Hulamin Limited (HLM.JO) Earnings Call Transcript & Summary

Good morning, everyone. I am Mark Gounder, CEO of Hulamin. Welcome to our 2025 interim results presentation, where Pravashni, our CFO, and I will take you through our operational performance and financial outcomes for H1 2025 and share an update on our execution against our strategic objectives. We will then close with an outlook on our business imperatives for the remainder of this year. We have also included additional information for your reference. At this point, I invite you to type in your questions as we progress through the presentation. In a year of critical expansion and maintenance, safety remain paramount with a heightened focus on people and machine interaction. I am pleased to report that we experienced 0 injuries during our 25-day integrated shut while maintaining a continued decline trend of our reportable incident frequency rate dropping 9% over the last 5 years. With us experiencing 2 lost time injuries in the first half compared to 2 for the entire 2024, we have launched a project to increase emphasis on our 16 defined high-risk categories. Going into H2, ensuring a safe working environment remains our core focus as we ramp up production following the shut. Zero harm to our employees is critical in the success of Hulamin. Our key objective for the first half of this year was to build sufficient finished goods to supply the market during the integrated shutdown while focusing on maintaining profitability and liquidity. The stronger demand on local can body of 6%, coupled with fulfilling of deferred export can and orders from prior year due to the fire, enabled a 2% growth in volumes and a stronger sales mix. In line with our strategic objectives, we have grown our local market share by an additional 1%. Completion of our CapEx was in line with our forecast, whilst normalized EBITDA was ZAR 282 million with sufficient inventory holdings of 41,000 to support a ramp-up in production post the shut. The net debt of just below ZAR 1.6 billion was in line with our forecast. Reflecting on our strategic priorities, key milestones have been completed, successfully completion of our integrated shut and protection of the local market during the shut period, effective working capital management, resulting in net debt forecast being achieved. We have commenced with an aggressive cost improvement rollout. Following the strategic review of our noncore operations, we have ceased trading on our Containers division effective June 6, while we are in the process of winding down the business. We will be exiting the extrusion business this year. As announced on the 18th of August. Since we've entered into negotiations with a potential buyer; for this reason, in our results, we have classified it as a discontinued operation. I will now hand over to Pravashni to take us through the financial performance overview.

Thank you, Mark. Good morning, everyone. Overall normalized EBITDA was down 20%, driven by a combination of tailwinds and headwinds. Tailwinds presented opportunities, which included continued strong local demand on can body. Our aggressive cost improvement program has started yielding benefits. U.S. volumes remained resilient despite the 40% duty and a 6.7% increase year-on-year on utilization of cheaper metal units. The benefits of these tailwinds were offset by the following headwinds: Rand-dollar exchange rate strengthened by $0.34 2024 pricing on deferred export can end volumes. We were unable to pass the rapid incremental change in U.S. tariff costs from 10% to 25% to 50% during the transition. However, with all the orders post the new tariff effective date, the incremental tariffs was passed through to the customers. There have been imports of cheap finished can ends. Can ends constitute only the top of the can and are made from a different material than the can body. These imports have affected the local pricing. We are actively partnering with our customers and government to explore the possible solutions, higher than inflationary increases in energy costs, mainly gas and electricity. Considering the tailwinds and headwinds discussed earlier, revenue increased by 8%, while normalized EBIT was down 24%. The higher net debt levels of ZAR 1.6 billion was impacted as we continue to prioritize our expansion CapEx strategy, which resulted in us incurring a higher interest bill. To contextualize the current year earnings, normalized EBITDA excludes metal price lag and other nontrading items. Our normalized EBITDA has moved from last year to this year with a movement of ZAR 70 million. The increase in currency contributed to ZAR 49 million of the ZAR 70 million movement. The remainder, largely driven by pricing pressures was not fully recovered despite significant efforts to offset the impact of high CPI and energy inflation through improved sales volumes and optimized product mix, strategic pricing, better scrap utilization and cost containment measures. However, we remain committed to our aggressive cost reduction program, which will drive greater efficiency in the second half. Finance cost is driven by elevated average debt levels required to support the working capital and capital investment strategy. Taking into account the key issues highlighted, our normalized headline earnings for the year was ZAR 80 million. We have had an expansion CapEx program, which we have implemented, which was the key driver of increasing our debt from ZAR 1.3 billion to ZAR 1.6 billion. We recognize the requirements of this project and as a result, secured additional debt facilities to complete the project. By the end of June, our headroom was higher than last year, reflecting the planning done for this CapEx project. We are confident that we have sufficient headroom to support our trading activities and have implemented the necessary measures to effectively manage this capital expenditure. We are mindful of our debt position and confident that the benefits of our capital program will support our trading performance, ultimately leading to a reduction in debt. in line with our initial expectations when we launched this CapEx program. In addition, proceeds from planned noncore disposal will further contribute to lowering our net debt level. I will now hand over to Mark to touch on our strategic execution journey.

Thanks, Pravashni. Our committed strategy from 2022 to improve shareholder value remains unchanged as we continue to focus on seizing opportunities in both the local and export market by improved operational efficiencies, plant liability and global cost competitiveness. By the end of 2025, we would have strengthened our core business by completion of the market-driven wide can body investment, which includes commissioning and product qualification with our can customers. Utilization of cheaper metal units like recycled secondary ingots, used beverage cans and increased can makers waste will boost our scrap usage to 25% as a percentage of total sales. An aggressive cost reduction program, which is underway, is critical to ensure margin step change and long-term sustainability of our business. Enablers to drive increase in plant output for 2026 will be completed. As a result of the integrated shut, full impact will not be realized in 2025 with our forecast being an annualized production between 175,000 tonnes to 180,000 tonnes. Forward-looking to end 2027, we deliver on returns from capital spend by production exceeding 200,000 tonnes with 60% being in the can stream. Driving our can strategy by commercializing wide can body in the first quarter of 2026 will enable us to displace current imports of wide can body coils. This will allow for our market share to increase up to 85%. This further aligns to current market developments with all can makers installing additional capacity as the can market continues to grow at an estimated CAGR of 5%. Our cost base will be further enhanced by significant increase of cheaper metal units and delivery of our aggressive cost reduction program. The positive returns from operations, working capital initiatives and release from noncore operations being exited will translate to a gearing below 25%. Beyond 2027, our focus will be on sustaining shareholder value while identifying further growth opportunities. A quick recap on our delivery on our market-driven wide investment would focus on the next steps. To allow commercialization in quarter 1 next year, we have partnered with our can make customers to complete the 3-stage qualification by December 2025. The next 6 months is not indicative of the true normalized performance of the business. And therefore, we have extended our forward view for a period of 18 months. Our second half of the year began on a positive note with the successful commissioning of the final phase of the market-driven wide can body expansion project. The focus now shifts to plant productivity across cost streams and initiating the product qualification process to achieve commercial readiness by the first quarter of 2026. An improvement in the financial performance by delivery of production enablers to support sales exceeding 200,000 with a strong mix, coupled together with the realization of margin improvement through aggressive cost reduction and increased usage of cheaper unit metal units. With our capital peak being over and improved cash generation, we will reduce our gearing. By exiting noncore businesses, our sole focus will be on delivering improved value from our Rolled Products business. We thank you for joining our results and outlook presentation. We will now open the floor for any questions. We have also included additional information in the annexures for your reference. I continue to encourage you to type in your questions as we go through answering what questions we currently have. Noma, do we have any questions that we can start the process, please.

Yes, Mark, we do have a couple of questions. The first question is coming from Alicia from the company, [indiscernible]. The question reads, please can you elaborate on Mozal closure and how it affects Hulamin?

Thanks for your question, Alicia. I can confirm the Mozal closure has no impact on Hulamin. We source our raw material from South32 at Hillside in Richards Bay. And yes, so there's no impact on Hulamin at all.

We have a next question, which is coming from [indiscernible] from Hulamin. The question is, how does the wide can body expansion supports long-term revenue and local margin growth? And when is the return on investment expected? How is leadership managing pricing pressure in the local market while protecting margins and sales volumes growth?

Thanks, Victor, for your question. I'm going to break this up. And I think in the presentation itself, I spoke about 2025 and by the end of 2025, where we'll be from a return of investment and returns for shareholder value as a whole. Then we move on to articulate very clearly that during 2026 and 2027, that's when the value or margin growth will kick in. So that by the end of 2027, we should be well above getting our returns from the capital invested over the last 3 years. With regards to pricing pressure, we touched on earlier that we've moved our business from the last 3 years to be customer-centric and to have partnership with all our customers, both local and export, but focusing on local, which we've predominantly done in the last 2 years. So what we're doing right now is working together with our customers and government to be able to look at all possible measures to protect our local market.

The next question is from Stefani Terblanche from Netwerk24. He has two questions. One is, how did the U.S.A. tariffs impact the company? And the second question is, how dependent is the company on the U.S.A. as an export market? And are there alternative markets this revenue could shift to?

Good question. The business -- and I think the key part here that we need to remind everyone, we used to be 70% over the last -- 5 years ago, we used to be 70% export and 30% local. And at that time, 40% in the U.S. market and 25% in the European market 5 years ago. Where we've evolved coming from our reset of our strategy 3 years ago is we are probably 55% local right now, 25% in the European market and only 14% exposure into the U.S. market. And of that 14%, it's predominantly 2 products only that we sell into the market currently. It's our plate where we've got long-standing customer relationships, predominantly driven from our quality that we've managed to still maintain our plate volumes due to our relationship and the quality even though the current tariff of 50% applies. The second product that we do there is [indiscernible]. And again, it's based on a long-standing relationship and also availability of that product in the U.S. market. So what we're seeing right now is that the impact of the tariff as a whole is minimal. Our volumes are holding, and we are managing to pass through the full tariff impact to our customers ultimately. And sorry -- sorry, Noma. Moving on to alternative markets. The outturn for those products will be actually in the European sector if additional risk comes in from a volumes perspective in the U.S. market.

The next question is coming from Sean Van Wyk. There's a couple of questions in one. First one is, why was the deregistration of Hulamin Rolled Products not disclosed to the market? Next one, why was the aluminum beneficiation initiative allowed to be deregistered by the CIPC for not filing annual returns. So can I stop there? And then Mark, you can respond and then I'll ask the next questions because there's couple from Sean.

Okay. Firstly, those companies are dormant companies and applications have been made to deregister them to the CIPC. And yes, they are dormant companies. So to me, the deregistration should have happened.

Okay. And the next question, why did Hulamin not disclose to the market that the Hulamin Containers sale was a related party transaction and issue a SENS announcement of it?

Do you have any other questions specifically around Containers?

Yes, there's also another question. They say, please explain why ex-CEO, Richard Jacob; is a Director of Containers. And then -- so I'm just going to look for another question around Containers so that you can respond to all of them at one. And then it says, can Hulamin confirm if there's an investigation into the sale of Containers division?

As all shareholders are very well aware that we executed a review on all noncore businesses at the beginning of this year. And with regards to Containers right now, we've ceased operations, and we're busy winding up the assets with regards to the remainder of the business. Hulamin as a whole takes feedback from all parties very seriously. I can acknowledge that the Board has received allegations from one shareholder regarding the transaction as a whole. We've basically engaged with the independent party to be able to review the allegations, and we'll be able to provide feedback to everyone once that report has been completed, which will definitely cover all the questions regarding containers that you've just earmarked.

The next question still from Sean is, can you please confirm if [indiscernible] is the new owners of Containers? And is it arm's length sale or non-arm's length sale?

Okay. As we put there, we're still right now winding up the assets. We're busy in the transaction now with various parties. Once we conclude everything, we'll be able to share with everyone exactly who the owners of the assets will be.

We have a question from [indiscernible] from Value Capital Partners. The question is, Mark, just want to get an idea of CapEx plans for the scrap utilization and if this is all on track.

Okay. Most definitely. I mean Hulamin has got a clear cut -- we've got a clear strategy with regards to using [Technical Difficulty] cheaper metal units going into our strategy plan as a whole. The key part here is that we've got the CapEx -- firstly get return from the CapEx that we've spent over the last 3 years on the wide project, while looking at various initiatives from recycled secondary ingots, used beverage cans and basically can makers waste to drive the lower cost production over the next 2 years. Beyond 2027, that's when we will review CapEx to be able to drive an increase -- substantial increase again on our recycled content. But before we get there, what we're wanting to do is maximize on the facilities that we do have and plough mines to be able to sweat the current assets to get the maximum value before we commit any further capital. But it's definitely in our plans beyond 2027.