KAP Limited (KAP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to KAP's results presentation for the 6 months ended 31 December 2022. Thank you for taking the time to attend and for your interest in KAP. This has been a challenging period for all of us, overshadowed by the escalating electricity supply disruptions in South Africa and the effects thereof on economic growth in the country. The manufacturing section is reliant on stable and good quality electrical supply. And this is also true for KAP's operations as more than 60% of our revenues come from our manufacturing businesses. The sustainability of KAP's operations and the ability to extract value from these operations are top of mind for our Board. And while we have certainly experienced some negative secondary effects from continuing load shedding, I'm encouraged by the group's resilience during this very disruptive period, especially for our two big businesses, PG Bison and Safripol where the fundamentals of these businesses remain intact. The management team has a very clear strategy in place, including energy to ensure the continued sustainability of the group's operations and to enhance the value delivered to its shareholders, and I remain comfortable with the approach that they are taking. Gary will elaborate more on this during the presentation. And I will now hand over to him to take you through the operational review. Gary?

Thank you, Pat, for that introduction. And good morning, everyone, and thank you for taking the time, as Pat has mentioned. This has been a very challenging and complex environment that seems to be the general message at most of our presentations. But we certainly continue to experience a lot of political uncertainty and instability, especially leading up to the NCE Elective Conference in December. We felt continued subdued consumer demand. And this has obviously played out for us in lower volumes, which I think you'll see as we go through the presentation. Escalated electricity, so going into Stage 6 load shedding. I think the economy can still operate fairly well at Stage 4. But once you get into Stage 6, it really gets complex and starts to weigh on the economy significantly. We found commodity prices less volatile. So we certainly didn't experience the same volatility that we did in previous periods. However, raw material prices remain elevated. We've seen supply chains starting to normalize. There are longer lead times. So it's not back to pre-COVID levels but certainly, again, less volatility. And then we've seen a much weaker rand, which predominantly for KAP is positive for us. And I think for each of these factors, they've had varying effects on consumers generally, on our customers and on our operations. We're accelerating our efforts to build resilience, and this comes in two forms. One is to mitigate the risk. And then secondly, to create opportunities of how we can continue to grow in the current environment. So if we look at the salient features of our results, revenue up 12% to ZAR 15 billion. And this is primarily related to cost recovery. So when we go through the presentation, you'll see predominantly our volumes are down. And what you see in revenue, the growth is largely a recovery of cost escalations. EBITDA down 2% to ZAR 2.2 billion, and operating profit down 8% to ZAR 1.4 billion. Operating margin affected by the revenue increase being a recovery of cost where that doesn't transfer straight down to operating margin. So operating margin down 210 basis points to 9.3%. HEPS, down 17% to ZAR 0.31 and very disappointing for us. Our cash generated from operations down 96% to ZAR 0.1 billion. And Frans will unpack that in a lot more detail. And it's obviously, as I said, disappointing for us, and Frans will unpack that. So our results were impacted primarily by lower sales volumes as well as a major plant breakdown in Safripol, which I will go through in a bit more detail and then slower-than-expected recoveries in both Restonic and Unitrans Africa. So that from an operational perspective and then materially higher finance costs, which again, Frans will break down in the finance section. So overall, I think if you look at it from an EBITDA number still resilient and really underpinned by diversity of our business. If we just look at it from a segmental analysis and we break down revenues, so prior year on the right-hand side of your screen current half year on the left-hand side from a revenue perspective. It's fairly clear there are three larger businesses and three smaller businesses and then down to the operating profit on the bottom left. PG making up 34%; Safripol 32%, Unitrans 23% -- and then the three smaller businesses, Feltex at 7%, Restonic at 3% and DriveRisk at 1%. So I think that just provides more context in how we see in the group and how our revenue and operating profit is driven. So if we start with PG Bison, I feel it was a good first half, a tough operating environment. And I think this business did very well in the context of that environment. You'll recall, we did expand our Mkhondo Petrotec particleboard line, which gave us a 14% total increased capacity which is about 100,000 cubic meters per annum. So that came through and allowed us to increase production volumes by 9% and that was within a marketplace where we actually had very good demand. So demand was strong. And we've done a lot of work over the years around demand creation. So marketing activities as well as customer enablement to allow our customers to service those markets and as well as our work around value adding. And I think the robust demand in this kind of environment really points to the resilience of the informal market, where a lot of our product goes, and that's often not captured in form of statistics. We were disappointed a little bit around our ability to execute on our value-add order book. So we had a delay of 7 months in our 7th MFB press, which we were going to install. That resulted in us continuing past our planned maintenance schedules on our remaining presses which ultimately led to some breakdowns on those presses. So a very unfortunate situation, and that led to temporarily increased inventory levels and a lower mix of value-add sales. So that value-added sales ratio decreased to 62% from 66% in the prior period. And that's a combination of, number one, higher raw board volumes. And then secondly, just our ability to commission and operate that new press to be able to execute on our order book. So we have managed to get sales price increases, which has allowed us to offset our raw material cost inflation as well as our operational cost. And then obviously, a high degree of leverage coming through in our cost base just in terms of the extra volume that we produce. So in the period as well, we also continued to focus on our export markets and with that grew our exports. So overall, for PG, revenue up 10% to ZAR 2.659 million, operating profit down only 1% to ZAR 489 million, and operating margin 18.4%, still within our long-term guidance for that business. So really pleased with how PG has performed. If we then move on to Safripol. So this is our second kind of biggest business and from a profit perspective. And coming off a high last year, we had a record performance in this business last year, really driven by elevated polymer margins globally. We knew that there was going to be a correction, which we expected. I think that correction has just come in a slightly different format what we expected. So margins actually remained relatively resilient. So overall, that actually increased operating profit by ZAR 80 million. HD and PET margins were higher than the comparable prior period. And then PP margins were lower, which is what we expected and what we budgeted for. The biggest impact on the business was lower sales, and this came through in 2 forms: one, subdued converted demand. So this is directly our customers that convert the product to be able to sell into downstream markets. And that was largely impacted through Stage 6 load shedding where their ability to operate under those conditions was significantly compromised. And then secondly, reduced consumer spend just in a generally more subdued environment. With the ongoing unplanned stoppages, so we've had flood damage, we've had electricity failures, and we've had ongoing material inconsistency and electricity. That's not good for a chemical plant and especially a polymer plant that operates at extremely high temperature and high pressure and that has resulted in increased maintenance of these sites. And we had a very unfortunate breakdown as a result of that. So we lost 38 days of production and it was at a very unfortunate time in that we had a full order book at very good margins. So we did lose some sales. We managed to supply most of it out of stock. However, we did lose some sales, and we obviously lost the production recoveries. So total sales volumes for the division down by 11%, while production volumes reduced by 1%. So that obviously had an impact of inventory build, which is the primary reason why our working capital was over at half year. And that's a combination of both volume as well as cost implications. We did do some exports to try and manage inventory levels to the extent that we could, and that was primarily on the HD and PP side and that will be continued into the second half. So -- and just for comparative purposes, in the prior year, you'll recall we had a ZAR 91 million operating profit which was recognized in 1H '22 but actually related to FY '21, and that was in relation to retrospective ethylene price adjustment where we have renegotiated that contract. So overall for the division, revenue up by 7% to ZAR 5.2 billion, operating profit, although down 26%, as I said, coming off a high base, some nonrecurring items in the prior and still very healthy at ZAR 450 million and giving you an operating margin, again, still within our long-term guidance of 8.4%. We then move on to Unitrans. And Unitrans, we are starting to look at this business more and more as a single unit and looking to unlock synergies across the divisions, where essentially, we operate in the same sectors in the different territories, and we feel that there's more opportunity to look at this as one business, approach the market with one sales and value proposition within certain specific sectors. So more and more, you'll see Unitrans starting to be presented as a single business within 5 or 6 industry sectors. For now, we will carry on with the territory segmentation. So in the SA business, petrochemical, mining and food all performed relatively well and supported by petroleum volumes, mining volumes and new poultry contracts. A general line haul which, I guess, in a lot of ways, is a barometer for economic activity. So that's a general cargo line haul between major centers, and that was very subdued generally with lower volumes and very competitive landscape. So with that, we started to restructure those operations to really reduce our exposure to that part of the market. In terms of the Pick n Pay contract that we lost, we retained those assets to mitigate against supply chain constraints, escalating vehicle prices and with those starting to dissipate, we are actively now liquidating those assets and turning that into cash. In the Unitrans Africa business, this was very disappointing for us. There were two large impacts. Firstly, materially higher rainfall. The impact of this is that we continue to operate for longer with consistent volumes. So with that, you have extended operating costs, and you're also in very challenging field conditions, which can lead to significant wear and tear and damage to equipment. And then the second factor was our fuel business, where a large part of that business is transhipment of fuel from the SA ports up into our neighboring countries and with South Africa placing a moratorium on fuel exports that obviously had a significant impact on that division's ability to operate. The mining business there performed well with contract expansion so very happy about that. And then our rail business, as we said some time ago, this was really an opportunity for us where we saw limited downside risk and a potential significant upside. We were warned about it. And as a result, we started very small, and we wanted to learn our lessons small. And if it works, we would grow it, if it didn't, we get out, it hasn't worked, and we are disposing of those assets, and we're fairly confident that we'll recover the full value of those assets and then redeploy them elsewhere. In terms of passenger, they had actually a good half. They've done a lot of work on resolving a number of legacy issues, which have plagued that business for some time. They renegotiated certain loss-making contracts, they increase kilometers, increased their cash ticket sales and increase their special hires to actually produce good results under a very, very difficult environment. We continue to sign new contracts to ZAR 630 million in annualized revenue -- just for context, often that takes 12 months or so to actually come into the system. When you win a contract, you still need to procure equipment and the lead time of that equipment and commissioning it can often stretch from 6 to 12 months. So overall, the division revenue up 12% to ZAR 5.4 billion, and that is primarily recovery of fuel cost. So limited volume growth. And in fact, overall, probably flat to slightly lower volumes. Operating profit down 3% to ZAR 334 million and operating margin at 6.2%, which is below our long-term guidance for this business. We then move on to Feltex, we expected a recovery in the Feltex business, and it did come through. So we saw materially improved vehicle assembly volumes from the OEMs. And we also saw materially improved light commercial vehicle and sport utility vehicle sales which are the large drivers of our aftermarket business called Maxe. So a much better environment for us to operate. And despite those increased volumes of volumes, the offtake remained quite variable. So not a perfect situation yet. Still quite a bit of variability in the OEM offtake, but certainly returning to much more consistent and normalized levels. We do remain, however, below pre-COVID levels. So we're not back to where we would like to be yet, but certainly a significant improvement. The technical challenges that we had in relation to the start-up of the Mercedes C-class a little while ago, those have largely been resolved. And then in the period, we did a lot of work on two issues. One was recovering elevated costs. So as I mentioned, although we've seen a lot of the commodity volatility normalizing, it's normalized at a higher level. And through our contracts with our customers, we actively seek to recover those cost escalations through our pricing. So there, we've had some success to date, and we have some outstanding matters, which we hope to conclude during H2, and some of those are with retrospective application. And then secondly, we've done well on our insurance recovery in relation to the flood damage from April '22 and although that's quite a big number received in this period in relation to floods that took place in April '22, I remind you that the primary customer related to that was Toyota and Toyota only got back into production during August and actually only got to full production in October, November. So a lot of the impact of that was actually felt in the current period that we're reporting on. So for that division, revenue up 32% to close to ZAR 1.1 billion. Operating profit, ZAR 97 million and that was of close to breakeven in the prior. And then operating margin, 8.9%, still slightly below our guided margin largely through the costs that we are going through the process of recovery as well as the volumes, which we see going back to pre-COVID levels ultimately. If we then get on to Restonic, so this was a very disappointing performance for us. We were confronted by pretty soft market conditions, and this impacted on profitability. And as a result of that and other factors, we actually embarked on a fairly major restructuring of our various operations within this business. So consumer demand was certainly weaker and I think that's an impact of higher interest rates, higher inflation and retail price point in elasticity. So we've certainly seen in our retail space that we operate in, moving off a ZAR 3,999, ZAR 4,999 price point to try and recover cost certainly results in lower volumes at higher price points. So there is a degree of inelasticity there, which weighed on our volumes during this period. In addition to that, the retail trade is significantly impacted by load shedding, especially in the small towns where a lot of our customers' retail stores are. And often, if you experience midday load shedding in those small towns, the town largely clears out and the stores closed and don't reopen for the day. So lots of retail time is lost which affects sales in the sector. So our bedding units were down 5% and are now at levels which are comparable to pre-COVID levels. Our foam and textile volumes, which are key inputs into the furniture and bedding manufacturing sector. And I guess, give a barometer of the growth or not of those sectors were down 8% and 11%, respectively. And we don't believe that we have lost the market share in either of those businesses. We were able to get selling price increases to offset predominantly raw material costs, and we're really grateful to our retail partners for that. However, the impact of lower volumes on our operating leverage was significant. So we weren't able to pull back all of those operating costs sufficiently for the lower volumes that we produced. In addition, we invested a lot in marketing more so than we have done previously, and that was really to drive demand and to support our retail partners. So as I mentioned, a deep restructuring going on in that business right through from product strategy and into marketing strategy, our sales strategy, our supply chain and logistics right back into operational execution and raw material sourcing. So a lot of focus on all elements of that business to really get their ratios back in line and to get our operating margin back to our guided margin, which we still feel is appropriate and achievable for this business. So revenue up 1% against volumes down 5%, 8% and 11%, respectively. So really illustrating what we've done in terms of price increases to offset some of our costs. Operating profit down 57%, largely due to our inability to offset operating costs against lower volume and then operating margin down to 4.4%. DriveRisk, so this business remains relatively new and are stable, and really exciting business. And we were unfortunately impacted by the rapid weakening in the rand so that caught us off guard, and we pay our subscriptions to our suppliers in dollars and we invoice in rands. So it's quite important that we consistently maintain our pricing in line with rand-dollar exchange rate and where there's rapid variability, it takes a bit of time to recover that. So that had an impact on the SA business. The Australasian business performed well, so they are obviously a lot more sheltered or less impacted by that, and they've performed well, predominantly through the mining sector where we managed to sign a material contract. We did two small bolt-ons in that business really to facilitate growth, one in terms of building our software platform and productizing a lot of our software and the other in fitment in order for us to more speedily convert our confirmed orders into revenue-generating product, in other words, physically installing a sold unit into a vehicle so that we can start burning annuity revenue on it. We still are experiencing significant interest in the product. And as we are getting out there marketing it more together with the complementary revenue streams that we're developing the interest in the product continues to grow, which we're obviously very excited about. So revenue, ZAR 288 million, and operating profit, ZAR 10 million less than we would like at this stage. But as we are able to correct our sales prices in line with exchange rate, that will come right and an operating margin of 3.5%. So that is the operational review. I'm going to hand over to Frans now to take you through the financial review, and then I will come back at the end to go through the outlook and a little bit of strategy. And then Frans, and I will do Q&A at the end.

Thanks, Gary. Yes, and welcome, everyone, and good morning, and thanks for your time to come and listen to us. So just on a consolidated level, if you look at the financial highlights, revenue up 12% to ZAR 15 billion. EBITDA down 2% to ZAR 2.2 billion, operating profit before capital items, down 8% to ZAR 1.4 billion, operating margin at 9.3%, headline earnings per share down 17% to ZAR 0.31. And then our EBITDA interest cover at 6.5 and net debt to EBITDA of 2.3. So if we look at the revenue graph between all the divisions, you can see there that all the divisions basically increased the revenue compared to the prior period and that's giving us a 12% total increase, and that's on the back of what Gary explained, we didn't have any real volume increases. Most instances were at flat or lower volumes. So this just illustrates the ability for us that we've had in the 6 months to actually pass on cost increases, raw material to our customers. If you look at the operating profit, you see there that the Restonic is down ZAR 54 million. Safripol down ZAR 160 million, and that's largely offset by Feltex, it's up ZAR 95 million. Good performance by PG Bison basically flat and also Unitrans that's basically stable. I think there's a couple of big items we need to highlight. When you look at the operating profit. Firstly, combined, we received ZAR 102 million insurance income relating to the April 2022 KwaZulu-Natal floods for business interruption. So it's part of headline earnings, operating profit, not capital related. And it's ZAR 50 million in Feltex, Safripol ZAR 5 million and ZAR 17 million in Unitrans. This is still interim agreement of losses that we've signed with insurers. The claims are still open, and we're working actively in finalizing that and hopefully, we can conclude this before the financial year-end. Also, you need to take into account in the prior year, there's a ZAR 91 million that we've accounted for the Safripol ethylene price adjustment, which is not in the 6 months. And then also the Unitrans Pick n Pay penalty where we've accounted for ZAR 18 million in the current period and the balance of that was accounted for in 2H '22. So it's not in the exact comparative period, but in the second half of the prior year. What does that give you on an operating profit margin consolidated, it's down 210 basis points to 9.3%. We give you the detail over 5 years. I think good for us or good for the business is PG Bison, stable and 18% is right in our long-term guidance that we gave of 18% to 20%. Similarly, Safripol is within guidance of 7% to 9%. And the rest of the businesses are actually below our guidance. On the income statement, it was a challenging market environment. Gary explained it in quite a lot of detail that affected our results for the period. We've also had unfortunate 38 days production loss reduction in Safripol PET plant. But despite all of that, we still managed to generate EBITDA of ZAR 2.2 billion, which is 2% down on the prior year. You will notice that depreciation increase compared to prior that's mainly due to investments. You'll see on the CapEx slide that we've made some significant investments in the last couple of periods, and that's starting to come through in terms of the depreciation line. Operating profit at ZAR 1.4 billion, 9% down and then a significant increase in net finance costs up 54%, and that's twofold, partly higher net debt levels and also compared to the prior period, we're starting to feel the effect now of the latest interest rate increases. Combined, that takes us headline earnings down 18%, there's a 1% benefit in terms of lower weighted average number of shares. So that gives you a ZAR 0.31 per share or 17% down on the prior. Balance sheet remains strong. You'll see there on -- on the property, plant and equipment, ZAR 14.5 billion. We've given you three balance sheets there, 31st December prior 30 June and now December, just to see the trend. So we continuously invest and we've got large projects on the go, and I'll show you some of that detail later. And throughout this period, and included in December, there's actually ZAR 1.2 billion in capital work in progress. What that means is we've actually invested the money. We haven't been able -- or we're still in -- we're still in the building phase of those projects. It's not in commercial production, and we can't generate any return or EBITDA out of those projects. Biological assets, flat compared to prior year, net working capital increased compared to December last year, ZAR 1.6 billion. I've got a slide to explain that in detail. And then our net debt compared to December and the prior year increased just over ZAR 2 billion. I've also got a detailed slide on that. The net effect is a net asset value per share increased 8% to ZAR 4.69. Plantation is -- like you know, it's a strategic raw material for us in our PG Bison business. It's flat year-on-year. Just three items I would like to highlight there. We did acquire 639 hectares for ZAR 20 million in Northeastern Cape region to just increase our source of raw material. Also in the Northeastern plantations, we're continuously converting from Sawlog into pulpwood for internal use. That will have an effect on your standing value of the plantations. And then in the southern Cape because of the recent fires that we had here, the plantation is not in rotation. So we've actually harvested more than what the younger trees could grow in that implantation. So that's why decrease due to harvesting is ZAR 106 million, an increase due to growth is only ZAR 63 million. On working capital, compared to last year December and the reason why I compare to last year December and not to June, is it's the same business cycle. So that increased ZAR 1.6 billion to ZAR 4.7 billion. The two main businesses where we've actually increased our working capital is in Safripol, where it increased ZAR 818 million and PG Bison ZAR 227 million. And if you unpack that to the components of working capital, inventory increased close to ZAR 1 billion, and that's impacted for two reasons. Number one, it's the lower sales that we've experienced in the period, lower volume sales. So the inventory -- our actual inventory volume increased. And we also had significant raw material increases and cost escalations affecting the absolute balance of inventory. Receivable increased ZAR 721 million. That is directly related to selling price increases. Included in the base of our working capital and still in this period that we're referring to on the slide there, we have invested in strategic inventory to mitigate supply chain disruptions, and that also includes critical spares for our plants with long lead times. So we see -- or we're working actively on managing our working capital to optimize it. And towards year-end, we are working on the inventory volumes just to make sure that we bring it down and we match it to be in line with our demand. Cash flow. Like I said, EBITDA down 2% to ZAR 2.2 billion for the 6 months. We've invested ZAR 2.2 billion in working capital, you will notice -- well, that takes us down to cash generated from operations of ZAR 51 million, significantly down from the prior year, with the main reason is the investment in working capital, that's more than the prior year. And I think I've explained enough there, and we are -- we do have plans, and we are working on that to manage it better throughout the year. You'll see in the cash flow statement also the increase in cash net finance costs compared to the prior period. And lastly, cash conversion ratio of 2% is below our target of 90%, and we see that we will bring that in line to our target of 90% by year-end. If you continue with the cash flow statement, we've invested in this 6 months just over ZAR 1 billion in capital projects. And then we've paid the $0.29 dividend in September, the ZAR 741 million, and that's not going to be repeat in the next 6 months. If you look at the detailed CapEx slide. So I know it's a busy slide, but what we try to illustrate here is just some history on actual investment in capital, split between expansion and replacement and also depreciation. Just to give you a feel, and then on the right-hand side, we've got the material and strategic projects. The only two I would like to highlight at the moment is PG Bison, the MDF Mkhondo new project. So that's still on time in budget to be completed by July '24. And then on the Boxberg, value-add expansion, the MFB press is in the process of being commissioned and that we will complete in March '23. You will note that Unitrans have a slightly lower replacement CapEx compared to what the used to have, and that's where they're actually utilizing some of the Pick n Pay fleet into the existing fleet, not replacing with new vehicles. Also, we're allocating lower contract or lower-margin contracts into the existing fleet, saving some replacement CapEx. If you look at the weighted average number of shares, that's down 1%. We haven't bought back any shares in the 6 months. And that's just to illustrate the fact that the prior year shares had on the weighted average number of shares. Net debt, if you compare June ZAR 7.5 billion net debt to December now, ZAR 9.9 billion net debt. It is mainly due to the investing activities of ZAR 1 billion that I showed in the previous slide. It's ZAR 2.2 billion investment in working capital and the dividend that we've paid ZAR 741 million in this period, which we're not going to pay in the second half. So if you just go to the movement there, we've settled bonds of 1.5, raised new bonds of 1.8. We've utilized our RCF, ZAR 500 million and then on the right-hand side, you see here that our cash balance at year-end reduced by ZAR 1.5 billion. So there were some significant debt funding activities during the period. We continue with our strategy to replace large maturities with smaller, more frequent issuances. And I think we've largely rebalanced our total debt profile with that we don't have any large maturities outstanding anymore. Like I said in the period, we've issued 1.8, settled 1.5. The detail is on the left there. And we successfully GCR confirmed our rating in November '22 as A+. From a serviceability perspective, net debt at 9.9% gives you with EBITDA of just over ZAR 4 billion gives you a net debt to EBITDA of 2.3. 6.5 EBITDA interest cover. Both of those are well within our covenants, and both of those measurements are also within our internal target. So we've made a note there, our internal target for net debt to EBITDA is to be less than 2.5x. From a debt maturity perspective, we've done basically all the funding for this financial year included in the maturity there for June, the ZAR 929 million. Here's a ZAR 500 million RCF, and with the working capital that we're going to focus on and release some of that investment, we hopefully will not have to renew that RCF. And then for the balance of that maturity profile, we've got sufficient capacity and liquidity into '24, '25, '26 to refinance those if it's required. Yes. So with that, Gary, I hand over to you for the forecast. Thank you.

Thank you, Frans. So on to the outlook. So PG Bison, we expect demand to remain relatively robust. It has started the year well. We have strong order books currently and we expect that to continue. All of our value add plants are running effectively. And as Frans mentioned, that 7th MFB press is now in the commissioning stage, and we expect that to come online during March. We'll also continue to drive our exports. So those are important markets for us that we've had over several years and actually provide strong support to local demand and supply. Focus in this business on getting the inventory back in line. There was a bit of a build in December because of the kind of lower sales of value-add product. And that business is really focused on getting the inventory back to where it should be. If we look at Safripol, we are hoping for a much more stable performance. We've done a lot of work around making the Durban plant more resilient to electricity disruptions. We've got various mechanisms on our machines. So voltage regulators as well as standby generators really to allow that business to operate more consistently through electricity outages. We believe according to our industry forecast that our margins will remain relatively stable. And however, in the near term, we're going to have a bit of a kind of hangover coming through from the PET stoppage where we had relatively expensive raw materials on the water that have come into the system, and that will affect margins in January and February. There again, actively keeping our export opportunities open to be able to balance supply and demand. And as we mentioned earlier, really get our inventory levels down to the correct levels in that business. Unitrans, we expect a challenging outlook. So as I said, this is often a barometer of broad industry activity, which we see as being relatively subdued. We are working hard on consolidating this business into a more streamlined, more efficient higher-margin, higher-return business, taking out nonproductive assets, redeploying unproductive assets into more productive contracts wherever possible. So that's really the focus for the second half. Feltex, we expect the recovery to continue. As I said, the board volumes are up. And a lot of the inconsistency in OEM offtake is starting to normalize. And then we have the forward range starting to ramp up which we are hopeful and optimistic that will be successful and obviously add to our volumes. Restonic, again subdued consumer environment. We don't expect that to change in the near term. We do, however, have relatively acceptable order books currently. And as I said, in this business, we're going through a major restructuring right across the whole business. There's no silver bullets in this business that's going to turn things around. We need some increased volume. We need to work on our product strategy, marketing strategy, sales strategy, supply chain, operational and procurement. And I think collectively, as we go through that, we'll see the improvements starting to materialize. DriveRisk, really, the focus there is, as mentioned earlier, our price adjustments to offset the exchange rate impacts and then conversion of our sales pipeline into revenue-generating units. So we've got a lot of interest, a very exciting pipeline, but it's really converting that pipeline into installed revenue-generating units, which is really the focus of -- our working capital and the impact on net debt is a key priority for us. And we're not comfortable with at current interest rates, our debt levels. So that is a key focus to get those debt levels down. And with that, an obvious impact is the working capital, which is then a key focus. So just in terms of our efforts to build more group resilience. We're doing a lot of work around three primary areas being electricity, water and security and to secure our plants and ensure that we can continue to operate. We've done a lot already on electricity. We've got a 10-megawatt plant complete in Sasolburg. The second phase of that will be another 9 megawatts, we've commenced with a 4-megawatt plant in Boxberg, and we have approved a project to do up to 13 megawatts in condo and then there's various other smaller projects, which collectively can make up about 40 megawatts out of the total 80 to 90 that we consume. So a lot of work that we're doing around energy resilience. That's obviously combined with a significant standby generation capacity, which allows us to -- in several of our businesses operate through certain parts of load shedding. We also have curtailment agreements in place, which allow us to flex our production to be able to operate through most stages of load shedding. So a lot of work around the mitigation of risk is in place, and it's really now an increased focus on new markets and new opportunities in this environment. With that, and the discussion around opportunities mitigation strategies, we obviously need to reassess our capital allocation and there's a lot of work going into that now in terms of exactly where we're allocating capital, what our portfolio of businesses looks like and how we're going to manage that optimally going forward. So although it's tough out there, we're not -- it's not a foreign concept for us. We're not immune to it, but we're certainly out there making plans to mitigate the risks and then making plans to find opportunity in the environment. So that remains forefront of our minds. I think the one risk that remains is Eskom stability. So we can do as much as we can do, just Eskom needs to come to the party with at least a degree of stability and consistency and not only in the generation, but in terms of the entire infrastructure of how electricity is transmitted and distributed. So that remains a concern for us. So overall, a mixed bag of results. I think in the context of the environment. I think we've done well in recovering a lot of our costs, which you've seen in the revenue. And now it's really a case of looking to find the volume so that we can start to claw back our margins. So with that, thank you very much for listening, and thank you to our staff for their hard work and commitment during what remains quite a challenging environment. And then obviously, to our customers, suppliers and banking partners who really support this business throughout this period. So thank you very much. And with that, we are finished in terms of the presentation, and we will open up to questions.

Thank you, Gary. First couple of questions comes from Jackie Evoly from [indiscernible] Please, could you give us a sense of labor relations across the group?

So our labor relations have been stable and mature. So I think that's probably the best description. We obviously go through normal labor negotiations. And I think our unions and bargaining counsels do their job, but it's been approached in a mature manner bearing in mind the environment. So up to now, it's been stable.

Okay. Next question. Given the challenging environment, are you adjusting your future expansionary CapEx plans in terms of volumes, timing, hurdle rates, et cetera?

I think the nature of a big industrial businesses is that a lot of the projects take several years to approve, implement and ramp up to full capacity, and that's in ordinary circumstances. So obviously, with that, we have got some large-scale projects in progress, which we will run through to conclusion. And each one of those projects had export markets as part of the feasibility studies. So those projects will be concluded, and we're still confident in terms of getting them done on time, in budget and still reaching our feasibility hurdle rates. Obviously, looking forward, as I mentioned earlier, in an environment like this, we obviously need to reassess where we allocate capital from potentially growth opportunities into risk mitigation and sustainability requirements. So as an example, expansion into energy generation that in the current environment, gives us very good returns and ensures the sustainability of the rest of the business. So that's one example. But certainly, we are reanalyzing all of our expansion and capital plans to ensure that we not only put our balance sheet under pressure, but also that we're clever in terms of how we allocate capital for the right returns.

Okay. Thanks, Gary. So I'm going to group 2 questions here. So the one from Jackie on -- has management or the Board considered what a Stage 8 load shedding situation looks like for the group? What would be the additional impact and what mitigations can be put in place? So Rowan Goeller from Chronux has a similar question at stage 4 load shedding and above? Are you seeing increased challenges in your factories?

Yes. So as I mentioned in the presentation, at Stage 4, we can manage quite comfortably. When you get into Stage 6, it gets significantly more challenging and not necessarily from load shedding in itself, but then tire grid becomes unstable. So you have a lot more inconsistent electricity which is quite difficult to manage. So that's the one element. And then downstream from that, it has more severe impacts on our customers who convert our product into end consumer products. And then you obviously have a greater impact on the end consumer themselves. And especially in for example, consumer-facing businesses like our Restonic mattress business, where those furniture stores are in a mall or shopping center, they literally close. So that obviously has a significant impact. In terms of the sustainability of our plants and leading up to Stage 8, we are working on mitigation plans around that. In our large plants, we do have curtailment agreements in place, which allows us to work with Eskom or municipality in terms of flexing supply. We also have some alternative energy and standby generation. So collectively, it still provides us quite a resilient position in terms of our own operations, but obviously downstream becomes a challenge. I think once we get into Stage 8, I think -- 2 issues, water becomes a greater challenge. And there, again, that's an area that we are focusing on. And then secondly, security, I think, is going to become a greater challenge. And again, it's an area that we're focusing on.

A question from Nicole Hendricks from Old Mutual LDI. What is the size of your available liquid facilities committed? And what is the maturity of these facilities?

I'm going to ask Frans to answer that.

Yes, that's fine. So we've got a committed facility of ZAR 750 million in terms of our RCF. And like I said in the presentation, we've got ZAR 500 million.

And I'll answer that, Christina. So the restructuring that we are doing are not necessarily related to headcount. So it's not necessarily a cost to the business. It's more realigning what we do in those businesses and focusing our assets and our attention and our management time and efforts on the right things. So as I said, as an example, in Restonic, it goes all the way from the right product strategy through to how we're physically marketing those products and selling them our efficiencies through our factories and balancing supply and demand more effectively than we have. So it's a lot of streamlining process improvements as opposed to just one-off cost of taking people out of the system. So that's the first part of the question. The second part around the inventory. And if we go to the long form and part of the presentation, we've given a split in terms of inventory, what is cost related and what is volume related, obviously, where some of the inventory increase is cost related that is in the system. However, what you would have found predominantly in Safripol, and you would have seen it in Frans' cash flow side, where there was quite a large outflow of working capital in relation to creditors. For PET, we had acquired a lot of our raw materials early in the year, and we then had a breakdown. And so by the time those raw materials got into inventory, we had already paid creditors. So there was no offset of creditors and inventory. So that will be normalized by year-end.

Another question from Rowan Goeller from Chronux, what is the outlook for margins in Safripol?

Yes. As I said in our outlook, we think that margins will remain relatively stable. So we will have a short-term impact on PET which is, as I said, the impact of expensive raw materials acquired in kind of September, October pre the breakdown only coming into a salable product now at slightly lower selling prices. If we look at our IHS forecasts, it appears that both polypropylene and HDPE margins have bottomed in November and December, and we see those improving for the rest of the year to June. So relatively stable kind of on average. And then with HDPE margins, you may recall, we negotiated a margin color in terms of how we procure ethylene. We're currently on the floor of that color, and we expect it to remain on that floor for the rest of the financial year.

And last question from Jackie from [indiscernible]. Does the current environment change your view on appropriate levels of the group, i.e. are you comfortable with current gearing levels? Or would you look to deleverage?

Yes. So as I said at the end of my outlook, I think at a 10.5% interest rate compared to a 7.5% interest rate, we would prefer to have lower debt and that's going to be a combination of bringing our working capital back in line as well as capital allocation, capital expenditure. So yes, we would like to reduce our debt a little bit from where it is now.

Thank you, Gary. That wraps up all the questions. So thank you to the audience. Can I hand back to you, Gary, just to close the call, please.

Yes. Thanks, Christina, and thanks for the questions and for your attendance. And we'll see you in 6 months or so. So thank you.