and increased our capability for future growth and success. So just running through some of those key events. Starting in 2018, we invested $5 million in the automation of packaging and bundling stations at our largest facility, which is at Bremer Park in Queensland. We invested $3 million in their new paintline in our Canning Vale plant in Western Australia, and we also consolidated all of our operations onto that site in that year. And that was the year that we began the upgrade of our building systems range. 2019 was one of the biggest years in Capral's history, certainly the biggest from a turnaround perspective. We spent a significant amount of money restructuring the Bremer Park site, resulting in ongoing annual cost savings of at least $10 million per annum. That significantly derisks that plant and significantly derisk Capral overall. The other thing we did that year was to establish the standalone Building Systems division to allow us to grow our share in that market, which we were #3. We're now back up to #2 in that segment, and we continue to strive for further growth in Building Systems. 2020 was also quite a significant year. Obviously, COVID was a frightening event in more ways than one, whether individually or personally, but certainly from a business perspective, running our business with -- at that stage, over 900 employees was reasonably challenging, to say the least. However, once COVID restrictions were lifted in Australia in the second half of 2020, we saw the market rebound quite quickly. We saw disrupted import supply chains and the growth of Australia-made sentiment. We also, at that time, successfully had dumping duties reimposed on China and extended for a further 5 years. So those factors combined to see a significant lift in growth in demand for our products, which has continued right through into today. In 2021, we acquired the Smithfield plant from G James here in Sydney. A really good acquisition for us and one that will hold us in great stead, add additional capacity to our business in years to come. And that was the start of our industry-leading safety performance. Obviously, that doesn't come overnight. Many years of work gone into developing our safety systems. But we -- in 2021, we achieved industry-leading safety performance, and that's continued right through until the year just completed. We consolidated our New South Wales corporate head office and our New South Wales distribution center into a new site in Huntingwood here in Sydney, which we speak to you from today, and we started our sustainability journey to net 0 began in 2021. 2022; record high LME hit the market, primarily as a result of increased global demand, but exacerbated by the Russian invasion of Ukraine, upset global markets. 2 major projects, which we began late in 2022, the upgrade -- firstly, the upgrade of our Penrith plant and the installation of a new paintline here at Huntingwood in New South Wales. We introduced late in 2022, a lower carbon aluminium options for our customers, and I'll talk a bit about that later in the presentation. And we also released our new building systems range and software to support it. 2023, continue to expand our trade center footprint with 2 acquisitions in the past 12 to 18 months. We've invested in thermal break capabilities, which is going to be important as we move forward with high stringency in the building code in Australia, the more thermally efficient window systems. And we achieved Aluminium Stewardship certification for performance, standard and chain of custody, which is also very important for us going forward, particularly around our sustainability story, which I'll touch on a little bit later. So, moving to the 2023 full year highlights on the next slide. Yes, thank you. So earnings finished stronger than our guidance and certainly stronger than we expected, driven primarily by stronger volumes in the second half of the year than we anticipated. So, right throughout 2023, we had solid volumes through our business and more importantly, for our manufacturing plants, which enabled -- which supported the strong -- which was supported by the strong residential pipeline. So while residential housing starts came off quite significantly in the last year or 2, the significant pipeline of work to be completed, helps support our volumes last year and for longer than what we anticipated. We do have quite a diversified industry exposure. So, we're not totally reliant or certainly nowhere near totally reliant on residential, and we gained share in a number of markets in which we play. Flowing through the bottom line was the ability to maintain margins and careful cost management recoveries through the period because, as everyone knows, inflation has been running at above normal levels over the last year or 2. So turning the next page to look at our highlights -- financial highlights for the year. So the full year results exceeded expectations, as I said, exceeded guidance with our underlying earnings on par with last year's record result. So in terms of volume, down 1% on the year, so held up better than we expected. Sales revenue down 5%, almost entirely driven by lower aluminium metal prices, which is driven by the international LME price of aluminium. So it's still turning in a strong sales revenue result, a bit over $650 million. And pleasingly, our underlying earnings, underlying EBITDA, $62.5 million, slightly up on last year, and our underlying EBIT at $39.5 million, which was slightly down on last year due to higher depreciation and the impact of lease amortization, because we signed a new lease at one of our major sites, which impacted amortization in the 2023 year. Underlying earnings per share, $1.83; down $0.13 on last year. And that resulted in us declaring a final dividend of $0.35 per share fully franked. And that, together with the interim dividend of $0.20 a share fully franked, combined with the share buyback program undertaken in the second half of 2023, which was $0.175 per share equivalent, meant a total return for 2023 year to shareholders of $0.725 per share, which was up $0.025 on last year. Of note is that we have now utilized all of our franking credits. We've exhausted them and decided to pay those out fully in the current year. And so any future dividends will be unfranked from Capral and we'll talk a little bit about that later in the presentation when we get to guidance. Pleasingly, our net cash position improved considerably from where it was at the end of December 2022, over doubled to nearly $60 million, and that was a result of, obviously, improved profitability or good profitability. That's a significant reduction in net working capital levels, driven by both a reduction in actual stock levels in terms of volume, but also a lower metal price and lower selling price as a result of the LME reducing. In terms of net tangible assets per share, they rose 10% to just over $10 at the end of FY '22. And our underlying net tangible assets that excludes the timing of the leased assets, which now sit on their balance sheet, thanks to accounting standard AASB 16. If we take -- if we eliminate the impact of that, our -- I guess our underlying or real NTA per share is sitting at around $11.80, which is significantly above where we have been trading for the last 12 months and currently. Our safety performance continues to be best-in-class. We have the lowest reportable injury frequency rate at 4 of any of our listed peers over the past 12 months in the building industry. It's something we've been very proud of. Okay. Turning to the next slide, where we discuss our channels to market. One of the things that has helped us protect our volume over the last few years has been diversification of the industries and becoming less reliance on the residential housing market and other distributors that we sell to, and increasing our market share in industrial and our direct distribution. So speaking to the right-hand pie chart there. The largest segment -- largest single segment that we are exposed to is residential building at 40%. And then the second biggest segment is commercial building at -- non-residential building at 12%. And then we have a large variety of industrial markets including -- major ones including transport, marine and many other metal fabrication industries, which now make up close to 50% of our total volume. If we went back 5 years ago, that number would have been around 40, low 40s, Tertius?

Yes.

So, a significant increase in terms of industry exposure, which is something we've been strategically doing to minimize the impact of the inevitable downturn and the ups and downs of the residential housing market. The left-hand pie chart is how we go to -- is how we actually, as a company, go to market. So, 50% -- 56% of our total volume in Capral is supplied directly from our extrusion manufacturing operations to large customers and into our own distribution facilities. But that 56% represent what goes to our large customers. The other 44% of our volume goes through our distribution business. And as we said earlier, we have 20 distribution sites around Australia. The largest part of that is extrusion, which is supplied by our manufacturing facilities, supplied by manufacturing facilities, and around 14% of our total product, total volume is rolled product, which is sheet and plate, which is all imported, and there's no local rolling mills existing in Australia anymore, hasn't been for more than a decade. So just in terms of the volume seasonality in the volume. So, our volume was broadly in line with last year, as you saw on the previous slide, was down 1 %, so it held up extremely well. The residential market has slowed and the pipeline has reduced, but that reduction in that pipeline, we really only saw at the back end of 2023. Resellers started returning to imports as that supply chain normalized. However, importantly, our market share gains we made in direct end users that we're importing has held up well. And our volumes, so the softer volumes and slightly softer volumes in those 2 areas was more than offset by ongoing infrastructure investment and strength in our industrial sectors and market share gains there as well. The graph on the right hand side of this particular slide shows the volume seasonality first half versus second half. You can see there that the -- traditionally, we have had a stronger second half than first half, and that's generally been driven by the residential housing markets as we enter into the summer months becoming more active and working towards having houses locked up or dwellings locked up by end of year, so that builders can progress payments. In the last 2 years, we haven't seen that eventuality happen or that traditional seasonal peak is not eventuated. This year, it was driven by a slowdown in residential activity in the second half, but also an increase in the diversity of markets that we're exposed to. Okay, so let's turn to discuss what's happening in the housing market. So, residential construction, while our exposure has lessened, it's still our single biggest market, representing 40% of our total volume. So the detached housing commencements, which are significant for us, have slowed. Our volume is primarily in detached housing and in low-rise multi-res and we are less exposed to the high-rise apartment market, particularly sort of 10 stories and higher, which are the domain of fully imported windows, typically. So in 2023, we've seen the market drop a further 5%. It had dropped nearly 20% in 2022. So the volumes that we're seeing in terms of housing commencements or residential housing starts from the -- are down 25% from their peak in 2021. But that, as we said -- as I said earlier, which I must emphasize is that the significant amount of work there was work in progress due to delayed commencements and delayed capacity in building, has seen that -- has kept that volume of work to building industry suppliers like ourselves quite strong right throughout most of 2023. In 2024 housing starts -- sorry, residential housing commitments are forecast to start lifting. However, that is mainly being driven by an increase in high-rise multi res, in particular, with detached housing continuing to decline a further 7% in 2024. Okay, so that's the housing market. So overall, we are certainly expecting softer conditions now that, that housing pipeline build has diminished quite significantly and the volumes into our key market segments, which is detached and low-rise multi-res are going to continue to be relatively soft in the months and the year ahead. So just turning to the next page. Next couple of pages, we've got some examples of showcasing where Capral's products are used. I always like to highlight and feature some of our key projects throughout the past 12 months. So here, we have on the left-hand side, some apartment building in Western Australia, where our Facade Solutions division produced, using Capral product, windows for one of the large apartment projects in WA. And in the next -- the middle picture and right hand picture represent residential dwellings. One in WA in Busselton, and the other in Glen Iris in Melbourne, both utilizing Capral's proprietary window and door systems. Then turning to the next page, we have some examples of our commercial projects completed in the last 12 months, also using Capral's proprietary window and door framing systems. So first one there on the left-hand side, New South Wales Rugby, the Waratahs' new head office. Who knew that rugby [ still had any ] money to spend? Luckily it was in 2023. And let's hope that's a positive start for -- a sign for rugby in Australia. So a brand-new building there, which we're very pleased to be providing all the windows and door solutions or systems to that facility. And then a childcare facility here in New South Wales and the Ravensthorpe Shire Visitor Center in Western Australia, not only containing Capral's window systems, but also, as you can see at the top of that picture, the battens were also supplied by Capral, [ our own ] aluminium, which we are seeing a significantly increased use of aluminium in facade solutions, which I'll also talk a little bit about later. So, turning to the next slide, which showcases our industrial sector, which has been our standout in the last 12 months, in fact, probably 2 years. This sector remains strong despite a slowdown in some segments, but the overall volumes have held up very well and we've improved our market share. So just touching on a couple of the key segments within industrial. Transport, strong condition throughout the year, expected to continue through 2024. The graph in the middle of the page shows new truck and van builds over the past 11 or 12 years. And as you can see, 2023, a record year. And our truck builders are telling us that they have pretty full order books right through to the end of 2024. So that is important for us, both in terms of our extrusion -- manufacturing, extrusion, supply and also our sheet and plate distribution as well. The marine market experienced slower conditions in 2023, but we are starting to see an improvement there, are still our largest customer in this space, as a number of defense contracts underway. And then our large Tasmanian customers, both Incat and Richardson Devine Marine have contracts to build local ferries and most significant of which are for Sydney Harbor. So yes, we're starting to see a lift in the marine market and expect to see that in 2024. Clearly, the demand for solar -- rooftop solar, both residential and commercial, continues to grow, and we are starting to take a stronger position in that market, albeit for various reasons. We will never be a large supplier into that market, which has traditionally been the domain of imported solar rail. I will share with you a video on the next -- when we get to the next page on one of our key solar rail distributors. Industrial construction; investment is steady, but there are starting to be signs of pullback, but we -- nationally, but we are still very strong in a couple of states, particularly here in New South Wales. We are supplying into some large projects, not rail projects, but also more importantly, the new Western Sydney Airport project. And the cladding sector continues to grow as rectification activity comes online, and we're starting to see aluminium being used more extensively in the sector for new builds as well as rectification. Our volume to aluminium distributors, as we've signaled previously, has softened as the import supply chain is normalized. So, a number of aluminium -- there are a large number of aluminium distributors in Australia and imports are a stable part of their supply arrangement. Our manufacturing and general fabrication markets have held up well, and we certainly retained our share gains against imports over the last couple of years. So, next slide, just showcasing a couple of key customers and where our products end up in industrial. Well, the middle one Muscat Trailers. One of the largest truck builders in New South Wales, where we supply both extrusion and plank to Muscat. That's a very important transport customer to us here in New South Wales. Echo Marine is a bit different to Austal and Incat and Richardson Devine that these guys build super yachts for the very wealthy people. I don't think I'm going to be able to get one of those unless Capral's share price goes a lot high, Tertius, but these are sort of in the $100 million category. So Echo Marine has been one of our long-stay customers, and this is a great example of the vessels that -- luxury vessels that they produce using significant amounts of both extrusion and plate in the construction. So, I just want to spend a little bit of time talking about solar rails and Sunlock. Sunlock came on board with Capral about over a year ago now for their supply of solar rails and importantly for us, we -- to enable us to grow, to become good share of their supplier. I think we're now their leading supplier of extrusion rail. Our low-carbon aluminium offer has certainly been one of the key attractions for them to join us on that low carbon journey, both in terms of the product that they're supplying and the extrusion that you're using in the solar rails. So without further ado, we've got a short, very short video. It takes about 1 minute to showcase Sunlock. And these are a series of videos that we have produced for our key customers to showcase their business and how Capral's products are used within their businesses. So customers use them for their advertising purposes and marketing purposes as do we. So, I'll just share with you that video now. [Presentation] So I think it's a great insight into what we do and -- both in terms of our supply, but also in terms of where we're going with our sustainability program here at Capral. So without further ado, I'll pass you over to Tertius Campbell, our CFO, to run you through our financial results for 2023.

Thanks, Tony, and good morning to everyone. Amidst inflationary pressures and slightly reduced volume, Capral has demonstrated yet another strong performance. Our fully integrated value chain has reaped the benefits of solid volume levels, good asset utilization, tight cost control and prudent capital expenditure practices. In summary, the key financial highlights for the 2023 year encompass robust earnings, strong balance sheet and healthy cash position. Moving to Page 15 on our profit and loss. Capral's earnings for the year exceeded our expectations with underlying EBITDA amounting to $63 million, marginally better than the previous year's performance. The decrease in LME price of aluminium and the lower volume contributed to a small 5% decline in revenue. Whilst the 1% dip in sales volume had a minor adverse effect on earnings, enhanced margin and more favorable product mix culminated in a noteworthy net profit before tax, just short of the record levels we achieved last year. Continued strong demand ensured efficient utilization of our production and warehouse facilities, thereby maintaining favorable operational leverage. However, the impact of inflation on non-metal costs surpassed $6 million, dampening our earnings. Nonetheless, price increases, cost-saving initiatives and efficiency projects provided a measure of mitigation. The release of a prior period claims provision provided a non-recurring benefit. Underlying EBIT at $39.5 million mirrored last year's performance. Therefore, no additional deferred tax asset recognition was made at this stage. Our underlying net profit after tax of $32.9 million lagged the previous year, primarily attributable to heightened finance cost driven by increased interest and the average debt in beginning of the year. And the underlying earnings per share of $1.83 supports the declaration of a final dividend of $0.35 per share, bringing the total cash returned to shareholders to an equivalent of $0.725 or 40% of our net profit. Moving to Page 16. Metal cost, you'll remember that during 2022 metal prices, that's the LME plus the premiums, rose to record highs, placing enormous pressure on our working capital requirements. Over the past year, the LME started to moderate. The average LME decreased around 12%. Metal cost has not yet returned to the pre-war in Ukraine or COVID Levels. But that forecast reduction -- but as forecast, the reduction enabled us to release to date around $20 million tied up in our working capital. If we look at the balance sheet in next page. Capral's financial position remained strong with a net cash position just short of $60 million at balance date. Noting that all working capital trade loans were settled during the first half, the cash position allows Capral to not only declare a final dividend, but also continue the share buyback originally announced the second half of last year. Debtor days outstanding improved to 42 days, a very good result. And as anticipated, our inventory value have also reduced, resulting in a further release of cash. The average monthly working capital requirement fell by approximately $5 million compared to 2022 and $22 million since December '22. Some further reductions is anticipated in the 6 to 12 months contingent upon sales levels and aluminium input costs. With the declaration of the fully franked final dividend, Capral has now distributed all its franking credits. Additionally, there are $110 million of accumulated tax losses eligible for recognition as deferred tax assets in future periods. Turning to the cash flow, Page 18. Cash generated show a significant improvement in comparison to the corresponding period, facilitated by the release of working capital, as explained earlier. This contributed to a free operating cash flow of $51 million, after the planned $8 million expenditure -- capital expenditure during the year. An additional $16 million was returned to shareholders through dividends and buybacks. In conclusion, the final dividend of $0.35 per share will be paid in March, and due to the continuation of the buyback initiative, the dividend reinvestment plan will remain inactive for this distribution. The share buyback program will commence shortly after that record -- after the record date. Just the next page. This graph shows the progress Capral has made in regards to cash returned to shareholders over the last 8, 9 years. Total distributions in FY '23 were an equivalent of $0.725 or 40% of underlying earnings per share. The Board also announced a further buyback of up to 10% in the next 12 months. Tony, I think that's basically all the key items So I hand back to you.

Thank you, Tertius. Okay, turning to the strategy and outlook, which is obviously very important. Our focus has been on returning -- getting good returns on the investments we've made and continuing to improve our long-term competitiveness. We're also looking to expand our distribution footprint in particular. We'll talk a little bit about that on the next couple of slides. So, turning to the next slide. Our strategy has remained consistent throughout the last number of years, based on building on our strength, what we -- what Capral is good at, and clearly, we're the largest player, we've got the widest range to market. We have invested in innovative systems and supply chains, and we've got very experienced people. The focus has been on using those strengths in optimizing what we do and continue one of our key values within Capral is better every day, and we're always looking to continue our -- to improve our productivity and our customer service metrics and optimize our supply chain. And then we're looking to grow for the future. So leveraging those capabilities and the new opportunities in the market; developing new products and channels to market, which we've been successful at doing both in building systems and the lower carbon offer, which are 2 good examples; and enhancing our overall presence in the architectural market through our Building Systems business and the work we do with architects through our specification teams. And looking into the future, expanding our footprint either organically through starting up new facilities or through acquisition. So, just running through on the next page, some of the key things that we're doing in each of the important parts of our business. Manufacturing, continuing to do what we have always done over the last decade, looking to be better at what we do, ensuring that our plants run reliably and that we have the right amount of maintenance capital spend on them. If we are undertaking a project which will last a number of years or which will take a number of years to progressively upgrade our shop floor control systems to a common modern platform, that will take probably right through to the end of 2025, by the time it's complete. And so that the upgrade of our Penrith plant at the beginning of last year and the second stage of that has been delayed till the end of this year. And then the third stage will be in 2025, that we'll complete the upgrade of the Penrith plant to a new modern facility. In terms of our distribution business, we released a new -- finally released our new window and door system range to market and the software to support it. We installed a new paintline here in Sydney, we spoke about earlier, and looking into maximize the benefits of that. And also, to grow our -- one of our key strategies in the last 3 or 4 years has been to grow our direct distribution channel, both organically and we're now looking at by acquisition as well. In terms of sales and marketing, we continue to enhance our -- what we do from a -- on the technology front, digital front. We've upgraded our -- in the last 12 months, upgraded our website and our new e-store late last year, commissioned and up and running. We continue to roll out the customer partnership program with the Crafted with Capral campaigns and videos, which we've just seen. And the new one for this year -- or late last year and this year is developing what we call Capral Can Do videos, which promote Capral's capability and the improvement in the enhanced capability we have, not only just in extrusion manufacturing, but all the value-add services that we've added over the last number of years as well. So moving to the next slide, to some specific initiatives in terms of market development. We've spoken about lower carbon offer. We're the first to market with lower carbon aluminium, and we are the only ASI-certified supplier. So we're the only one who can provide a certification of lower carbon aluminium to customers and architects and downstream developers. So our focus in 2024 will be to expand the market understanding and penetration of our LocAl Green and LocAl Super Green offers to market, focusing on both the architectural, let's say the builder -- construction market, particularly commercial and to a lesser extent, residential, where the volumes will be, but also to our key industrial markets, we're certainly starting to see a lift in recognition of lower carbon aluminium and the likes. We've already seen what's happening in -- what Sunlock are doing in the solar rail industry, but we're also seeing demand start to come from the both ship builders and also from the transport customers as well. Solar, we've spoken about. It is a large market. That market has been traditionally the domain of imported products. It is very small number of extrusions involved, high volume, typically anodized, typically coming out of China at low cost. So difficult to penetrate those supply chains where imports prevail in that market. But we have grown our share and we continue to grow our share, utilizing, obviously, our local and short lead time supply offer. We're offering a non-anodized product, so we can be reasonably price competitive. And also we've got the unique ability to offer a lower carbon alternative, which should be attractive to the sector. Cladding; well, for some time now, we've been working with cladding system suppliers to address the new fire standards and recladding opportunities. And we've also seen a big uptake just in decorative battens for the use of -- in industrial and commercial projects as well. Just touching on imports and antidumping, because they are a significant part of the market and they are a significant part of what we do here on let's say on a day-by-day basis. But we certainly lead and continue the fight for fair trade on behalf of the local aluminium industry. We successfully appealed the removal of measures on Malaysia and Vietnam, and that appeal was -- successful appeal was announced late last year, which will see duties reimposed on low-cost dumped imports out of those 2 countries, which we're very pleased about. And we also undertook a review of the duty levels on Chinese imports given the aluminium price being at a higher level. And that also was concluded late last year with positive outcomes. The big challenge we have or the big target on for the next couple of years is the review of Chinese duties in 2025, because they're reviewed every 5 years. Late last year, aluminium was added to the strategic minerals list. Not quite sure what that means. The important one is the critical minerals list, which give the smelters and the alumina refineries -- which would have given the smelters and alumina refineries some respite from the decarbonization of their industries, or the upstream industries, but the second best was the development and the addition of aluminium to the strategic minerals list, which we've not quite determined yet what that means, but it's got to be better than nothing on it. So, not that it adds significantly for Capral, but we are an important part of the local industry. Obviously, the smelters in the aluminium business are of a scale significantly more than what the extrusion manufacturers are, but we're still important in our joint supply chain, and I sit on the Australian Aluminium Council with a number of those big players. So turning to the next slide, which is our commitment to sustainability. We have put a lot of effort in this in the last couple of years internally, and the focus in some of the -- that commitment was that, first of all, that commitment to net 0 by 2050. But more importantly, with the ASI Stewardship Initiative certification, we've committed to a 20% reduction in emissions Scope 1 and Scope 2 by 2030. So, as part of that certification, that's what we committed to. We're also well advanced with our -- the changes to the reporting standards that are going to descend upon us all in 2025, for us anyway. We're a calendar financial year and hopefully 2026. But those of you that are close to this will understand that these are quite onerous for companies of our size or any reasonable size. And our commitment to the United Nations sustainability goals underpins what we do. So, some of the key highlights this year. ASI certification we've spoken about. We've digitized our learning platforms. We've trialed the waste management program in WA, which we intend to roll that out to major sites. We've enhanced our internal integrated management system to systemize ESG considerations into that so that we can -- our [ data was ] accurate. So, we're well advanced in terms of our planning for the new [Indiscernible] standards coming forward. The LocAl, lower embodied carbon off of the market, we've spoken about. As part of our ASI certification and our responsibility as a corporate citizen, our responsible sourcing program implemented and throughout all of our supply chain, looking at more efficient and sustainable packaging systems. And more importantly, all of that has helped combined worked to a reduction in emissions per extruded tonne of aluminium of close to something around 6% in the 2022, 2023 because these are done on a financial year basis or during the year-end basis. And with the programs we've done with our manufacturing facilities, the addition of our renewables to our rooftops and through the grid, we're well on track to achieving our 20% reduction targets by 2030. So that's sustainability. And moving now to last but certainly not least, our outlook and earnings guidance for 2024. So just summarizing what we've already spoken about -- residential building commencement is forecast to recover slightly in FY '24. However, we will see a weakness in the detached housing sector and that pipeline of work that we enjoyed in 2023 has reduced quite significantly at the end of last year. Our other key markets, commercial and industrial, are expected to remain pretty firm. LME, well Tertius spoke about, this year, we forecast to moderate slightly, depending on which forecaster you ascribe to, but we typically listen to Harbor Aluminium as our source here predominant source in terms of aluminium, international aluminium pricing. The inflationary cost pressures here in Australia are significant, especially in the areas that we outlined here. Everyone is aware of that. We have been successful in recovering most of that inflationary impact in the last couple of years, and we're looking to do the same again in 2024, albeit in slightly different, more difficult conditions as the market starts to ease a bit. So absent any unforeseen events, we're expecting our underlying EBITDA for 2024 to be between $50 million and $54 million and our underlying NPAT between $23 million and $27 million. Working capital levels, Tertius said, will remain relatively steady this year. Working capital expenditure around $10 million for the '24 year. And on that basis, we'd be in a position to continue to return to shareholders in the form of either unfranked dividends and/or buybacks, in accordance with our capital allocation policy. And we announced today that we'll undertake an on-market buyback of up to 10% of our issued capital during 2024. So, that concludes the formal presentation, and we'll now hand back to Harmony for any questions that anyone may have that Tertius and I will do our best to answer.

[Operator Instructions] Your first question comes from Andrew Johnston from MST.

Congratulations on a good result. Nice to see those extra margins coming through. You mentioned in your discussion about one of the reasons for the strong result was the sales mix. Can you talk about that? And is that related to the work you've been doing on the building systems, your proprietary building systems that you've introduced?

Sure, Andrew. The growth and the focus on our proprietary [Technical difficulty] over the last 4 years has delivered significant growth in that market for us. That market was relatively quiet in the second half of 2024 as that residential sector started to slide. But the [Indiscernible] not only includes that, but more importantly, the growth in our industrial segments. So we've grown both regionally in terms of our footprint, but also, more importantly, we've taken share from imports across a wide range of industries and growth in some of those key segments like transport that we spoke about previously. So it's not just building systems, albeit that's an important component of it. But the bigger component of it actually in 2023 and in 2024, I believe, will be growth in our industrial segments.

And then on the issue of the imports, you mentioned that you've had successful review against Malaysian and Vietnamese imports. Can you just talk a little more about exactly what that means? You mentioned also that, that's being reviewed. So assuming that the existing findings remains, what does that actually mean for your business and the local industry going forward?

Okay. Look, everything we do on the antidumping, we often prefer to call a fair trade front. It's about keeping the worst of the dump imports out of the country. And so we need to remain vigilant on that, and that's why we typically appealed, the decision to remove duties from -- we didn't have duties on every Malaysian or every Vietnamese exporter because some of them weren't dumping, but the ones that were dumping, we had measures in place, which were removed. So what does that mean? Well, the measures have been reimposed on those that were dumping. I have to say that those exporters, together with their import partners have appealed to the Federal court that decision, but that's going to take a long time to play out. What that means is that we will see that we will keep -- continue to see -- keep the worst of the dumped, low-priced products come out of the marketplace for the foreseeable future.

Your next question comes from [ Simon Samuels ] from Delta.

Yes, a couple of things. I was wondering what the situation is with bad debts that you might see from particular smaller house builders that might buy product from your distribution centers? And secondly, more of an observation, you've used all the franking credits up. So, congratulations, and thank you for spreading those out. But would it not be -- most people would probably prefer you to do buybacks rather than issue unfranked dividends going forward? I noticed you've already mentioned that 10% is -- 10% of the share issue is the target or maximum you're willing to do at the moment, that would approximately equate to the dividend that you would pay. So, assuming it takes 2 years before you're tax paying again, I would suggest that that would be a good target to get the share price somewhere north of $12. So from my point of view, I'd like to see you do that.

Sam, I'll address your question on bad debts. I can probably cover that off, Tertius. Or do you want to -- you can cover off, you've got exposure. So...

Yes. At the moment, I mean, obviously, there is a general view in the market that there are more small builders going into administration. Builders, however, is not one of our key customers, it's more downstream. But we haven't experienced an increase in bad debts on our side. We obviously do keep a very close eye on that. And we also insure the largest -- almost 100% of all our debtors anyway. So we are looking into that or keeping an eye on that very carefully. But at the moment, there hasn't been anything that really impacted us.

And in terms of capital allocation and distributions to shareholders, clearly our focus has been, quite rightly, on the distribution of our franking credits, which we have now completed, which I'm very pleased about -- being able to do that. And -- but going forward, different shareholders have different requirements and different wants, I guess, in terms of what they want or what they want to see. Some shareholders are ambivalent, whether it's unfranked or franked, whether they're institutions or individuals or offshore investors who don't have [indiscernible] credits. So we're trying to do what is best for our overall shareholders. And the Board is very cognizant of the fact that we're never going to be able to please everyone a 100%. But you're quite right in pointing out Simon that share buybacks are more tax effective and provide theoretically or should provide a better return to shareholders overall until such time as we can return to being a taxpaying. So we're very cognizant of that fact and we're aware of it.

Okay. Just one other thought I had. CSR is possibly going to be taken out by Saint-Gobain of France. Does that affect us in any way? And are they providers of aluminium or are they a customer that would no longer be one under that environment or is that too far a strength you know that...

Simon, thanks. Also, obviously, a very timely question. No impact at all. CSR are a shareholder in the Tomago, large shareholder in the Tomago smelter, but we do not buy through CSR out of that smelter. We buy through another party, Rio Tinto, or [indiscernible]. So, it won't have any impact. They're not a customer of ours. Obviously, they're in the same -- sell into the same sector, but in terms of building products, that won't have any effect on our business.

[Operator Instructions]

I do have a couple of online questions, if I can carry on with those, Harmony?

We do have a follow-up question on the line from Andrew Johnston from MST.

Just 2 more questions, probably related. In relation to the Perth upgrades. So firstly, why the delay in stage 2? And then secondly, what does it mean from a returns and financial perspective, the work that you're doing on that Penrith upgrade?

Andrew, the delays were caused by the overseas -- the Italian overseas supplier struggling to get their -- obviously, the industry is flat out in Europe at the moment and struggling to be able to provide us with the products we require to able to complete that project. So it's been delayed as a result of the overseas supplier. Nothing that we could do about it down here. The sourcing of this expertise and knowledge is contained to a few specialists in Europe, predominantly. The question about the impact -- the Penrith extrusion plant is our oldest plant in the fleet, and the necessity to upgrade that plant was about stay in business really predominantly. But certainly, what we'll end up with will be a very modern, highly efficient plant, which will deliver high levels of productivity and lower cost of production in that plant once we finally complete all 3 stages.

Okay. So, that means that it's going to go across a range of parts of your business. Does it actually change the quality of the product that you end up producing?

No change in quality. It probably have already -- it certainly reduce the level of rejects we have, but we catch up. We have a very stringent quality control during our process and dispatch areas. So we'll reduce the amount of scrap, but won't have a material impact overall. So it won't change the quality of product we send into market.

And finally, on that -- in talking about the strategy and where you wanting to take the business, you talk about return on investment. So, are there particular things that you're focusing on or looking to do to drive that return on investment?

Our capital improvement projects, we are typically looking at a less than 4 year payback on anything we do, anything that's extending out further than that. We generally doesn't cut the mustard, unless it's a sustainability type project. So we are looking at sort of the 20%, 25% return on any [ capital ] projects. If we're looking at acquisitions, we try to keep the multiples that we would look to pay to below what we're currently trade at, which is probably a little bit difficult to do. But we're trying to keep those multiples sort of in the under 5x -- well, under the 5x mark if we can, albeit the acquisitions that we made are pretty small to-date. So you got some questions online, Tertius?

Yes, Harmony, can I carry on? Okay. We've got a question from Laurence Rodney, communications guy asking how much remains to be taken up in past tax losses. We still got about 100 -- just under $190 million of tax losses available to us and around about $100 million that can be taken up as a DTA on the balance sheet. I think that answers that question. Tony, then there's a question from Naomi John from Taylor Collison saying, would you please be able to provide some commentary regarding the commercial volumes in aged care, etc., and potential to grow here? And how do these margins sit between residential and industrial?

Yes, another good question. Hard to define aged care sits within our non-residential building channel to market, which makes up in totality, 14% of our total volume. So, within that 14% aged care, I would say would represent -- we do quite a few aged care facilities. I was thinking maybe 20%, maybe 20% to 25% of that 14%. So whatever that works out at, is about -- maybe 3% of our total volume in the aged care. So not significant, but not overly material. But certainly, we're aware of this growing sector. We work closely with architects and builders in this environment and Capral's products are specified in a large number of these buildings. In terms of margins in that, that sector is pretty competitive. And commercial building systems are certainly for our distribution business, are at the lower end of the margin scale. But clearly we're making a manufacturing margin as well as a distribution margin. So it's a good business for us overall. Hope that answers that question.

Then a question from Ian Meller asking, can you please provide an approximate breakdown of the main sector contributors?

Main sector contributors?

Basically it's transport, marine...

Well, we explained in the presentation, 40% of our volume is driven by the residential housing market. And the biggest component of that is window and door frames. There are other products that go into there as well, but window and door frames are the biggest part of that. So 40% residential, 14% non-residential building, which we've just spoken about, and the other 40%.

It's actually 48%.

48%? It covers a wide variety of markets. The biggest single one is transport, followed by marine, but there are a myriad of markets or other markets, general fabrication that can make up that component. Yes.

We don't have a detailed breakdown of that.

Okay. And lastly?

No, that's it.

That's it? Okay. So, unless there are any additional phone questions, Harmony, I think...

I think there's another question that just came up -- from Austin Taylor. Do you see any impetus for defense materials to be manufactured in Australia instead of being imported?

Yes. Well, we are seeing. That is -- it's all good questions. We are active in defense. I think we had a previous presentation, we haven't focused on it specifically today. But Capral is a supplier or a certified supplier, a qualified supplier into defense projects. So we've completed our certification to be able to supply defense projects. As you probably understand, defense, whether it's vessels, whether it's a warship or a border control vessel, are typically steel build. There is a component of aluminium, but it is not the biggest component by any stretch. So, aluminium in. those shipbuilding projects would make up somewhere less than 15% of the metal used in that construction. In submarines, virtually no aluminium. And in land vehicles, probably less than 10% will be aluminium, majority of steel. So it is something we're focusing on, but it's not a huge aluminium usage.

That's it.

Okay. So, Harmony, I think we may be done, unless you've got any other phone questions to answer.

There are no further phone questions at this time. I'll now hand back for closing remarks.

Okay. Well, thank you everyone for the attendance this morning. Hopefully found that presentation insightful. We're very pleased and proud to be able to present our third consecutive year of very strong earnings results relative to what we have produced in preceding years. And we're looking forward to some challenging conditions in 2024, but the company is very well placed to withstand that and still post some pretty strong results. So, thank you for your support, and I wish everyone all the best. Thank you.

Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.