Hulamin Limited (HLM) Earnings Call Transcript & Summary

Good morning, everyone. I'm Richard Jacob, Hulamin's CEO, and welcome to our interim results presentation for the 6 months ended 30 June, 2020. Before I start, I'd like to welcome some of our returning Hulamin team as well as 1 or 2 new members. On this call today, I have Anton Krull, our CFO; also on the call this morning, I have Ayanda Mngadi, Ayanda is our Group Executive for Corporate Affairs; Laren Farquharson, soon to be acting CFO; I also have Noma Kanyile, our Communications Manager; as well as Clayton Fisher, our Managing Director of Rolled Products. So I'd like to welcome you to the presentation this morning. In terms of the agenda, I'll make some opening remarks and give you an update on what's happening in the market. As usual, I'll then hand over to Anton, who will talk through the financial results. He will then hand back to me for the operational review, an update on our ongoing turnaround actions and I'll close off before taking a few questions and answers -- questions with the prospects. So opening -- some opening comments and update from what's happening in the market. Hulamin, in the first half of 2020, we continue to focus on protecting our balance sheet. Net working capital is up from 18% to 29% in the period on the lower volumes. Net debt-to-equity ratio increased to 27% on a debt increase of ZAR 337 million. As well as a reduction in equity due to impairments in the 2018 and 2019 years as well as a loss in the first half. We did, however, manage to retain control over inventory as in line with our December '19 levels. The 2019 turnaround actions continued this year. We continued to maintain tired controls over inventory and working capital. We continue to focus on cost reductions, which I'll talk about quite a lot more in the presentation as we go forward. We took out ZAR 400 million of annualized costs last year. We delivered on those in 2020 as well as took out some additional costs in the first half of this year. And that is both across Rolled and Extruded products. I'll talk a bit more about that as we progress through the presentation. And in terms of bringing volumes back into the business, although the impact of COVID-19 had a devastating effect on the business. We continue to rebuild our distribution channels into the United States. We also maintained our best-in-class safety performance. Our total recordable injury frequency rate for the half was a commendable 0.19 injuries per 200,000 man hours, which those of you in -- with safety statistics and so on will recognize that, that is a commendable effort. In terms of the salient features for the first half, I think probably the biggest impact on the financial results was the significantly lower volumes. The COVID-19 impact on the local and global economies had massive disruptive effect on Hulamin, including both demand from our customers as well as on our manufacturing operation. As a consequence, our volume -- sales volumes were 35% lower across the group. We did, however, reduce the EBIT loss, which was 29% lower at ZAR 119 million. The turnaround actions are ongoing and largely complete. We recorded a safety -- cost reduction of around ZAR 500 million compared to on an annualized basis compared to the first half of last year, which includes both the ongoing sustainable savings as well as some one-offs in this period. We also completed the closure of the Olifantsfontein extrusion plant and the consolidation into the Pietermaritzburg site. Although the sale agreement was concluded, that transfer hasn't been completed yet, and we expect that in the second half of this year. And we managed to maintain control over the rolled product inventory at around 50,000 tons. This is a graph of the rand dollar. You can see how it weakened sharply in the first half as a result of the downgrade. That also -- that has an impact on Hulamin working capital and absorption of cash as well as the conversion of dollar receipts into rand, which we will largely be effective from the second half of this year onwards. In terms of the market, the LME aluminum price did weaken sharply in the first half of this year from averaging around about $1,750 in the first half of 2019 was much lower at about $1,600 in the first half and that was largely an impact of the global recession and the negative economic impact of COVID-19. The demand for flat rolled products, which is, as you know, is the largest part of our business was -- came under significant pressure in the first half due to COVID-19 and the impact on global economies and lockdowns and so on. But in addition to that, I just wanted to note that there have been some additional protectionist actions not only in the U.S., but also in the Middle East and Europe and the 2 new ones in those 2 regions are largely focused on China. Tightness continues in global beverage can markets as the environmental pressure not to use single-use plastics continues to escalate. We have strong demand forecast for beverage can stock for both the second half of this year and going into next year as well as strong order book going into this next period. We're also supplying existing and new customers with new and existing products. Automotive demand for aluminum has fallen sharply in line with the fall-off in the automotive sales in line with the COVID-19 slowdown. However, we continue to make progress, particularly in the electric vehicle market as some new product developments are starting to gain traction with a new customer base. In spite of the easing of the lockdown in the recent weeks, the local economy remains particularly soft. I'm now going to hand over to Anton, who will present you with our financial results.

Thank you, Richard. Good morning. It goes without saying that this has been a particularly tough half for Hulamin. Sales volumes were impacted significantly by the lockdowns domestically and in our international markets. And that impacted both manufacturing as well as demand. Demand in the domestic market was particularly heavily impacted, but also we experienced significant declines in the automotive, distributor and in the local can stock sector. Export can stock and heat-treated plates were resilient and performed well, however, during the period. So the impact of that sales volume reduction was significant on Hulamin's results, and normalized EBITDA was down to a loss of ZAR 96 million. That was exacerbated by excess hedge positions, which came under pressure as the volumes reduced. Underlying volumes in the business reduced as well as the currency weakened sharply. At an underlying level, however, the Rolled Products business was trading on a profitable basis before hedging. Largely as a result of the work that was done in 2019 in terms of restructuring the business and making some reductions in costs. At an earnings level, there was a further impact from a reversal of a deferred tax asset for Hulamin operations and the nonrecognition of further deferred tax assets relating to tax losses in those businesses of Hulamin Operations and Hulamin Extrusions. And that's just impacted by a softer outlook for the business and that resulted in those deferred tax asset positions reversing and were not being recognized. So the loss per share of ZAR 0.75 was higher by 53% over the corresponding period. The balance sheet, as Richard mentioned, came under pressure. So with the cash impact on the business -- negative cash impact on the business, debt rose. Equity at the same time, has come under pressure from succeeding years of impairments, together with the losses incurred in the current period. Debt equity covenant at 50% means that we have some headroom in relation to that covenant. And at a liquidity level, we have headroom in our facilities that has come under pressure. But there is adequate facility in our facilities, and I will cover that just now. So just moving on to the next slide. This is just a graph demonstrating our earnings performance over the last few years. One can see that the impairments in 2018 and 2019 were severe and impacted earnings significantly. On a headline basis, so stripping out the effect of impairments. One can see that 2016 through 2018 was reasonably consistent. 2019 came under pressure. There was a number of nontrading items that impact the numbers in 2019, along with the nonrecognition of deferred tax assets. There's a further nonrecognition in 2020 and the impact of the excess hedges impacted the business. So those bars there with the dotted lines just indicate what performance would have looked like without the impact of the deferred tax assets and the hedging and other nontrading items on the 2019 and 2020 year. So if we just move on then to have a look at the salient features for the year. As Richard mentioned, the aluminum price weakened significantly, 9% on average period-on-period. But the LME weakened sharply through to May since recovered, the exchange rate likewise, weakened significantly through to around May and started to then recover thereafter. In terms of volumes, 35% down to 71,000 tons. And that impact mostly in Rolled Products but felt across all the business units. Revenue, of course, then likewise, down 30% to ZAR 3.7 billion. At EBIT level, H1 2019 was impacted by a number of one-off items, nontrading items. And one can see that at normalized level, H1 '19 was a lot better than at the primary EBIT level. In 2020, there weren't too many significant one-off adjustments. And so that loss at EBIT level carries through normalized level. I've covered the picture on earnings. And I'll talk just now on just some of the items that have moved underlying operating profit. So if we just move on to the cash flow and balance sheet side of things, CapEx for the half was significantly down on the prior period. We look to manage CapEx, obviously, during this period to conserve cash. Net working capital significantly impacted by the low activity levels and inventory rose significantly quite quickly. We've managed to bring that under control. And this further work, we're doing to bring it under further control over the remaining months of this calendar year. Free cash flow negative ZAR 302 million for the half, impacted mainly by the rise in working capital. And that took net debt up to ZAR 609 million from the ZAR 272 million at the end of December 2019. And I've covered the increase in the debt equity ratio. So just moving on then to have we looked at the performance by segment, Extrusions recorded another loss in the half, mainly driven by the impact of lower volumes on the business. One will recall in 2019, it was a significant impact on production through a machinery breakdown in 2020, the issues have mainly been the severe impact on -- of demand on that business. Rolled products, at a normalized EBITDA level, negative ZAR 72 million. But if one adjusts for the impact of the losses on the excess hedge positions, the business was trading profitably. It's at an underlying level. So if we just move to just have a quick look and remind ourselves that the fundamentals of our [ financial ] performance in Hulamin on the left-hand side in the top block, you can see the costs. And on the right-hand side, the revenue side of the business, both the cost and the revenue have in the gray blocks and aluminum components, so we acquire aluminum at markets and we sell aluminum at market. And there is some noise that comes through the profit and loss and the cash flow due to the timing impacts of that pass-through of the aluminium through our system and the relative change in market prices. In terms of the underlying manufacturing business, the and most of the manufacturing costs are rand based. They're highly fixed in nature. On the revenue side, the conversion fees are largely denominated in dollars and in euros, roughly split equally between the 2 currencies. So we've got a large currency exposure. And of course, we did benefit from the currency weakening what we had done was put some hedges in place at the beginning of the year to secure the currency on our rolling margins and secure rand-rolling margin for the business. And unfortunately, as the volumes dropped off significantly and the rand weakened that did hurt the business in terms of the numbers I've previously mentioned. In terms of volume sensitivity, the significant reduction volumes had a significant impact, but we were assisted by the action we took in 2019 to lower the cost base, and we took some extraordinary measures in 2020 to improve that position. And then obviously, on the aluminum pass-through, we -- as you know, we hedge and have hedged for many years, the metal price lag. But again, with the sharp drop-off in underlying volumes that put us in a position where we had excess hedges, which were exposed to then the sharp changes, particularly in the currency. So if I then just move on to -- just having a look at those excess hedge positions, you can see there that on the right-hand side, the sales volume levels dropped sharply through April and remains at significantly lower levels in May and June. So that's the underlying trading. The hedge position is obviously secured at higher volume levels. And that disconnect, combined with the really sharp weakening of the currency, in particular, had a significant impact on those hedge positions, resulting in over ZAR 100 million loss in the half. So what I would mention is that we have ceased our metal price lag hedging until the outlook is more certain. And that will provide us with a better foundation for improving cash flows in the second half. I can just move into the next slide. So just breaking down and understanding how normalized EBITDA and earnings moved for the half versus the previous corresponding period. Obviously, some support from the currency but of much lower trading activity levels. And the inflation on cost coming through, the big story, of course, was the sharp drop in volume, and that has a severe impact on the business. You can see the support we got from taking out costs mainly in 2019, but further costs in 2020. So that's over ZAR 200 million of cost out in the period. And obviously, on an annualized basis, nearing ZAR 450 million, ZAR 500 million, that's just in the Rolled Products business alone. So the impact of the excess hedge positions, you can see there was sharply negative, taking our normalized EBITDA to a negative ZAR 96 million loss. And then the impact of the deferred tax asset reversals and nonrecognition having a further impact in at earnings level, taking normalized headline earnings per share to ZAR 0.76 loss. So we move on to the next slide. So at just having a look at how our net debt has moved from the ZAR 272 million recorded at the end of December 2019 through to June 2020, significant impact on from working capital, primarily to build in inventory in the period. And as I say, we're taking measures to regain that position. Cash flow from operations, slightly negative. So there wasn't support from positive cash flow from operations to mitigate against that. And then, of course, CapEx, interest paid was nicely down on previous periods. But obviously, expecting higher interest paid in the second half as we've got higher level of borrowings going forward. So just moving into the next slide. There we can see really good performance from 2015 through 2019, taking net working capital efficiencies write-down to around 18% in 2019 as a percentage of revenue, however, sharply impacted in 2020 and up to 29% mainly driven by higher inventory levels. And of course, severely impacted by the sharp drop in activity. And at the same time, we've had to support our change into the U.S. market on common alloy in that distribution channel. And in particular, what impacted us in this period is a sharp skew to export business as the domestic market fell off significantly, and that requires a higher level of working capital to support that business. If we just move on to the next. So CapEx was sharply down in the period. We managed that quite carefully. We had incurred some additional CapEx in 2019 in order to ensure that we were well planned -- we were prepared for an integrated shut, which we had planned for 2020, which hasn't taken place yet due to the impact of COVID. So CapEx managed minutes well. And we're not expecting significant increases in CapEx to the 2019 levels. So if we move then on to the next slide, liquidity and capital structure. So in terms of liquidity, borrowings sharply up and at the same time, we've seen our borrowing base come under pressure through reduced activity levels. And that's at a combined effect of reducing the headroom in those facilities. So what I must mention is that we have [ one more ] facility of ZAR 1 billion. And we have a general borrowing facility of ZAR 500 million of that general buying facility. We've got direct facilities overdraft of ZAR 200 million, and we've got ZAR 300 million of indirect facilities to support LCs and guarantees. So the general borrowing facilities at 360 day notice facility and the [ MERF ] is a 3-year facility, which matures in September 2022. In terms of debt equity, debt equity, I think we've mentioned before, sharply up, but there is a fair amount of headroom in relation to the debt equity covenant of 50%. So that brings me to the end of my section, and I'm going to hand over back to you, Richard. Thank you.

Thanks, Anton. And -- yes, so I'll talk now about -- firstly, just to give you a review of the operational performance of the business in the first half of 2020. I'll then talk a little bit about the ongoing turnaround actions and then close off before some questions on the prospects for the second half. So here is the usual graph set of graphs that I present the summary of the Rolled products performance. You can see in the top half, the significantly negative impact on volume in the first half. That is an annualized number. So you can see it's a very sharply down. And then as I mentioned at the outset, our safety performance is tracking consistently at these low levels since 2016 more or less. On the lower graphs, the margins marginally up on last year, but still tracking pretty flat compared -- since 2016. The sales mix, as you can see, pretty consistent. Automotive is a little bit down, or everything is down, but proportionately, automotive is a little bit down due to the softness in the automotive market. Packaging also down, largely as a result of the lockdown regulations thanks to COVID and the alcohol ban that you all felt in the first half of this year. This is a new graph. These are annualized numbers. Total rand earned in gray and total costs in blue. And you can see how we managed to take out quite a lot of cost in gross terms. However, the -- that was insufficient to compensate for the loss or the lower level of total margin earned, thanks largely to the decrease in volume. This is the graph that I normally present, where you can see a volume impact on unit cost and unit margins, even though the unit margin is sharply up, thanks to the weaker rand, the impact of low -- of the decrease in the volume, in other words, a much smaller denominator in the equation, which gives you the unit cost means that the unit cost is sharply up and hence, our focus on bringing volume back into the business to get that unit cost [ drag down ] as it should be. And that also talks to what we've already spoken about is the heavily fixed cost nature of the business. Yes, you can see in a more detailed level, the impact of the slowdown in the business in the second quarter. You can see the dramatic impact of lower sales and April, May, June and the significantly lower June sales -- June quarter, which is the second quarter on annualized sales. Looking at the product mix. You can see the, as Anton alluded to, the impact of the much lower local sales, where our cash cycle is somewhat shorter, had a significant impact on inventory. Bearing in mind that we carry the finished goods -- outbound finished goods on our balance sheet for approximately 45 days longer on exports. So the drop in the local sales volumes had quite a negative impact on the business in cash flow terms. You can see the drop-off in everything, except probably the end and tab stock, which is the yellow green line. Looking at the rolling margins in a little bit greater detail, you can see a slight uptick on recent years, although it's not really at this stage, not so much a trend. It's more of a mix effect and some slightly higher end and tab stock margins. Looking at inventory, as Anton said, a slight increase in inventory, although pretty much in line with recent years and recent periods. However, the working capital impact largely as a result of the weaker rand and the fact that the inventory now, our finished goods inventory was quite a lot larger due to the impact of the outbound logistics. Talking about some market conditions. The demand for our end and tab stock is firming. We're experiencing quite a significant increase in demand from all regions of the world, probably except the local market where the overall sales of cans has come under significant pressure due to the COVID alcohol regulations and other impact in the local economy. But globally, the demand for cans is substituting other products such as single-use plastics and as far as Hulamin is concerned, our volume -- our sales volume for end and tab stock is largely limited by our production capacity. So we're operating pretty much at full capacity. There are some incremental improvements that we are making to the can end and tab stock manufacturing process, which talks to the opportunity for increases in sales volumes in the immediate future. In South Africa, we all know that alcohol sales were curtailed twice in the first half for -- initially for quite an extended period and then the second period was a bit shorter. That has quite an impact on Hulamin through our exposure to the beer market. There's a significant portion of can stock that is sold through beer into the beverage packaging market. Foil sales were stable to strong, but the GDP impact of local other sales, such as engineering, transport, automotive, was very significant. Quarter-on-quarter, more than 50% down in the second quarter. Demand for local extrusions is also is firming. We are now pretty much consolidated in the Pietermaritzburg site with 2 of the 4 presses that we had running at this time last year in operation. And thanks both to our reduced capacity as well as reasonably firm demand from the market. Lead times for locally produced extrusions and particularly our Pietermaritzburg operation are moving up. Just talking a bit more about Hulamin Extrusions. We did experienced a loss in the first half in spite of having taken out significant costs. The Pietermaritzburg site is now the single site from which all our extrusions are produced. The Olifantsfontein site has been closed, although there have been certain costs associated such as security and various other facilities costs that have flowed through from 2019 into 2020. As soon as that transfer goes through, we're hoping and expecting it to be in quarter 4 of this year, those costs will [ cease ]. But all in all, that business is returning to health and performing reasonably well. Cost savings realized last year and, being experienced this year in the region of about ZAR 150 million per annum. And definitely productivity and efficiency improvement that we're seeing, the 2 presses in Pietermaritzburg are beginning to impact quite significantly on that business. In terms of the ongoing actions, the businesses this year was really much focused on stabilizing the business after the significant impact of the business on last year, which was the closure the Section 189 retrenchment process. We continue to focus on automotive and transport market development, bearing in mind that this business is not able to export due to the volume, density, the nature of extrusions and the value that you can pack in a container. So in terms of the local markets, this business is quite significantly impacted by automotive. We continue to develop a number of opportunities in the local automotive market to capitalize on the opportunities for local procurement in the automotive market and as that market's health improves. The cost savings, we continue to have a daily focus on operational improvements and rationalizations, and I'm pretty optimistic that we will need to exceed our cost savings targets for the year. In terms of the ongoing turnaround actions, we spoke quite a lot in the last presentation for the 2019 results presentation about the turnaround actions. There's largely 3 components to that: cost reductions, rebuilding volumes, as you saw from previous slides as a enormous impact on the business and then control of working capital and inventory. In terms of cost reductions, as I said earlier, the Olifantsfontein site has been closed. That property had a property sale agreement that is in the process of being transferred. There was a Competition Commission approval that was required. And that has been concluded in the first half. So it looks like there's little to stand in the way of that transfer going through in the second half. We also, if you look at year-on-year annualized costs, our costs are more than ZAR 500 million lower in the first half of 2020 versus 2019. That includes both rolled and extruded products. In terms of the costs that were taken out last year, that number exceeds ZAR 400 million per annum, largely as a result of energy and manpower savings. So if you add on to that ZAR 400 million, the additional costs that have come out of the business in the first half of this year, that totals in excess of ZAR 500 million. In terms of rebuilding the volumes, we have taken on more resources in the United States market. And our sales to the U.S. customers is ongoing and growing. We have secured additional heat treat plate orders and business this year compared to the first half of last year. And our standard products business also continues to grow. In terms of support distribution and supply chain finance, we have a project there that is gaining traction, and we expect to be able to announce some progress there in the second half. In terms of the third component of our turnaround plan, which is controls over inventory and working capital. We are pleased to say that we've managed to keep inventory at in and around 50,000 tons. And although the value of that inventory has shifted in line with the weakening currency and the richer mix, total working capital remains reasonably under control and certainly in terms of things that we have control over. We do expect, as volume and activity levels increase, there may be some increases in the second half. But we've shown that, that should not increase in proportion with the one proviso being the growth in the local market or lack thereof versus exports, which has quite an impact on the balance sheet. In terms of costs, this is some granularity that I'd like to just share with you in terms of -- if you look at our cost base in the first half of 2019 versus the current half, you can see roughly ZAR 1.5 billion of cost in the first half of last year. The first green reduction in cost is very much a variable cost saving, and that's roughly ZAR 200 million or just under ZAR 200 million. Then additional costs, things like paints and lacquers because of the higher volume of can end and tab stock, some impact of a weaker currency on dollar-denominated costs, an impact of inflation. And then some positive contribution from lower commodity prices, such as the oil price. And then the final column, which I'm going to give you a little bit more detail on our cost savings or cost reduction projects. And the total of that brings our total cost savings in net rand terms, just in excess of ZAR 250 million in Rolled Products, if you compare the first half of last year with this year. In terms of the major cost reduction categories in Rolled products, 2019 versus 2020. You can see that we reduced permanent employees by approximately 320 in the first half of -- or during 2019, with an additional 45 heads lower in 2020. And that is a significant contribution to savings, as you can see from the graph below, just under ZAR 100 million in the first half. In addition to that, there's a significant energy saving that's largely driven -- that's largely a variable cost due to the lower activity levels. But in addition to that placement and the procurement people have negotiated some other savings in terms of prices. That's been pretty positive as well as some efficiency improvements in the operation. The balance which is also quite measurable is maintenance and other costs without sacrificing the quality of our maintenance at all. Also would be remiss in not sharing with you some of the progress on the antidumping actions in the United States. First, just a bit of background on the 23rd of March, earlier this year, the United States Aluminum Association launched a antidumping action against 19 countries, representing 36 rolling mills from around the world, largely excluding China because those antidumping actions had been concluded earlier. The products range that this applies to is what we call common alloy products. So in other words, nonspecialized products. And so products that fit into the standard HS codes. And these exclude our -- particularly from a Hulamin perspective, our ends stock that's end, tab and body stock as well as our heat treat plates, so those products are unaffected, and we have started to ramp up our sales of those products into the United States as a countermeasure. In terms of current developments. We've submitted our -- whatever data and questions have been required of us. The analysis by the Department of Commerce is ongoing and as a result of the COVID-19 disruptions to work in the analysis in the United States. The preliminary findings, which were quite significant, have been delayed from the 16th of August to the 6th of October, by the Department of Commerce. In terms of our ongoing mitigating actions, I'm sure like all the rest of the 36 rolling mills, we are focusing on sales of the same kinds of products into other regions that is ongoing and showing some reasonable traction. We also are optimizing the products that are not affected by the antidumping and countervailing duty actions in the United States in those particularly focused on beverage cans. So as I said earlier, we are looking to optimize and maximize our sales of beverage stock as well as heat treat plate. So in terms of what is our strategy to turn around this business, and particularly, I'm talking about Rolled Products here, but it same applies to Extrusions as well. The top the title of the slide largely explains that it's a return to full volume or full capacity utilization with a more profitable mix of sales at lower cost. And that really summarizes our actions and our very keen focus in this period in 2020. This very challenging period. We continue to optimize our intake of orders as we look to improve our product range. We've made some good product and market developments on the auto and transport side. We've got some quite interesting metallurgical improvements that we've made and progress that we've made in terms of automotive products particularly as a result of our experience with the hard magnesium containing alloy that we sell into the end and tab stock markets. We also continue to rebuild our distribution channel into the United States. That program is progressing well, both with the progress that we're making with the new distribution partner as well as our resources, our own Hulamin employees in the United States who're doing particularly well. The local market is gradually returning, although I must point out that significant risks remain, both in terms of specific risk in specific markets as well as things like second wave, we've seen, particularly in Europe, but also in other parts of the world that's just when you think you're getting 3 of the constraints related to COVID-19. So many countries and many regions have experienced second wave. So there is a reasonable -- reasonably high probability of a second wave of lockdown regulations if that COVID outbreak happens again in South Africa. In terms of stabilizing our manufacturing operation, a number of cases, both active cases of people who've tested positive as well as those in isolation in quarantine was sharply down compared to the highs of June and July. We continue with a spread of our -- Anton spoke a little bit about the maintenance program that we've had a shutdown that was intended to be taken this year a sort of intense 2-week shutdown period. However, with the constraints on international travel, many of the partners and the suppliers of the very high-tech equipment that we use that we'll be replacing in the operation have not been able to travel. And we've considered that these maintenance -- planned maintenance shutdowns are too high-risk without the experts, even though we have some high-tech video capability to talk to these technicians from -- largely from Europe we are spreading that maintenance over this year and next year. We continue to focus, as I said, on EBITDA delivery. That's the underlying performance of the business, which will be driven by lower cost and higher volume. But I also need to point out to you that there a number of risks that remain in the business, particularly the fact that the hill side, primary aluminum supplier the certainty of supply remains unclear as our Eskom and our supplier, they continue to work on unlocking that. The U.S. anti-dumping case affects about 10% of our sales and should that be negative for Hulamin and that will definitely have a negative volume impact on the business in spite of our ongoing actions to replace those volumes. And likewise, the local economic conditions are still uncertain, and particularly the beverage can demand there, we've seen thus far in 2020 that's had a very negative impact on our customers and on their demand as a result of the chopping and changing and the significant reduction in alcohol sales. So that's all that I really wanted to say. So Hulamin appears to be -- I'm certainly quite optimistic that the second half will show a return to profitability. However, there's a lot of uncertainties that remain. And thank you for your attention. And I'd like to now open the floor to questions.

We have a few questions from the web call. Our first question is from [ Pete Nash ] While hedging is supposed smooth earnings every 6 months, is it not value-destructive to shareholders over a longer period of time.

Thanks, Peter. I'm going to hand over to Anton and Laren to comment on this.

Thank you, Richard. Thanks for that question. I'll kick off. So yes, I think we agree with that sentiment. So, Hulamin, primarily does not hedge out does not take a speculative view in terms of the long-term on currency or metals. So our hedging is primarily to hedge the 3-month price lag on our metal procurement and sales. So that's that we've adopted for many years, and we benefit from, obviously, the contango and the [ 4 ] points as part of that hedging. And by hedging, we do recognize that we introduced some cash flow risk. We're also mitigating the profit and loss volatility. And I think that's been recognized for some time. What we have [indiscernible] in recent years is to provide some underpin to the currency impact on conversion fees. And that we were hurt significantly in the current period as I mentioned, with the fall-off in volumes. But we certainly don't have any intention to enter into do speculative hedging over a long period of time. I don't know if that answers the question.

Our next question comes from [ Longani Chanko], it's to Anton. What focus is the entity has on free cash flow. What target does the entity has to increase retained free cash flow and to the CEO, directors meet -- are directors meeting their KPIs with the director's fee reaching an approximately 7% of market cap, should we not be looking at mitigating the Board, CEO and CFO, what targets are put in place to increase intrinsic value?