Hulamin Limited (HLM) Earnings Call Transcript & Summary

Good morning, everyone. I am Mark Gounder, CEO of Hulamin. Welcome to our full year results presentation, where Pravashni, our CFO, and I will take you through our operational performance and financial outcomes for 2024. We will also share an update on our progress thus far and next steps in the execution of our strategic objectives. We will close with an outlook on our 2025 imperatives and current emerging market trends. We've also included additional information for your reference. At this point, I invite you to type in your questions as we progress through the presentation. Zero harm to our employees is critical to the success of Hulamin. Safety is a cornerstone of our business, and we've continued our positive safety trend in 2024. Through our proactive management focus on risk assessment and directing efforts towards our high-safety risk areas, we have managed to complete a key milestone of being below 0.1x for our lost time injury frequency rate for the first time in 5 years. Going into 2025, we remain committed in driving safety awareness at all levels by strong, visible and proactive management. 2024 began with promise with improved demand in our key product streams. However, operational challenges, and particularly the fire on our can and finishing line limited our ability to fully capitalize on market opportunities in H2, which negatively impacted our overall financial performance. Pravashni will provide more context in the financial results section. Some key operational highlights are Rolled Product sales volumes increased by 2% year-on-year, primarily impacted by the fire. Local demand remains strong, contributing positively to our strategic capacity allocation with local sales at 55% during the current year. The 45% of export sales included a weaker sales mix in H2, having been impacted by the can end finishing line fire, with the business having to allocate the available limited capacity towards lower-margin export cold-rolled standards. In our primary streams, we achieved record sales volume for can body sheet and plate. Continuous improvement initiatives with no additional capital spend unlocked plate capacity to capitalize on incremental export demand. Touching on other operational and market conditions. Export pricing pressures persisted in Europe, primarily impacted cold-rolled standards and plate products. The fire insurance claim for both asset replacement and business interruption was finalized within our reporting period. Our financials include insurance excess and lost opportunity of about 2,000 tonnes high-margin export can end product line in line with our insurance cover. A strategic review is underway for our Extrusion business unit, which posted performance below expectation. We continue to prioritize our market-driven capital spend with the business outlaying ZAR 569 million during 2024. Our normalized EBITDA was ZAR 544 million. In quarter 4, we started our inventory build strategy in preparation for the 25-day strategic shut in June to complete our final phase of the wide can body project. As a result, overall net debt closed at ZAR 1.3 billion. With an understanding that our revised strategic objectives are instrumental in ensuring the long-term sustainability and profitability of our business, the focus remained on executing against these defined objectives. We continue to prioritize our local market-protected can stream despite the fire, successfully executed Phase 1 and 2 of the wide can body investment, increased can body demand enabled increased scrap utilization as a percentage of total production to 22.3%. Hulamin's salable capacity is dependent on our sales mix. As part of our simplification strategy launched in 2022, our capacity is prioritized to high-margin products. We started the year with constrained capacity of 180,000 tonnes to cater for extended plant upgrade shuts during 2024. The fire on the finishing line resulted in 8,000 tonnes of export can end capacity being lost. As a result, available salable capacity was 172,000, which was strategically allocated towards our primary streams at 84%, being 3% up from the prior year. Due to improved hot mill plant performance and pricing primarily in quarter 4, available capacity was allocated towards 1,000 tonnes of hot band, which contributed positively to our total sales volumes of 173,000 tonnes. I will now hand over to Pravashni to take us through the detailed financial performance overview.

Thank you, Mark. As Mark has highlighted during the business performance review, 2024 was a challenging year. The year presented many opportunities from demand recovery. However, the potential benefit was constrained by operational challenges and fire. As previously highlighted, sales volume was up 2% at 173,000 tonnes, which consisted of a weaker mix in H2. This resulted in normalized EBIT at ZAR 379 million, being down 22% from prior year, which also impacted our overall headline earnings. The reduced performance, stock build, and CapEx spend impacted the strength of our balance sheet, which increased debt levels and gearing. To contextualize the current year earnings, normalized EBITDA excludes metal price lag and other nontrading items. I would like to concentrate on 4 key elements that impacted our normalized earnings for 2024. The total external impact of ZAR 257 million was largely offset by the improved sales volume mix and improved scrap utilization. In line with our insurance cover, the business interruption claim excludes the first 14 days of lost production, which equates to approximately 2,000 tonnes of can end and tab and an insurance excess of ZAR 10 million. From our calculations, around ZAR 45 million was not covered by the insurance. Plant reliability challenges amounted to ZAR 57 million, which included additional overtime to catch up on lost time and additional freight costs to import emergency spares to minimize downtime. Both the fire and breakdown are unexpected costs that are nonrecurring. The finance cost of ZAR 183 million is driven by higher incremental interest rates and elevated average debt levels required to support working capital and capital investment strategy. Taking into account the key issues highlighted, our normalized headline earnings for the year was ZAR 142 million. The primary driver of overall increased debt was the increase in stock build for our shuts and committed expansion capital, net working capital of ZAR 391 million being impacted by 4,000 tonnes higher inventory holdings at 44,000 tonnes, weaker sales mix in H2, consisting of a long cash conversion cycle, and 55% local sales. We underinvested historically in CapEx, and now we are in the expansion mode with focus on delivery of market capital projects. We continued executing our market capital-driven investment strategy into 2024 with total spend of ZAR 569 million, of which ZAR 295 million was for expansion and improvement with critical focus on our wide can body capability and additional capacity enhancement as we drive towards increasing rolling capacity to 211,000 by 2028. Critical maintenance remains a priority as we address our equipment reliability challenges. Expenditure was allocated towards these key focus areas: fire risk assessment, safety, investing in critical spares, and mitigating obsolescence risk due to aging plants. As a result, our expected working capital requirements and funding strategy, our net debt is expected to increase in the first half of 2025 and taper down into the second half of 2025 as focus will be on de-gearing and offloading stock post the 25-day shut.

Thank you, Pravashni. Our strategic focus and business model remains unchanged despite the challenges we've had in 2024. Our critical focus going into 2025 is liquidity protection while we support the inventory build program for the 25-day shut to complete the final phase of our wide can body capital investment. So how have we progressed thus far against our committed strategic objectives? In response to the temporary setback on our financial performance due to the fire, we have completed a comprehensive fire and asset risk assessment to identify additional risk gaps and have started the execution of a risk improvement road map. We've also rebuilt the can and finish line within 3 months and within budget while finalizing the insurance claim. Substantial progress has been made on enhancing our can body capabilities and increased scrap utilization. Phase 1 and 2 were successfully completed in 2024, which was focused on speed and capacity to handle increased can body volumes. Final phase to be completed in July 2025, which is the actual mill widening and slitting function. Used beverage can scrap utilization capacity was enhanced to 15,000 tonnes through additional bailing and screening capabilities. Full utilization of the enhanced capacity will be used as we increase our can body sales in the plant. We have continued to prioritize available plant capacity towards high-margin products. Aligned with our business simplification strategy, we've signed a binding offer for specified assets of our containers business with the transaction expected to be completed during H1. With regards to our Extrusion business, we are in the process of completing a strategic review, and feedback will be provided in our interim reporting later on this year. Recapping on our business case for the market-driven capital investment into local wide can body. Current installed capacity of can makers in South Africa is at 81,000 tonnes and is expected to grow to 120,000 tonnes by 2027 post new lines being commissioned at 3 can makers. In 2024, the current demand consumption is approximately 67,000 tonnes and is expected to grow at 5% CAGR. Completion of our wide can body investment will allow Hulamin to increase market share by displacing wide imports. The increasing demand from can body consumption is expected to increase our capability to absorb more cheaper metal units. In order to understand the step change in our scrap utilization to displace expensive primary metal, I need to clarify some definitions on scrap. Pre-consumer scrap is processed scrap in blue that we purchase from our customers, while post-consumer scrap in green is used beverage cans. Improved scrap utilization was enabled by enhancement on the used beverage line cleaning line in 2024 and additional investment is planned in 2026. The increase in can body sales from 2021 has allowed us to be able to increase our scrap utilization. In summary, these are the investments that is required to be completed to enable the key performance drivers to bridge the return on equity gap for Hulamin. In order to assist some of you in modeling our business, we have provided the next 3 years of key performance driver milestones. The key aspects are: can body sales increase from 52,000 tonnes to 68,000 tonnes; total sales capacity increases to 210,000 tonnes, while our 3 streams, can body, can end and plate make up 75% of our total sales capacity. Increased scrap utilization means cheaper metal units, which improves profitability. Ultimately, in 2027, this business is earning a return in excess of its cost of capital. Going into the outlook, we thought we'd start by looking at our market situation, especially given the emerging global trends in both the U.S.A. and Europe. Local market demand remains strong, except for the auto segment. Inventory build requirement of 20,000 tonnes of finished goods at the end of June is critical to support the 25-day integrated shut. North America proposed 25% tariff increases to our primary streams. Plate, foil, and canon make up approximately 12% of our total volumes. Current duty framework is not expected to impact Unum's market position in U.S. in its current form. However, we continue to monitor any developments and have included additional information in our annexes. On the long-term market risk in Europe, involving recycled content and decarbonization, where we've seen here our customer base wanting to enter short-term contracts for imports. On the implementation of our road map, we remain on track to be able to deliver our reduced recycled content and our carbon footprint readiness strategy to enable retention of the EU market as a whole. Our guiding principles in terms of our core focus products haven't changed. Focus remains on can body, plate, and can end, optimizing and capitalizing on growing demand. To sum up, we have 6 imperatives: delivery of our market-driven wide can body capital execution and product qualification by end of quarter 4. Proactive monitoring of global market emerging trends needs to continue. Clear focus and continued focus, should I say, on reliable plant performance. On effective working capital management, we have high confidence to deliver strong returns, and our expectation is that we come through the shut into the second half of 2025 year. The working capital is temporary of the shut and will unwind in the second half of 2025, and the deliberate and intentional CapEx that we've committed should start to reflect in profit cash flow in the short to medium term. Continued focus on operational efficiency and cost reduction program will bring us in line with international benchmark. Complete strategic review and a decision on our Extrusion business at the end of H1 will be conducted. We thank you for joining for our 2024 performance review and outlook into 2025. We now open the floor for any questions. Noma, please can you assist me with the questions?

Thank you, Mark. For now, we have one question. It is from [ Raoul Gamsu from World Roof ]. The question is, how much headroom do we have on the debt facilities?

Thanks, Noma. Our debt finished off at ZAR 1.3 billion. Our total facility is ZAR 2 billion. So we have approximately ZAR 700 million headroom.

Perhaps we could just wait for a couple of seconds to see if there are any questions.

Sure, Noma.

Next question is from All Weather Capital. The question is, what cost of capital number is Hulamin using at present?

Thanks, Noma. Our current WACC is around just short of 17% right now.

The next question still from All Weather Capital. What is the price uplift of wide can body versus narrow can body?

Thanks, Noma. That's an interesting question. With regards to the wide can body, there's definitely additional benefit to our customers with regards to efficiencies on being able to produce wider material, use wider material, and track more efficiencies there. The margins on it will be aligned in relation to our customer-centric strategy where we continuously create wins for both customers and us in order to show profitability for both our customers and us going into the future.

Okay. Thank you, Mark. We have another question from Blue Quadrant. It reads, in relation to the shutdown and increased expected inventory for the first half of the year, will this be comparable to H1 in 2024 when NWC was also increased?

Thanks, Noma. I think the substantial difference would be that we are shutting for 25 days. In the presentation, I highlighted that we're looking at our normal finished goods normally sits at about 14,000 tonnes. In order to be able to continue to supply the market during our 25-day shut, we need approximately 20,000 tonnes. So you're looking at compared to H1 last year, it's going to be approximately 3,000 tonnes higher than previous year.

Okay. We have a follow-up question from [ World Roof ]. It reads, exposure to automotive sector, direct and indirect, what plans are in place if there is substantial reduction in demand?

Okay. So thanks, Noma. That's a very good question. Local demand has improved since H1, and we are engaging with customers closely to manage the global volatility in this sector. If you look at our total volumes that we sell into the sector right now, it's approximately 10% of our total volumes. So although it's not substantial, we definitely in quarter 1, have seen a slight uptick in that market, and we continue to monitor it. And it's, again, relying on being a customer-centric relationship that we launched 2 years ago. We keep very close to our customers, but we're definitely seeing some green shoots in that market in quarter 1 right now.

Thank you, Mark. We have another question from All Weather Capital. The question is, can you please expand on the exceeding your cost of capital? Is this only in 2027? Or will this be from H2 2026?

I think in order to ramp up to way above our WACC as a whole, there will be a gradual climb. And if you look at the last slide, where we created the key performance driver milestones, the value creation definitely will uptick, and the margin uptick will start climbing in 2026 and ultimately reach, exceeding our cost of capital towards the latter part of 2027.

Thank you, Mark. We have a question from MP9 Asset Management. The question is, please, may you add some color to your hedging strategy?

Okay. So right now, we've got different tier hedging. In order to protect liquidity or protect our balance sheet, we do not currently cover metal price lag as a whole. So that's a Tier 2 hedging that we don't cover right now. With regards to our conversion margins, that normal hedging is in process right now.

Thank you, Mark. Can you please speak to the lead times in placing the wide can product? How long from commissioning of the line will it take to ramp up the volumes?

Right now, we're looking at between 6 to 8 months to be able to ramp up the volumes post the capital investment itself in the plant shut in June, July, I call it getting production fit and qualification with regards to our customers. So we're looking at a period of 6 to 8 months to be able to ramp up the volumes.

We're just going to go on hold again as there are no more questions at the moment. Mark, there seems to be no more questions from my side. Can I hand over back to you?

All right. Thank you, Noma, and thank you, everyone, again, for joining us today. Look forward to engaging with you throughout the year. Thank you very much.