Hulamin Limited (HLM) Earnings Call Transcript & Summary

Good morning, everyone. I'm Richard Jacob. I'd like to welcome you all to the Hulamin interim results presentation of 2021. With me is Mark Gounder, our new-ish CFO. Mark, welcome to you. And this will be the first presentation that Mark takes you through the financial performance of Hulamin. By way of the agenda for this morning, I'll make some introductory comments around the highlights of the first half. I'll then hand over to Mark, who will take you through the financial performance of the half. He'll then hand back to me, where I'll talk about the operational review of both Hulamin rolled and Hulamin extruded products. And then I'll close off with some comments about the first half but -- sorry, the second half, what to look forward to and the prospects; and a couple of comments about some of the disruptions that we faced during July. So by way of the first half, just some highlights in terms of manufacturing, sales performance. We continued to improve volumes in the first half, particularly when you compare on the real challenges of 2020, getting closer to the 200,000 ton annualized number, although marginally below, thanks largely to the disruptive impact of the second and third waves of the COVID pandemic and how it's impacted on our manpower and our ability to manage the operation with a -- with our normal hands-on management approach. Also quite exciting in the first half of 2021 is the commercialization of some technology developments that we have progressed through 2020 and 2021 in the automotive and particularly in the automotive body panel markets in the United States. Sales. Our U.S. market is performing well, likewise the beverage can market. Although 2020 was a particularly low year for beverage can sales in South Africa, 2021 is quite the opposite with approximately 90% growth in domestic beverage can sales. Automotive: Our traditional automotive market here in South Africa has been recovering, although not yet up to its usual volumes that we saw in the period prior to the COVID pandemic. As far as working capital is concerned, a tough time last year but continued momentum with the improvements and tight controls and likewise over costs in the first half, but Mark will talk a bit more about that as he takes over. Mark, over to you.

Thanks, Richard. Good morning to all. It's a real pleasure to take you all through my first interim financials presentation for Hulamin. In line with our group turnaround strategy launched in 2019, I'm pleased to report a much improved H1 financial performance compared to last year. Our revenue increased to a respective ZAR 5.5 billion, a 50% increase from last year largely driven by increase in LME dollar pricing by 41% and our group sales increasing to -- a respective 44% and even though our average exchange rate for the 6 months was more than ZAR 2 stronger. Coupled with the increased in -- revenue, our EBIT increases by 166% from last year to a respective ZAR 79 million, largely driven by improvements to capacity utilization. Our continued cost discipline maintained despite rising freight and commodity pricing. Also, especially in the rolled products side, we've had improved manufacturing performance with our [ melt class ] improving by 0.3% and our scrap utilization by 8%. On the free cash flow side, coupled with the improvement in EBIT and as mentioned by Richard, the tight control on our working capital, even though we've experienced a rising LME right throughout the year, has resulted in a 142% improvement of free cash flow compared to last year, a negative of ZAR 302 million. The improvement in EBIT and revenue has resulted in our earnings per share and headline earnings per share improving by 139% and 121%, respectively. And I'll unpack that further in the slides to follow. On the positive side. From a liquidity, our gearing is at a respective 28.1%, which is a 7% improvement on our December closing gearing of 34.6%. Overall, our net asset value per share has improved by 8%. Richard, can we move on to the next slide, please? On our salient features, the items I would like to highlight is the average dollar LME has improved -- or has increased by 41%, which has largely driven our revenue but at the same time put huge pressure on our working capital and our liquidity levels. The average exchange rate for the 6 months has decreased by 13%. And a special callout is on the rolled products side, an improvement on our sales volume of 43%. On the profitability side, I've -- in my highlights slide I've highlighted the improvement on EBIT and earnings per share and headline earnings, but also I would like to point out an 88% improvement on our normalized earnings per share. If I move on to the next slide, on our liquidity. We continued to invest in our asset base by a 7% improvement on last year while showing a 9% improvement on our net working capital as a percentage of our revenue. And this has been achieved by the tight control on our working capital and continuous innovative ways on managing our stock levels more than anything else. Our free cash flow improved by 142%. And our closing net debt, although 12% higher than last year June, it's still within our range of maintaining a 500 million debt capacity level. Our net equity ratio improved by -- or debt-to-equity ratio decreased by a marginal 1%. I move on to my next slides, where I create a -- sorry. Richard, can you move on to the next slide? All right, on this slide, I will take you through the headwinds and the tailwinds that our business has experienced but explaining it on the movement on headline earnings per share. On the external factors that we've experienced during these last 6 months has been an impact of ZAR 0.82 negative largely driven by the stronger currency of ZAR 0.52, inflation, the commodity pricing that we've experienced in the last 6 months largely driven by the pandemic and freight costs itself attributing to the ZAR 0.82 movement in external factors. Under controllable, huge positive has been improvement of ZAR 0.68 on our sales volumes itself; and a 0.30 -- ZAR 0.37 movement on a prior year excess hedging as we temporarily suspended our hedging policy for metal and currency as a result of the volatility experienced in the market, currency and operations during this year. Overall we've got a positive ZAR 0.20 movement on our headline earnings per share. On the next slide, I'll discuss each division and provide feedback on a much improved performance both by rolled products and our extrusions divisions. On rolled products. The increased asset utilization; higher sales by 43%, with our local market sales up by 90% compared to H1 of 2020, has benefited hugely rolled products this year, with revenue itself increasing by 48%, headline earnings improving by 110% and our net asset value for rolled products improving by 5%. On extrusions side. The recovery of extrusions has continued the momentum established in H2 of 2020, delivering a strong performance in H1 of 2021. Revenue improved by 73%, headline earnings by 200% and extrusions net asset value by 320%. Net profit has been impacted by ZAR 41 million of profit that we made on the land sale that we concluded last year but, however, overall a much improved performance of extrusion. On the next slide, I will take you through a bridge on the EBIT movement on rolled products itself. With the rising LME and -- our metal price lag resulted in a ZAR 76 million positive to our EBIT, but overall our external factors and the headwinds experienced by rolled products itself accounted for ZAR 176 million and the biggest factor being currency. On the controllable side or what I would call it the tailwinds, the increased volumes by rolled products has resulted in a positive movement on EBIT of ZAR 214 million. And the excess hedging from prior year was -- amounted to ZAR 114 million. On extrusions, a movement of a loss of -- on EBIT of ZAR 34 million to a profit of ZAR 61 million, with external factors accounting for ZAR 5 million largely due to inflation, but the much improved capacity utilization and operational efficiency compared to last year contributed positively of ZAR 44 million to the EBIT line. And the profit on the sale of the land and buildings accounted for ZAR 41 million of the remainder of the much improved of ZAR 95 million on EBIT from last year to this year. Moving on to the net asset value as a whole for the business. Our net asset value improved from 2.2 million to 2.4 million, with both rolled products and extrusions return on equity going up to 1% and 50%, respectively. On the headline earnings per share, an improvement of 6% and -- well, ZAR 0.06 per share and ZAR 0.09 per share compared to last year of ZAR 0.60 and ZAR 0.10 losses. On the next slide, I cover the currency-versus-commodity trend from 2017 to 2021. And you would see as in the last 6 months a real deviation between the exchange rate, the rand-dollar exchange rate; and the dollar LME pricing, which has resulted in the impact that we've seen on our revenue and also our cost base itself with regards to our related manufacturing and conversion costs and overall the pressure put on our working capital. We move on to the next slide, which is an analysis of our net cash flow from our opening debt in December of ZAR 751 million. The positive EBIT of ZAR 79 million, I spoke about earlier, but the impact of the ZAR 87 million on working capital is due to continued momentum and focus on -- our focus on optimizing and tightening controls on our stock, on our creditors and our debtors at the same time. There is -- on the proceeds on the sale of assets, we got cash proceeds in of ZAR 55 million; net impact, us reducing our net debt to a respective of ZAR 635 million for June 2021. On the next slide, I cover the liquidity and the capital structure. And I'm pleased to report that we've managed to maintain our headroom of greater than ZAR 500 million right up to June '21. And although our debt from June '20 has risen to -- risen from ZAR 569 million to ZAR 635 million, it's we still have enough headroom of more than ZAR 565 million to be able to continue with our improvement plan and utilization of our assets. Our net debt-to-equity improved from 34.6% in December to a respective 28.1%. And all our covenant ratios are well within the respective levels. On the next slide, on net working capital versus revenue performance, you can see we are very similar or marginally higher from a revenue point of view of ZAR 5.5 million versus the ZAR 5.2 million. And you see that our inventory levels have risen by quite a bit compared to 2019 largely due to the higher LME price, but we are very similar to June '20 even though the LME price has risen considerably. And this is largely attributed to us optimizing our metal purchases and managing our working capital and driving all the initiative projects that we have. On the capital expenditure, we continue to responsibly maintain our asset base to ensure sustainability of our business. We are on track with our capital program to spend close to ZAR 200 million this year on our assets. Thank you, Richard. Can I hand over back to you, please?

Thanks, Mark, and well done on your first presentation to our analyst audience. Nice having you on the team.

Thanks, Richard.

[ Sorry ]. I'm -- just need to get the technology going again. So I'm going to talk slightly differently to what I normally do about -- first, I'm going to make some comments about rolled products leading up to the half year. Sales were 43% higher on the corresponding period last year. We've maintained our excellent safety record. I'm very proud of the fact that Hulamin employees are very safe when they come to work, in fact probably safer than they are at home or on the road, but in addition to the improvement in capacity utilization, we did take the plant out for an effective 12 days major planned maintenance [indiscernible] significant upgrades on our hot rolling mill, which is our core asset, as well as a number of other assets that required planned maintenance and some technology upgrades. I can also say that demand has firmed, particularly after the lows of the COVID period, the initial COVID periods of 2020, but certainly the impact of the local import duty on aluminum rolled products and the local market has increased demand. We're particularly seeing that in the beverage can space where total sales into the local -- rolled product sales into the local market are up 90% year-on-year. The stronger rand-dollar obviously has a significantly negative impact on profitability, although it does help costs to some extent, but the impact on revenue is significantly bigger than the savings we get on our dollar-based -- dollar cost base. Also quite exciting is that we've entered into some new markets into the United States. Some technology we've been working on for the last couple of years in our rolling division is now starting to commercialize. We're [ planning ] to sell commercial volumes to some new electric vehicle manufacturers in the United States. So going forward into the second half, we'll continue to improve our manufacturing performance. What we are quite excited about is our recent performance, production performance, in June and August again following the [ disruptions ] of the unrest in KZN during July. We're looking at some really good volumes and hoping to get some really good volumes in the second half. Cost reduction actions continue, and we're maintaining very tight controls over costs in a broad range of areas in spite of the fact that a number of external prices have risen. The costs of logistics and freights have risen sharply. And likewise, energy also continues to rise significantly faster than inflation. We continue some pretty differentiated technology development. And we're very proud of our team, who've started to produce some -- we've started to produce some quite exciting automotive products that seem to be carving out a bit of a niche for us in the automotive market. And we also are growing. As Mark said, we've increased our scrap consumption by 8% in the first half and looking to extend those gains even further in the second half. Working capital is a bit of [ an assuming ] upstream problem because the rand-dollar has weakened since the first half. And likewise, the LME continues at its high level, so the inherent value of our inventory and receivables has risen, but we continue to attack our investment in working capital on a daily basis. And this is a major channel of capital allocation at Hulamin. Looking at some of the key features. As you can see in the top left-hand graph, the dark navy blue, local sales volume has risen as a proportion of total sales even though we are still somewhere below the 200,000-ton level. Unfortunately, there is an error on that graph, the number. I've just noticed that the sales leading up to June 2021 are -- or maybe it's not an error. It's just a bit misleading. The left-hand section are annualized sales, and the right hand are absolute numbers. So you can see how the local sales for the half leading up to June 2021 have increased quite significantly. As I've said, our injury level still remains quite well within international best practices. Also looking down the bottom, you'll see that the packaging sales continued to rise over 2020, 2021. Other products like automotive remained subdued. Looking at our annualized sales on a monthly basis, you can see the dramatic impact of the first half of last year and how the -- we continued to improve. I'm pleased to say that, since the end of June, our production performance has improved, which really is the basis for our sales, so we're looking forward to increased numbers in the second half. Looking at the mix a little bit more closely on -- in rolled products, you can see the gray bar with the local packaging sales. That's beverage can stock, largely driving that number, has risen quite sharply since the first half of 2020. Moving on to extrusions. As Mark said, this is a business that has really improved its performance very significantly over the last couple of years. We really are benefiting from the effects of the restructuring of 2019, where we consolidated operations into a single site. This has resulted in lower unit costs, better manpower productivity, lower overheads. Demand in the local market is reasonably firm, although in the last couple of months has softened somewhat. This has resulted in our ability to run the plant close to full capacity in spite of the fact that a lot of our employees have either had COVID or are quarantined as a result of having worked or been in close contact with people who've had the disease. Looking forwards, we will continue to improve productivity, make sure that we continue to operate and maintain our plant at tip-top condition whilst focusing also on improving customer service; on-time delivery, on time and full; lead -- reducing lead times; and so on. Just to make a couple of comments on some events post the closeout of our first half performance on the 30th of June. I think widely published in the media has been the fact that Pietermaritzburg was one of the epicenters of the unrest following the imprisonment of ex-President Jacob Zuma. We lost most of the week of production of the 12th of July. This resulted in around about 4,000 tons of lost sales. Fortunately, we had no damage to plant, property or equipment even in spite of the fact that our operations are surrounded by some retail outlets that were quite badly impacted. We -- no sooner had we got our operations back and running quite smoothly, then some of our export sales were disrupted late in July as a result of also widely publicized cyberattack on the Durban export container terminal. Fortunately, these sales will be recovered. We've largely recaptured those sales, as the production, our coils and sheets, were already in containers and awaiting shipment. So that really just has a working capital impact, loss of cash flow of -- by about a month of something in the order of about ZAR 200 million. Looking forwards, we continue our good momentum in building volume back into the business. We're looking forward to sales of something in the region of 105,000 tons for the second half, which should take us something above 200,000 tons for the year. We continue to focus on developing new and more differentiated products, particularly into the United States, but also we've started to qualify for some -- with some of these products into the domestic automotive market. And we have a healthy order book. Prices are rising internationally. And we look forward to a better second half, but we remain sensitive, as you all know, to the currency. If the rand were to strengthen, that would significantly negatively impact our financial performance on the second half, likewise the impact of commodity prices. Both the LME aluminum price as well as energy are the main drivers of our performance. And there's quite a lot happening in the aluminum space and also with the geographic premiums that affect the price of aluminum and how we buy and sell. And these have short-term impacts that tend to reverse over time on our trading financial performance. On extrusions, we look forward to further consolidation of our improvements focusing on extracting maximum cash, make some profit out of that business and getting it into a stable and successful position. And we're looking at some further investments to increase the capacity of our extrusions plant in Pietermaritzburg whilst maintaining our focus on -- our tight focus on costs and cost performance as well as customer service, lead times, on-time delivery and so on. As far as the group is concerned, we continue to focus and will continue to focus in the second half on cash flow performance, free cash flow, generating cash out of our operations while also looking a little bit harder at some of our investments and some opportunities to invest in the portfolio. With no further information, I'd like to thank you for listening to us and open up the floor to questions.

Richard, would you like me to play some music and give the audience an opportunity to ask questions?

Yes, please. Thank you, everyone. We don't have any questions today. I would like to again thank you for your attendance, and we look forward to seeing you at our next presentation early next year. Thank you.