Capral Limited (CAA) Earnings Call Transcript & Summary

Good morning. I'm Mark White, the Chairman of Capral Limited. On behalf of the Board, welcome to Capral Limited's 2025 virtual AGM. And I hope you enjoyed the Capral video to start our AGM. To meet the requirements of Capral's constitution, a quorum of 3 shareholders is physically present here at the Huntingwood venue today. Capral's Managing Director, Tony Dragicevich; Capral's CFO; Tertius Campbell; and myself. The other members of the Board, you will see Bryan on screen later and Laurie Lefcourt and Kathy Ostin are present online. Accordingly, I declare the 2025 AGM open, and you will now see the agenda for the AGM. Today's meeting is being held online via the Computershare meeting 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 have the ability to ask questions and submit votes. The notice of meeting and Capral's 2024 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 as set out on this agenda and will be taken as read. Online attendees can submit questions at any time. [Operator Instructions] Please note that while you can submit questions from now on, I will not address these questions until a relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on one topic, amalgamated together. To ask a verbal question, please follow the instructions written below the broadcast window. Please insert the agenda item at the front of your question to enable us to collect questions quickly. 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 voting for all resolutions. If you are eligible to vote, once voting opens, press the Vote icon and all resolutions will be activated with voting options. To cast your vote, simply select one of the options. There is no need to click the submit or enter button as vote is automatically recorded. You will receive a vote confirmation notification on your screen. You can change your vote up until the time I declare voting closed. I now declare the poll and voting open on all items of business. I will give you a warning before I move to close the poll and voting. Before addressing the formal items of business, I will recap on some of Capral's major activities during the 2024 financial year, capital management, safety and sustainability and updates on the composition of the Board. Tony Dragicevich, Capral's CEO and Managing Director, will also provide comments on the company's financial performance, key initiatives and strategy, fair trade, safety, ESG, key operating risks and outlook. So taking a look at 2024. In the 2024 financial year, Capral delivered a resilient operational performance despite the more challenging economic conditions with increasing diversification in channels that Capral operates in, the business is positioned well to perform strongly through cycles. The robustness of Capral's performance is also underpinned by the 2019 operational restructure that permanently lowered Capral's cost base, enabling the business to better leverage the capacity utilization of its extrusion plants. For the year ended 31 December 24, Capral delivered EBITDA of $58.3 million compared to $61.5 million in the prior year. EBIT fell 10% to $34.5 million as compared to $38.5 million in 2023. Net profit after tax of $32.5 million compares to $31.8 million in '23. NPAT in 2024 was assisted by a tax benefit of $3.6 million from the increased recognition of deferred tax assets. In 2023, we did not recognize any additional deferred tax assets. Revenues of $650 million in 2024 were on par with the prior year. Average selling prices increased by 4% as a result of the higher global LME aluminum prices, and this largely offset by the impact of 5% lower volumes. In Financial '24 Capral delivered earnings per share of $1.88, including $0.21 of tax benefit compared to the prior year of $1.77. Demand in Capral's key industrial sectors remain solid throughout the year with 2024 volumes growing compared to the prior year. This was driven by; recent acquisitions, retention of market share gains against imports, and strength in the transport and infrastructure segments. The residential construction segment, which contributes around 40% of Capral's volumes, slowed through the year as expected. Capral's extrusion operations responded by reducing production shifts, cost reduction activities and operational efficiency programs. Capral expects residential construction activity to approve during the second half of financial year '25. Capral completed two further distribution business acquisitions during the year to fill gaps in its network and grow this channel. The acquired businesses have been successfully integrated into the Capral network. Working capital was $87.7 million at the end of 2024, slightly higher than the $86.7 million at the end of 2023. Capral continues to have a strong balance sheet which enables the business to invest in ongoing operations, seek growth opportunities, and deliver to shareholders sustainable capital management strategies. Capral continued to work on antidumping of aluminum extrusions into the Australian market to help ensure fair competition in the markets in which we operate. This will continue in financial year '25 and beyond. With the recent tariffs imposed by the Trump administration it is critical that the Australian government remains committed to preventing aluminum extrusions being dumped into the Australian market. We were pleased to see the Albanese government committing an additional $5 million to the antidumping commission to reduce case time and better monitor goods and high-risk activities from overseas. Moving on to capital management. The Board is committed to ensuring that capital allocation priorities are balanced between investment opportunities for growth through acquisitions, growth and stay in business capital expenditure, working capital funding, and distribution to investors. Having prioritized the return of franking credits to shareholders in prior years and payment of the fully franked final dividend of $0.35 per share for the year ended '23. This exhausted all franking credits. Capral still has substantial tax losses to carry forward, therefore any dividend, which may be paid in the medium term will be unfranked. Capral began an on-market share buyback in 2023, and commenced another on-market share buyback in March '24, which resulted in equivalent distribution of $0.36 per share in financial year '24. In addition, Capral declared an unfranked dividend of $0.40 per ordinary share, which was paid on 26th of March 2025 in respect to financial year '24. This was paid to all shareholders that were on the register of members as at the record date of 5 March '25. The dividend reinvestment plan was not active for this dividend. For financial year '24 Capral returned equivalent of $0.76 per share, consisting of $0.40 in cash dividends and $0.36 by way of share buybacks completed during the year. This compares with the equivalent of $0.725 in financial year '23, which was made up of $0.55 in dividends and $0.175 in share buybacks. Capral commenced another on-market share buyback of up to 10% of its issued shares on the 3rd of March 2025. Capral's Board will continue to ensure that distributions to shareholders remains a key component of Capral's capital allocation policy. It is anticipated that subject to share trading liquidity, share buybacks will form a major portion of value returns to our shareholders. From a safety and sustainability perspective, Capral remains committed to pursuing excellence in its delivery of effective safety and sustainability programs across all parts of its business. While the number of reportable injuries increased in financial year '24, Capral's injury rate remains below reported peer averages. The environment is a key priority for Capral. We have committed to Net Zero by 2050 of Scope 1 and 2 emissions, and a 20% reduction in emissions by 2030. We are on track to meet these targets. Capral is also well advanced with its plans to meet the new climate change reporting requirements to 2025. Capral's LocAI, our lower carbon aluminum brand, continues to be a focus with volumes growing significantly in 2024. In addition, Capral has trialed recycling mill scrap aluminum back into the billet casting process through the Rio Tinto Boyne smelter. And investigations with other smelters to recycle extrusion scrap are also ongoing. The Sustainability Report in the annual report details of the many well-advanced initiatives in progress. Turning now to recent Board updates. On the 17th of April, we announced some changes to the company's Board. Firstly, that Kathy Ostin will resign as a Non-Executive Director of the company with effect from the conclusion of this Annual General Meeting. And secondly, that the Board announced the appointment of Laurie Lefcourt as a Non-Executive Director effective 17th of April and that Laurie will replace Kathy as a Chair of the Audit and Risk Committee after this Annual General Meeting. Laurie will stand for election at next year's Annual General Meeting. On behalf of the Board, I would like to take this opportunity to thank Kathy for her contribution to Capral over the last 5 years and wish her all the best for the future. I would also like to welcome Laurie to the Board and look forward to her involvement with Capral. Bryan Tisher, an existing Non-Executive Director and Chair of the Remuneration and Nomination Committee is up for reelection as Resolution 1 of the AGM, and we will hear from Bryan later. Looking ahead, we expect the detached housing sector to start recovering in financial year '25, with the benefits flowing through in the second half. The industrial sector is forecast to maintain its current level. External factors are likely to result in a continuation in the volatility of commodity prices. Inflation and other cost increases, particularly energy and labor costs, which will also have an impact. Capral remains committed to continuing to improve its operational efficiency, throughout the organization, together with its commitment to investing in growth and returning capital to shareholders going forward. The company is positioned well to perform through market cycles and the current uncertain macro environment. On behalf of the Board, I want to thank our shareholders, all of the Capral team and our other stakeholders for their strong support during 2024. Also, thank you to my co-directors for their contributions throughout the year. I will now hand over to Tony for his comments.

Thank you, Mark. Okay. First of all, we'll talk about 2024, and some of this will repeat what Mark reemphasize, what Mark has just said. The market conditions were softer in 2024, mainly due to a slowdown in activity in the residential housing market. Capral also experienced reduced demand from aluminum distributors as import supply chains returned to normal. Volume, however, remains solid in our industrial markets which allowed Capral's manufacturing plants to run at good levels of efficiency. The residential housing market slowed, impacted by high interest rates and affordability. Housing starts for 2024 finished at 168,270, slightly above the prior year and down 25% from the highs of 2021 and 2022. Commercial construction activity also slowed during the year. Our key industrial markets remain relatively strong, especially the transport and infrastructure segments, and we retained market share gains in the metal fabrication sector. The international LME price of aluminum lifted during the year finishing at 2-year highs, driven primarily by international trade and tariff concerns post the U.S. election. Capral's average LME cost for 2024 was 5% above last year. This flowed through to higher selling prices and working capital levels. Despite the slower economic conditions, Capral delivered another very good profit result in 2024 with EBITDA of $58.2 million on 5% lower volume, and EBIT of $34.4 million compared to $38.5 million prior year. A very pleasing result, demonstrating how far Capral has progressed in being able to deliver solid earnings during a slowdown in the housing market. Capral ended in 2024 with a net cash balance of $68.9 million. Debtor collection performance remained very good. Inventory levels rose slightly but higher LME prices lifted inventory value, leading to higher working capital levels which will likely continue to rise in the year ahead. Capral paid an unfranked dividend of $0.40 per share. Capral also completed an on-market buyback -- share buyback during the year equivalent to $0.36 per share, taking total 2024 distribution to shareholders to $0.76 per share. Capral has continued its on-market buyback program during 2025. And under the 12-10 rule. As advised last year, and also, as Mark has just said, Capral exhausted its franking credit balance in 2023, therefore, shareholder distributions in the medium term will be below by way of unfranked dividends and/or share buybacks. Key high-level strategies remain consistent. We build on our strengths, optimize what we do, and look to grow for the future. In the year ahead, we will continue to focus on our Smithfield and Penrith extrusion plants. Smithfield will focus on upgrading equipment to improve plant reliability and productivity. At Penrith, we completed the first stage of the plant upgrade, which replaced the main extrusion press during 2023. The second stage, which will replace the billet furnace and saw, will be completed this year, in fact, starting in June. We'll continue to grow Capral's distribution operations with the objective of increasing the volume of profitability of Capral's direct-to-market channel. During 2024, we added two Aluminum Trade Centers to the Capral distribution footprint with acquisitions of existing businesses in Melbourne and Brisbane. This makes a total of four new sites over the last few years. We continue to seek other opportunities to expand our distribution footprint and also into other adjacent market segments. Turning to fair trade. Capral continues to lead the local industry in the pursuit of fair trade. Key points to note are: an application was submitted for the continuation of measures on Chinese imports for a further 5 years; China recently announced the removal of export VAT rebates, which should see a lift in import pricing in 2025; and measures against Malaysia and Vietnamese imports remain in place until 2028. While some share gains have been made over the last few years, imports still represent over 1/3 of the total Australian extrusion market. Now that supply chains have normalized, and international trade flows are in the state of flux, it is even more important that we continue to fight to retain a fair trade for the local aluminum industry -- aluminum extrusion industry, which contributes over 2,000 direct jobs to the Australian economy. Safety is one of -- safety is the first of Capral's 5 key values. We continue our focus on risk assessment, training, systems, and our safety culture. Capral recorded a total reportable injury frequency rate of 7.7%, slightly better than our peer group average. Lost time injuries remained at 4, but medical treatment injuries increased by 5 to 9. Importantly, lost and return to work hours fell by 38% on the prior year. Capral's journey to Net Zero emissions by 2050, with a 20% reduction target by 2030, is on track and progressing well. During the '23, '24 year Capral Scope 1 and 2 emissions fell by 9% and intensity fell by 5%. This was a result of operational energy efficiencies and an increase in renewable energy sources. During 2024, Capral increases focus on waste management and recycling by introducing various programs at key sites. These initiatives led to an increase in recycling and a 12% reduction in waste from baseline. Capral maintained its Aluminum Stewardship Initiative certification and remains the only extruder in the region to secure this globally recognized certifications. This enables us to offer certified lower carbon aluminum options to the Australian market through our trademark brand LocAI. This is gaining traction in the market with volumes lifting by close to 4x over the prior year. Capral has considered the overall impact of ESG issues and has not discovered any resulting material impact on our financial statements at this point. Capral is well placed to meet the requirements of new climate reporting standards for FY '25. Key operating risks. Capral has a robust risk assessment process and active risk mitigation program, key risks include: significant slowdown in economic activity, particularly the new housing market; an increased level of imported aluminum extrusion and increased competition from new entrants locally; external threats, such as cyber attacks; and changes in construction methodology to meet the more stringent sustainable building codes. Now turning to the outlook. Forecast for the residential market showed detached housing approvals lifting in 2025 as interest rates start to fall. Total residential starts in 2025 are forecast to be slightly higher than the past year. However, the pipeline of work, the sustained volumes over the past 2 years has been completed. The nonresidential market is forecast to be steady in the year ahead as are our key industrial markets. LME is volatile and subject to international influencers. The threat of tariffs by the U.S. government led to LME soaring in the first quarter of this year, 2025, to the highest level since the Russian invasion of Ukraine in 2022. In the current environment, LME is highly volatile and, based on external forecast, Capral expects LME to be at elevated levels throughout 2025, leading to increased working capital levels. The recently announced 25% tariff on steel and aluminum by the U.S. government will not have a direct impact on Capral. However, it will influence international trade flows, and Australia must be vigilant in maintaining a robust antidumping regime to ensure a level playing field for local manufacturers. The overall market for Capral's aluminum products is forecast to remain reasonably steady during 2025. And on this basis, at this time and absent any unforeseen events, we expect earnings for the FY '25 year to be broadly in line with prior year. Therefore, Capral should be in a position to continue to return capital to shareholders by way of share buybacks and unfranked dividends. The focus in the year ahead will be deliver benefits from the recent Trade Center acquisitions in Victoria and Queensland, complete the second stage of the Penrith plant upgrade and continue to grow our distribution business both through acquisition and organic growth. We plan to enhance our range, service, and capability to grow our customer base and deliver strong ongoing profitability. And just in closing, I wish to thank the entire Capral team for their contribution to a very pleasing 2024 result. Capral remains in a good position to capitalize on its extensive capabilities, take opportunities as they present, and grow the business for the future. Thank you. Now I hand it back to Mark.

Thank you, Tony. Okay. So we will now move to agenda item 2. The first item of business relates to your consideration of Capral's 2024 Annual Report. Mr. Daniel Camilleri of KPMG, Capral's auditor, is available online to answer any questions you may have about the conduct of the orders. We did not receive any written questions on the audit ahead of today's meeting, and we will now address any questions on the annual report or the audit. Just a reminder to please insert the agenda item at the front of your question to enable us to collect the questions quickly.

No questions received.

Okay. Thank you. So as we don't have any questions on this, 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. The majority of shareholders who submitted proxy form appointed the Chair of the meeting as their proxy. As indicated in Capral's notice of meeting, the Chair will vote undirected proxy votes in favor of all resolutions. So agenda item 3, which is Resolution 1. The first voting item is the reelection of Bryan Tisher as a Director. The wording of the resolution is shown on the screen. Before we consider the reelection of Bryan Tisher, I will hand over to Bryan to address the meeting.

Good morning, shareholders. Thank you for giving me the opportunity to say a few words prior to my reelection for Non-Executive Director. I thought I would provide you with some details of my qualifications, work experience and skills that are relevant to the Capral Non-Executive Director role. Firstly, my qualifications. I have a bachelor degree of civil engineering with First Class Honours from Monash University in Melbourne, a Master of Business Administration from Harvard Business School in Boston, Massachusetts, and I'm a graduate of the Australian Institute of Company Directors. My work experience covers Rio Tinto, Boral, Orica and Legend Corporation. At Rio Tinto, I worked on mine sites in Manesar, Broken Hill and Kalimantan, Indonesia and gained experience in large commercial transactions on joint ventures and M&A. At Boral, I was Divisional Managing Director of the Boral Building Products division. And at Orica, I led the Asian business covering 14 countries in Southeast Asia. My current role as CEO of Legend Corporation, which is a private equity-owned business, supplying electrical data, power and industrial products into Australia, New Zealand and Pacific Islands. These work experience allow me to bring a number of skills to the Capral board. Firstly, experience as a CEO and Managing Director in asset-intensive, integrated manufacturing and distribution businesses operating in multiple countries. Secondly, extensive M&A and transactional experience. Thirdly, deep operational experience and workplace health and safety in harsh operating environments, such as underground mining, timber harvesting and sawmilling and commercial explosives. Finally, I've had a long relationship with the Capral business throughout my career. In 1995 when Comalco sold its downstream aluminum business to Capral. In 2000, when Boral sold its Angaston extruder to Crane, which Capral later acquired in 2005. And when I ran the Boral Building Products division, Capral was a key supplier to the Boral Windows business. Capral is a terrific business, and I'm very proud to be representing Capral shareholders on the Board. I'd be honored to represent the shareholders for a further 3-year term. Over to you, Mark.

Okay. Thank you, Bryan. The total number of valid proxy votes received is now displayed on the screen. Do we have any questions in relation to this reservation? Okay.

No.

With no further questions, we will now move to agenda item 4. The next item of business is a nonbinding resolution on the adoption of the 2024 remuneration report. The wording of the resolution is shown on the screen. The total number of valid proxy votes received is now displayed on the screen. Do we have any questions on this?

Nothing on this resolution.

Okay. Thank you. So with no questions on this, we will now move to agenda item 5. The next 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 subject to the vesting of those share rights on the first of March 2028. We just need the resolution. The wording of the resolution is now shown on your screen. The total number of valid proxy votes received in relation to this item is now displayed on the screen. And do we have any questions on this?

No questions on this resolution.

Okay. Thank you. So with no questions, we will now move to agenda item 6. So with agenda item 6, we will now respond to any additional questions submitted in relation to the matters above. Do we have any questions?

We have received a number of questions. First question from Mr. Stephen Mayne. How much time is the CEO spending in his new role as a Non-Executive Director of struggling Auckland-based building products company Fletcher Buildings. Could you please explain the nature of the agreement in terms of the CEO's time allocation and commitment to both roles.

I'll answer that, Mark.

I think so -- probably your role.

Well, as you can understand, most of -- majority of meetings these days are held virtually. So I'm not hopping over to Auckland every week. So I would think that between 1 to 2 days a month -- working days, that is per month, I would spend on the Fletcher Building role, a non-executive role. And for those that time, I do take leave from Capral to perform their function. So relatively modest time commitment during the working week.

Next question, also from Mr. Stephen Mayne. Australia is currently in the midst of an unprecedented deluge of takeovers that is contributed to listed entities on the ASX dropping in 26 of the past 27 months for a net reduction of 211 or 9.2% to 2,083 in April -- on April 30, 2025. There were a record 29 major takeovers above $200 million completed in calendar year '24. There is a clear mispricing between public markets and private markets. Why are public markets not valuing ASX-listed companies like yours, more highly and what are we doing to avoid being gobbled up?

Okay. So probably the -- I can't really answer why public markets are not valuing ASX-listed companies. But what I will comment on is what we are doing really in relation to being -- acting in the best interest of the company and its shareholders, which is really primarily around shareholder value. So our primary responsibility is to ensure the long-term success and sustainability of the company. And we believe the best way to do this is to deliver strong earnings through the cycle and strong share price performance. And I think with the results of financial year '24, we've demonstrated that Capral has produced strong results through the cycle. We have a really good team. We have a solid strategy, which Tony has outlined previously and again today, and that is really delivering. And that strategy does encompass building on our strengths, optimizing what we do and growth for the future. And in terms of delivering, the Capral share price hit a high of $10.88 on Tuesday this week and closed yesterday at $10.73. And we believe this is now delivering value for our shareholders.

Thanks, Chair. One more question also from Mr. Stephen Mayne. It's on general business. The 5 most valuable U.S. big tech stocks, Microsoft, Apple, Amazon, Alphabet and NVIDIA are together worth more than USD 15 trillion, largely because they have enormous pricing power, and are overcharging customers the world over. Could the CEO comment on which of the big global technology companies are -- we are most reliant on? And what would we do if they suddenly put their prices up by 30%?

Well, that's a question off the cuff. Look, we are -- I think out of those companies, the ones that we're probably most reliant on is Microsoft, which we use for all of our e-mail and servers, et cetera. And unfortunately, I'll probably share Mr. Mayne's frustration about having to deal with these large multinationals, but there's no other -- unless we go back to pen and paper, which I don't think we're going to anytime soon. They do have us by the -- I won't say, but yes, we are relied on them. But as far as Capral is concerned, a 30% increase or whatever increase they put up, is immaterial to our earnings. We don't know what minimal cost, minimal spend that we have with those companies. So it's not -- it wouldn't have a material impact on us at all.

Sure. That was the last of our questions.

So with no further questions, ladies and gentlemen, that concludes our discussion on the items of business. In a couple of minutes, I will close the poll and voting on all resolutions. Please ensure that you have cast your vote on all resolutions. I will now pause to allow you time to finalize those votes. While these votes are being finalized, we will show you a Crafted with Capral video featuring PLP Australia. [Voting]

[Presentation] Okay. Welcome back. Well, that wasn't on PLP Australia. It is actually on the Muscat Trailers, but a great video, nonetheless. And I hope you enjoyed that one, too. So I now declare the poll closed. And the provisional results of the voting indicated that all resolutions passed. And this will be verified and released to the stock exchange later today. There being no further business, the 2025 AGM of Capral is closed, and thank you all for your attendance.