Metair Investments Limited (MTA) Earnings Call Transcript & Summary

Good afternoon, everyone. A very warm welcome to all of you for the 2020 year-end results presentation from Metair. My name is Riaz Haffejee, and I'm the CEO of the company, and I'm joined with Sjoerd, who is the CFO of the company. I want to start my presentation with a safety message. As we are a manufacturing company, we take safety quite -- it's an important topic for us. And my safety message is just to share with you the things I've learned from COVID. As we know, we've been through quite a difficult year. I promise, I won't mention the word unprecedented again in this presentation. The 3 most important prevention measures that work are really wear mask, wash and sanitize hands repeatedly and create space, they really do work. And if you do come into contact with someone who is positive, limit the viral load, make sure that you have the least possible contact and that could save your life in the future. And if you do happen to get positive and have COVID, get treatment early. If you are diagnosed, make sure that you have good treatment and that you wanted to measure all of your results as much as you can. Now let's hope that we're all safe from this and that we have a reasonable year ahead from a COVID point of view. The agenda we have today this afternoon is going through Metair's COVID response strategy and where we are with that and what's the results been in the last year and what we see coming. The salient features of our performance for 2020 operational and financial review, the outlook and profits and then a Q&A, and you'll see some Appendices in the back with some further information that we have. So a welcome and opening observations, just to take you through, this is the Metair integrated annual report front cover. This color is conceptualized by the covering image and theme that provides the stakeholders with an insight into the major events for the period being reported. The image of our 2020 IAR is that of a relay baton being passed on from the carrying hand from that of our lead independent Director, Thandeka Mgoduso, representing the Metair Board; to Riaz Haffejee, the new group CEO. Smooth passing of the baton represents the smooth transition of everything of value in the business, our employees, our shareholders, our business -- our businesses, our partners and all stakeholders, the careful handover represents the care that we have in Metair for our people, our customers, our partners, our businesses, our shareholders, our country and all our stakeholders. The baton is passing to a strong capable hand that will navigate the new normal, meet for challenge and take the business forward and setting a new direction and leading the way through the pandemic winning the race and ensuring we have a sustainable future. And it's an honor for me to have taken that baton. And I thank you for that for that privilege. Thank you. The Metair Board is, as shown in the following slides, made up of 9 Non-executive Directors and 2 Executive Directors in Sjoerd and myself. We have a new Non-executive Director joining the Board on the first of May, that you see on the bottom right, that's Peter Giliam. And we have, at the moment, at the next AGM, we have announced that Grant Pretorius will be stepping down and Michael Flemming will be taking the role of Chairman at that time. So what do I have as my top-of-mind issues. I think that since joining the company, this list has changed a little bit as I've understood the things that have happened and things that need to happen in the company. And certainly, one of the biggest top-of-mind issues for me was this results presentation, was getting through, preparing and making sure that we get to this point and I'm able to talk to you in a manner that fits the performance last year. So I'm 7 weeks into the company, and I must say it's been quite a journey. The team is a fantastic team. They've done a great job going through the audited results, finishing the IAR in time, and they've really done a fabulous job, I must say a very big thank to all of them. I think another big top-of-mind issue for me is the site visits for all our subsidiaries in spite of the COVID restrictions. That's really been a tough thing to get through because I'm a pretty hands-on person, and I want to be able to see things for myself. And not getting -- not being able to get things quickly enough, I think, has been quite restrictive for me and especially for our overseas companies. It's one of the things that I really want to do. So it's tough to get around it a lot. But we've done the best we could with video. And I think that as soon as things open up, probably we think that by the end of May, end of June, we should be in a better position to travel a lot more. The third one was to meet all stakeholders and determine expectations. And I admit with most of the team, all of the team, I just haven't met with nearly all of the analysts and large shareholders, which I'll do now seeing us with our close period. So I'm really looking forward to that in the next 3 or 4 days -- 3 or 4 working days at least so that I can understand your expectations and understand what your feelings are about where we are and what we're doing. And then a big topic for me is to review the strategic direction of the company and the group in the current environment by the second half of the year. That topic, I think, has been on the table, we've Metair for the last 18 months, 24 months. And given COVID and the fact that we've put this on hold, I think this is a big issue that needs to be resolved. We need certainty, and I'm quite confident that by the time we get to that period of time, we'll have some good certainty there. New project delivery another top-of-mind issue for me in the automotive components business and the energy storage vertical, some really big projects in automotive components and big projects in energy storage that need to be delivered. And I am looking very closely at where we're applying capital in the group and making sure I'm following that and that is implemented properly and that we get the most value out of it for the years ahead. We have some new CEOs in the company as well. We have a new CEO of Mutlu, our battery company in Turkey, and a new CEO of Rombat, battery company in Romania. They are also brand-new in the position. So I'm following them as well and following their progress through the last couple of months. On to Metair COVID good response strategy. I think the first point when we look at the employee health, welfare, safety and communication, there were a number of things we had to do, and we really had to think differently about employee issues. Our support to all our employees were really -- was really very well received. Our businesses and our factories, we managed our COVID protocol very well. And I must say, given all the things that we did, I have a big thank you to give to all of our employees, to all of our management and especially to all of our medical staff on clinics around the country. They really did a fantastic job in being able to keep us operating as smoothly as possible. And you can see it was a big task. We had track and trace more than 2,492 employees. We had 908 COVID-19 cases. And unfortunately, throughout the group, we've had 11 people who passed away as a result of COVID-19. A special thank you to everyone who is involved in all of our efforts. And then from an employee health, welfare, safety and communications point of view regarding actual employee payments, we received a number of different kinds of support from governments around the world in the countries that we work in. So for South Africa, we had TERS, which we're all familiar with, 38% of pay up to a maximum of ZAR 17,000. In Turkey, we have 50% support for temporary unemployed. 75% support in Romania and an 80% maximum level in the U.K. In Germany, unfortunately, we had government support in Germany for a 100% but unfortunately, Moll, our company, we had a small -- we had a stake of 25% in that company that they applied for liquidation, and the shareholders decided not to inject more capital into the business. So that's part of our write-down number that you'll see in the figures later on. But all in all, we were allowed to operate fully under strict health and safety measures, and we did that to the best of our abilities. In South Africa, we had increased government interaction and economic participation. We needed to secure the best possible economic participation level. So at Level 5, when we were completely locked down and when we came out of that in Level 4, we wanted to be in that level 4 category so that we could start up with 50% of our employees, and we were initially categorized as a level 3 economic participant but through great interactions with NAACAM and NAAMSA and so forth, we were able to find our way into the right category, given that we make products that can be of essential services like FNB, for example battery, that was classified then as an essential service provider. And I think this government support is really a testament to the support that the government gives to the auto industry as well from a component supply point of view, our interaction with NAACAM, our industry body, and our involvement in APDP 2 coming up. I think this has been quite beneficial for us. So a really big gratitude to the government for that. Sjoerd, over to you.

Thanks, Riaz. So on solvency and liquidity, as you would know, was a big focus during COVID-19 and with also most -- than most companies and on top of that, we had to secure or renew revolving credit facility of ZAR 750 million in the height of COVID. And I must say from our CapEx, from our projections in terms of cash burn and cash analysis of sector we were in, we look to stick with within the parameters that we set forth. As a consequence of some delay in projects, we also dispersed -- we were able to disperse some major capital projects by a couple of months, 2, 3 months. That also assisted us in short-term cash management, and the shareholders will know by now the dividend was canceled at the end of the last year. I'm happy to say that the performance through the year has been very good and by year end, we're certainly in a -- from a balance sheet perspective, much better than we expected. A big contributor to that was a strong second half performance, especially in the energy storage, as well as a good working capital performance. And taking the current solvency and liquidity outlook for the business into account and despite having to invest -- not despite, we're lucky to invest in future business, that means we have gone, we're resuming our dividend cycle. So this year, we have set a dividend of ZAR 0.75 a share. It's a 2x cover based on headline earnings per share typically in the pipe. We've been in a 3x cover but we thought, given the fact that we canceled the dividend last year, it should contain an element of cashback. Therefore, we declared the ZAR 0.75 of the 2x cover and we're comfortable letting you know to manage the solvency and liquidity reporting. Riaz?

Thanks, Sjoerd. Going through the salient features at group level. I think it's quite important to look at all the main numbers. Revenue, we were down 9% to ZAR 10.2 billion. EBITDA reduced by 37% to ZAR 891 million. Our operating profit decreased by 45% to just under ZAR 600 million. Our net debt declined ZAR 513 million to ZAR 805 million. We had positive free cash flow of ZAR 687 million. And our dividend indicated was ZAR 0.75 per share. Moving on to some of the ESG numbers. We had a -- lost time injury improved to 0.61 in 2020 from 0.77 in 2019. We had a decreased emissions per person hour work to 11.4 kilograms of CO2, and we achieved B-BBEE rating of Level 1 from Level 2, a great achievement for the group. We have 65.7 thousand tonnes of lead recycled, and this is quite an achievement for the company. As you know, 99% of a battery is recycled. That smelter, it has closely existed for us. And really, we do use virgin led in some applications, especially for OE customers, but we recycle much of the batteries that we sell as well. Our COVID-19 response strategy was implemented successfully to secure a U-shaped recovery. And you'll see later on for the energy vertical, we think that that's more like a V-shaped recovery from the end of last year. We are entering in employment phase now as a result of the business expansion that we've had. And certainly, in the second half of the year, you'll see that we'll be hiring more people in South Africa, certainly. The strategic review, we'll finalize that in the second half of the year. We've got a lot of work to do to get to the right levels of information. And we've had a lot to change in the last 12 to 18 months, we stood our goal, and we've covered as many things that have come to the fore that we need to reconsider, and we'll finalize that by the second half of 2021. And our lithium ion production in Romania is targeted for commissioning and production also in the second half of 2021. Sjoerd?

So looking at the operational and financial review, I think it is important to cover the extent at which our businesses are currently operating. I think it's safe to say both June 2020, most of our companies operated without restriction, and demand returned really strongly for energy storage, more readily for automotive components as I'll show you shortly. But in South Africa, which most of you will be familiar with, we were in lockdown in March, 27 March to 30 April, so we have no production. Then coming out of the level 5 lockdown into level 4, for a month, you may think we had 50% margin, but actually probably more at 40% margin, op margin. Capacity utilization, now we sit with 50% margin, the best utilization. And then level 3, from June onwards. Obviously, everything is subject to the market demand, but certainly the freedom of being able to produce according to market demand was quite significant. Metair was deemed an essential service and had to deal with numerous -- many lockdowns of the long weekends, et cetera, but while we were disrupted from the business, the only impact was the actual market demand activity from around mid-March to June was around 50%, especially on the back of closing production in Turkey, similar to OEMs closing down in Europe. So that was a big impact. In Romania, a similar sliding down from the 16th of March, OEMs opening up on the 15th of June. Rombat didn't manufacture, but they continued to sell on service aftermarket and OES sell some stock but also at much reduced demand. In the U.K., we're also specified as an essential service so just we continued to operate under strict health protocol but also had to adjust to the market demand. In Germany, and as the rest of Europe all being slowed down mid March and then opened in mid-June, obviously, had a major impact on the investment -- on the Moll investment in that geography. And then in Kenya, also able to operate fully throughout the year last year, but just on the very strict health safety measures and curfews imposed in Kenya. So looking at the actual production or sales volumes. Automotive components, the demand was quite weak. In the first quarter, we started the year, I think, with some stability. Normally, we're able to catch that back in the second quarter by the time we were able, we would have been able to start catching that back, but COVID obviously brought that to a halt, so we see April at pretty much 0 production. And then slowly getting back to normalized levels, and we see in kind of the lines touching there in November. And that was the first time that you felt that we were kind of back to 2019 levels, fully recovering in terms of the market demand. Now the full year ended 32% down from 2019. But I think more importantly, and we'll touch on this in the outlook section, it is very positive outlook going forward. Definitely, the market is back and we anticipate good production volumes in 2021. South Africa is a major exporter of vehicles. So a lot of the export market is riding in that recovery, but certainly it looks as though we're pretty much back to normal. There is still, and I think it's a common theme around most of the announcements coming out in the market, the global supply chain disruption, and we are dealing with that. It's placing significant pressure on the whole industry. And it comes at a premium cost, availability of flight, availability of shipping containers, et cetera. It's really a major concern. We've been putting a lot of focus on it at the moment, and we're hoping by second half of the year that this will be much -- give us much more stability in terms of production. On the energy storage side, the recovery was very strong. From July onwards, we're already tracking to 2019 levels, and it's been sustained throughout the rest of the year. And certainly, we've seen a good start in 2021 as well. With the exception of export and industrial volumes. South Africa, we've seen aftermarket demand returned quite well. OEMs remain -- OEM volumes remain under pressure and therefore, we were down 35% full year. Industrial demand, which was already fairly weak before COVID, this weakened further, and we need to reassess the business model of our industrial business in South Africa, and we'll talk about that a little bit more further on in the presentation. In Turkey, OEM demand returned very quickly and actually supply has been strong, and we ended the year 2% ahead on OEM volumes in automotive. A combination of a good market recovery but certainly increased market share as we gain more market share in the newer technology, the start-up technology segment of the Turkish market. So that is quite pleasing. Aftermarket demand from July onwards through of December has been really strong in Turkey as well, ending the year only 2% below 2019, I think, was a fantastic achievement. And then on the export side, pretty much is -- very much impacted by country and economy locking down here in COVID with respect to the movement of goods, et cetera, and we certainly think coming into 2021, that gives us a good opportunity for volume expansion in those markets, of course, returning to normality and some other opportunities. And in Romania, very similar to the Mutlu story. OEM demand returned also very strongly, 2% higher than the prior year. So Europe is really doing well in terms of vehicle production, local aftermarket only down 5%. And then the export aftermarket down 2%. So Rombat was very much, from a volume perspective, in line with what we saw in 2019, so a very good recovery. Looking at the COVID-specific impact, just to give some sense of the -- some of the specific items. We've always had a 9% decline in revenue. Now if you compare that to the more volume decline, volume is down 33% than what the most -- the 12% in energy storage. The 9% revenue decline is really the weakness of the rand, which is just after some of the volume loss. So revenue down only ZAR 1 billion. And as we mentioned, Moll, we have to impair the investment in Moll. Total impairment was ZAR 140 million to Moll. Then from a receivable point of view, we had to make an assessment of our expected credit loss rate given the COVID-19 impact. I think it was actually a ZAR 16 million increase in provisions was really marginal. And I must say the data forecast performed exceptionally well during the year, and we're certainly very glad that, that part of the business has really stood up quite well to COVID. Inventory obsolescence did increase to a total of ZAR 52 million. There is some impact of run-out volumes to customers and visibility towards COVID, especially the new facelift business was with parts and commodities that we could not sell. And so that was the portion and that's certainly from an industrial business, as we discussed, there were some additional inventory obsolescence which we had to take as well. From a welfare and staff support during the year, and we have mentioned it previously, cost totaled ZAR 75 million. The majority of it, ZAR 61 million, attributable to the welfare payments that we made to our staff in South Africa during the hard lockdown. And then we do have the business interruption claim, a hot topic at the moment. And it is in progress. It has not been booked in this results because it is not virtually certain. We're engaging with our insurance to hopefully finalize this by the second quarter of the year. I think it might just be, to put some parameters to that, the business interruption claim is kept at ZAR 50 million. In terms of our extended damages section of the policy. So although the actual claim itself from the last business interruption are much higher, the claim is successful if kept at ZAR 50 million. And then also important to add, all of our cash-generating units for impairment, some of the goodwill and intangible assets, and especially on a post-COVID business creation, all of our 5-year plans taking into account the latest market data and what we were expecting from both OEM and aftermarket export business, mainly at Mutlu and Rombat, I'm happy to say that we still have a sufficient headroom within those assets. So no further write-downs required for our investments. Looking at the overall picture then, headline earnings of ZAR 1.48, down ZAR 0.56 per share, but I think it's quite a significant improvement, not I think the most -- it's a big improvement on the first half, where we had a ZAR 0.56 loss per share and so effectively, we managed to achieve just under ZAR 2 a share headline movement in the second half of the year, which I think is a very good recovery. Our operating profit down to 45%, EBITDA of ZAR 891 million. Free cash flow is, I suppose, the standout performer on this sheet, ZAR 687 million, it's higher than we achieved in 2019. A portion was assisted by a delay in some of our project-related working capital, which did assist us. And secondly, working capital performance has been really good for the year. Now this one slide is to the vertical performance is automotive -- energy storage vertical achieved ZAR 588 million operating profit, automotive components and truck components, ZAR 88 million, and a total of ZAR 561 million. I think is what you can see here is obviously the contribution of energy storage to the total operating profit, 87%, the segmental operating profit attributable to energy storage. And I think that's a testament to the diversification in the business exposure to aftermarket export business, and other geographies has really carried us through this period. I think in comparison, 2008, '09 financial crisis, Metair was in a loss-making position on similar volume losses in automotive components. So really, I think, from a strategic point of view, very good diversification are helping us through this period. And from a margin perspective, energy storage achieved 9.2% margin for loads, which is really good. Automotive components, 1.8%. And then total, 5.5%. And I think more significantly for us was the second half performance compared to 2019. Our second half performance for energy storage, ZAR 513 million, which is up 36% on 2019 performance, and an operating profit of 13%. Automotive components, because of the delay in the recovery or protected recovery was ZAR 136 million, a 20% contribution. And the revenue was up, volumes were still down, and the difference between that is obviously the currency impact and the second half margin in total, 9.1% compared to 8.8% was really pleasing as well. On a summary of the income statement, operating profit decrease ZAR 457 million, majority of that relates to the loss of margin on volume and revenue combined with significant under-recoveries, especially in the automotive components, in fixed production costs during the period of low production. And the ZAR 75 million employee welfare costs and inventory observations that increased from ZAR 18 million to ZAR 52 million and obviously, the increase in the impairments as well. Profit after tax includes a net interest charge of ZAR 164 million, so much lower than 2019 of ZAR 227 million. Interest rates came down quite significantly during the year so we benefited from that. But also from a net debt perspective, the position improved significantly so we felt we were less exposed. And that also includes an associate loss of ZAR 100 million. Of this, ZAR 108 million is for the Moll impairment. And then other income slightly improved to ZAR 118 million, mainly because of the derivatives. So we've been trading on foreign exchange derivatives, and as the rand started to weaken last year, so we managed to finish the year in positive territory from that against a foreign exchange point of view. Cash position was really strong. So we finished the year ZAR 1.6 billion on the balance sheet. Good working capital performance, also aided by some delay in the capital spend, as I mentioned, there's probably about a ZAR 200 million of delayed capital, which comes in disposed into 2021 now. But that certainly helped us. The excellent second half performance of the business and then obviously, the cancellation of the dividend from last year as well. Our borrowings on the other side also increased about ZAR 174 million, up to ZAR 2.3 billion. There was, I suppose, a level of liquidity securitization in the period and therefore, certainly, rebalanced during this year to ensure that we'll be optimally structured from that perspective. And then from a trade payables, which was probably the biggest working capital benefit that we had. We had some better terms from primary lead suppliers, but also the scrap purchases -- we diverted and made scrap purchases in the Turkish market. And then working capital, as you'll see, ZAR 300 million improvement. Better trade terms of creditors in general. The scrap availability in Turkey was quite restricted, especially in periods where the LME prices of the lead comes down, scrap traders typically tends to hold on to the scrap until lead prices improved, but that means we have to buy more primary lead from suppliers that does. The benefit of that is, obviously, it comes with terms. So a lot of our stock purchases have incentives in it, purchases with 60-day terms, which are very beneficial. We did have some lower-than-normal stock positions on imported content in automotive components resulting from the global supply chain delays. So we were quietly safety stocking, et cetera. So -- and we expect the normalization on that side, energy storage side as well as some further investment to support new business, and we'll cover that in a bit more detail in the outlook in the asset section. From a funding point of view, we certainly experienced huge support from our funders during the year. I really appreciate that. And we're also progressing fairly well to finalize our investments, funding the sites for the investments and also the refinancing of maturing debt. So that's well underway, the maturing debt there's a ZAR 750 million revolving credit facility, also ZAR 840 million in preference shares. And on top of that, we will need to secure about ZAR 800 million to ZAR 900 million of new investment funding, capital planning from our funding partners and certainly, we have reached support from them. And when we expect to close both of those sets of the refi as well as investment funding in the first half of the year. From a covenant perspective, on the balance sheet, our net debt-to-EBITDA is 1% -- 1x, sorry, while from a covenant -- financial covenant ratio, and that's when we bring hedge effectively onto the balance sheet as well, is at around 1.4x. So at the moment, our outlook is that we will -- we still have sufficient liquidity and sufficient headroom in existing facilities to cope with the expansion capital as well as the dividend requirements on the back of stronger trade. The capital expenditure, which was mentioned a couple of times, for 2020 was ZAR 381 million across the business, ZAR 234 million in automotive components. And you see the majority of that is expansion capital, and expansion capital from new model launches and facelifts, which includes the Toyota, Ford, VW and Isuzu. So the whole industry going through a period of facelifts and model launches. It's a great period for the local industry, majority of these model wants space that spring additional production and production volume opportunity and expansion of the industry so that's really good. The majority of our CapEx that we've committed. As you see the committed CapEx is ZAR 1.3 billion for 2021. The majority of that CapEx will be for Hesto to support Ford with their new launch starting 2022. But also Automould and Lumotech where facilities have to secure an additional Ford business. It also includes investments for a new smaller SUV platform that Toyota will be launching at Hesto and Smiths and also some investments for Lumotech in VW business and also new business, new model launch for Isuzu and also Hilux facelifts, which we expect later in the year. The energy storage capital is mainly focused around maintenance and general CapEx with some expansion planned for 2021. And the CapEx, as we've seen here, does include the rollover capital carried over or delayed CapEx from 2021, about ZAR 200 million. So that makes 2021, quite a big capital, the biggest in a single capital expansion year that Metair has ever had, which we're really grateful for because that is investing into our future and significant products for the next 2 to 3 years. The debt funding for all of these will be raised at the subsidiary levels themselves with an extent of group support. And despite the additional preproduction funding that we will be incurring for the fund this year for production and start next year, for instance, we anticipate that we will definitely remain within our covenants and have sufficient short-term liquidity available. Looking at automotive components as a vertical quickly. The vertical had to absorb a 32% drop in volumes. So to achieve an operating profit of ZAR 88 million, EBITDA of ZAR 228 million and close to neutral free cash, I think, was a good -- was a fairly good achievement. Having a positive EBITDA of ZAR 228 million, and given the first half performance, I think, is quite good. Traditionally, this business has been very -- yielding very high-return on invested capital, but it's the first time we've seen a drop this in a long time, we do expect a significant improvement in those returns going forward. We did see some higher inventory levels in the automotive components business, and that is really following investments and expansion of the OEMs and securing additional business on the one hand, but also the higher value imported content as the rand have devalued price significantly last year and this only pick up during 2021. From an energy storage point of view, the results were really strong, given the disruption, especially the half year. We were marginally profitable last year -- first half of last year. And that really was driven by the sustained demand in automotive batteries. A relatively lower drop in revenue of 6%, operating profit of ZAR 588 million and an EBITDA of ZAR 791 million. Big benefits from aftermarket and export exposure in those verticals. Unfortunately, South African industrial volumes were weak and economic activities in South Africa resulted in that ZAR 64 million decline in profitability of industrial, so putting it into a loss position of ZAR 33 million. Free cash flow improved significantly to ZAR 739 million, mainly aided by the working capital performance. Our automotive volumes in energy storage declined by only 11%, mainly as the result of reduced export out of Turkey. And the performance was really exceptional for the year despite the drop in volumes. And it actually managed to increase local currency profits compared to 2019, while the currency was fairly stable. So as a result, the return on invested capital only dropped marginally to 15.8% from 16.5%. On a segmental level, the automotive business did fairly well to manage to increase margins to 10.5% from 10.2% in 2019. The export margins increased from 9.2% to 10.6%, despite the lower volumes. Much better quality of the earnings at Mutlu and a much better ForEx performance during the year as well. Local automotive operating profit only declined by about ZAR 4 million. So it's on the industrial side where operating profit declined by ZAR 64 million to a loss of ZAR 33 million, due to weak industrial demand in touch economic conditions. And we are currently pacing and actions are in place to restructure that business, industrial business, the FNB specifically, and then that is expected to unlock value in the long-term as we reposition that business in the market. And then also from an individual energy storage business, both Mutlu and Rombat delivered an exceptional result for 2020. And FNB operating profit declined from ZAR 163 million to ZAR 73 million, the majority of that decline is attributable to the industrial storage performance, while automotive-level FNB stores recovered really well post lockdown. In rand terms, Mutlu's operating profit decreased by ZAR 4 million from 2019 delivering ZAR 409 million operating profit compared to ZAR 413 million. And then Rombat result was up 36% to ZAR 28 million. On the back of strong demand, there are some level of government support offset underutilization of facilities or fixed production costs. So that helped us. Certainly from a volume and a pricing perspective, Rombat was really well. Riaz, I'm going to turn it over to you.

Thanks, Riaz. Appreciate that and well done. Let's look at outlook and prospects. On the back of new model launches in South Africa and sustained demand in energy storage, we expect a positive outlook for the group. I think our immediate priority is to ensure that we have smooth leadership transition at all levels and to support the flawless launches of the new models and facelifts. The new model and facelifts are our ticket to sustained revenue for the next 8 to 10 years for those model launches. So very important for us to get that right. In the year ahead, we'll continue to drive effective project management, improve operating efficiencies to maintain the current base while investing in the future. We are -- there are a number of opportunities in the future that we are assuming as we prepare for our future and execute on the new projects with an investment of ZAR 1.48 billion. The energy vertical will be focused on expanding our automotive battery product range as well. In our SA industrial battery manufacturing segment, we'll evaluate the technology, as Sjoerd was mentioning earlier on in the technology shift, and while potentially shifting to a more responsive imported new technology trade environment in SA and expanding the product portfolio with other regions as well. We're seeing it similarly in Turkey and Romania as a good opportunity. In the automotive components business, we enter a year of preparation and implementation. As new projects are finalized and commissioned, some subsidiaries will enter preproduction and prototype manufacturing phase. And this results in a slight shift in business model as in these companies, it means generally we are supposed to build sprint -- sprint to build rather. So this means that now we need a little more engineering products in those developments, very important for us to concentrate on getting the right skills and putting the right structures in place to manage that. Our focus on increased agility and responsibleness to global markets that will require more engineering and design skill as a result and deepening our reach into our technical partners' skill and their IP base. So the outlook for the year is dependent, of course, on the final product complexity, the model and market mix that will become clearer towards the middle of the year. And this investment in our future could bring about a short-term migration towards the lower end of the market margin guidance in automotive component vertical for the year with substantial long-term benefits. I did -- I may have missed before that the supply chain coordination and disruption in the first half of this year -- first quarter of this year, last quarter of last year was substantial. But for the second half of the year, we do think that, that will settle down and come into a better position. From a COVID point of view, I think our focus is on a multi-step U-shape recovery to avoid the L-shape recovery curve based on international V, U and L-shape recovery trends. We're well on our way, I think, to have a U-shape recovery in automotive components. We think energy is in a V-shaped recovery at the moment. We'll see if that's sustainable in the first half of the year. Certainly, the last half of last year was very encouraging for us. And of course, our focusing on new model project launch, ensuring optimal execution. And COVID, one of the things it caused was it caused us some disconnect, disconnect with our employees, disconnected with some of the businesses we have. In terms of not being able to advance the things that we needed to, certainly, from day-to-day operations and managing the situations as they were, I think we did a great job. But in terms of advancing things, you now have to get that back into a year ago as economy comes to life as companies start to move, as people start to move, we're now in a position to reconnect in the way that we were before, and I'm really confident that, that will bring a lot of energy back into our system. Energy vertical recovery is based on an aftermarket demand, market share, brand positioning, economic range expansion and EO projects. So we're working on a lot of those things to get it back. And automotive components recovery is a project-based recovery. So we're well underway to getting that back. Sjoerd, over to you.

Yes. So what does that look like in reality, the way that we see it. I mean this is our step plan or step change future on a volume basis, this is energy storage. And we likely said from July onwards last year, we already saw a really strong recovery in volumes in line 2019. Based on our current outlook for 2021, we think from a volume perspective, we can beat 2019. There's also that, the significant improvement on 2021, and we think it can be in the range of 100% to 105%. A lot of that recovery would be export and orientated on the recovery of specifically Mutlu exports that we then achieved in 2020. So that will assist us to drive the 2021 level. And then looking out in 2022 into next year, I suppose, is -- well, from the 115% to 125% of volumes achieved in 2019. And that's further an expansion in terms of our local market expansion and export, additional OEM market share gains and then also lithium-ion production, which should be coming online at the end of this year. And there's also a level of lithium-ion trading in this. So that's a very, very positive outlook, we feel, for the energy storage business over the next 2 years. And yes, I think it's definitely a post COVID-adjusted volume outlook, and we feel confident in achieving that. From an automotive component perspective, 2020 ended at 68% of 2019 volumes. And as we mentioned, the recovery at the moment looks quite good and the current activity and what we anticipate for the rest of the year should put us very close from an overall production point of view to 2019 levels, between that 90% to 100%. And Europe to remain, I suppose, the ability of supply chain in the short term. But then more significantly looking through into 2022 and full year '23, there's a whole host of phase that's a new model that will be launched all the way from end of this year through to third, fourth quarter 2022. Those include new Ford platform, Isuzu, Toyota C-SUV, VW Polo C-Class, Nissan. So really big -- lots of activity. That will put our view of the local automotive industry production from an OEM perspective probably at 20% to 30% improvement over the 2019 levels. But I think much more significantly is our gain in market share within those volumes. So a lot of the new models we have gained significantly in new business. So from our perspective, if we achieve 120% to 130% range in volumes, then that could potentially put our automotive components revenue, 60% to 80% higher by 2023 compared to 2019. So it's a really exciting outlook for this business. Riaz?

Thanks, Sjoerd. I thought it's -- now it's important to just talk through a little bit about the Ford investment because this is one of the biggest projects that we've done in sometime from a Metair point of view. Our companies were awarded new Ford contracts with production planned to start in 2022, probably the second, third quarter of 2022. The investment will be the largest ever for a single customer, total funding of over ZAR 1.3 billion. The model life revenue linked to the new investment is estimated at between ZAR 32 billion and ZAR 35 billion, of which greater than 90% is incremental revenue, and the life cycle is expected to be 10 years. Our total capital investment in property, plant and equipment is estimated at around ZAR 900 million, including ZAR 234 million for building construction at Hesto. Initial working capital investment is around ZAR 350 million for the group. And capital investment is over an 18-month period. Project will be debt funded at the underlying operating companies. Project volumes are significantly higher than the current production, potentially doubling Ford production in South Africa in the future. And it's a great achievement for Ford that have been given such a wonderful chance with Ranger worldwide. Planned production returns all in line with Metair's minimum return targets. We've been careful to have this meet our minimum targets. And the new Ranger is earmarked to be one of the top models for Ford globally. Both the ranger and the Amarok will be produced in South Africa. The majority of vehicles produced will be for export markets. I think in 2021, we expect to show a significant improvement over 2019 based on our volume outlook. We expect continued demand-side weakness in the South African local markets. In the South African local market, we have more than a continued recovery in exports, of which greater than 60% of local OEM production is exported to the key vehicle markets being Europe and the U.K. Sustained and growing battery demand in local aftermarket and OEM, with strong recovery in export sales as the economy start to open up. Our operating profit normalization expected in both segments, consolidated operating margin expected to be between 7% and 9%, assuming no further disruption to manufacturing. But automotive components vertical will be impacted by project costs, costs involved in preparation of new projects, resulting in softer segmental EBIT margins by 1 percentage point to 1.5 percentage points per annum for the next 2 years. And with significant upside in profit in the following years that come. ZAR 1.3 billion to ZAR 1.5 billion capital expenditure for 2021 is the investment required in the new model. About ZAR 1 billion of that is automotive components, and the rest in the energy business. We should successfully comply with lenders' covenants and resume payment of dividends. I think the outlook we have is one of confidence and one we are looking forward. Sjoerd?

So the rest it translates this into the vertical level, we're expecting '21 local OEM manufacturing levels above that 90% to 95% of 2019. And our share of the market will continue to grow compared to 2019 due to new business secured. And the full year, EBIT operating profit, the margin guidance that we normally have, they still impact of between the 7% and 9%, but certainly given the preproduction costs or the project costs that we need to incur in preparation for model launch will have a 1 percentage point to 1.5 percentage point impact. And that means we expect to be closer to probably to the 7% than the 9%. Working capital is expected to increase some level of normalization and combined with the working capital required for new business. And then for the time being, certainly, additional working capital to mitigate some of the supply chain risk management, we might be keeping a little bit more stocks just to cover any potential disruption. From a CapEx point of view, segmentally, we anticipate up to ZAR 1.1 billion out to be spent on the automotive component segment, mainly at Hesto, but are for 3 major projects for 3 OEMS. And then in the energy storage vertical, we expect automotive battery sales to continue to improve on 2019 levels with sustained aftermarket and OEM demand and certainly, a much improved outlook for exports. But a key condition for the export business is now no further COVID disruptions, and that we will be able to serve and reach our export customers then have economies open up. Our margins could be slightly lower in the short-term and impacted by the continued low demand for industrial business and a possible change in the business model for FNB's industrial business. And then expecting working capital increase of ZAR 200 million to ZAR 250 million, again, a bit of normalization of working capital combined with lithium-ion production requirements, which we will need to support as we start producing in the second half of the year with working capital. And there's also a slightly more limited amount of supply chain risk management in energy storage. And then yes, segmental capital expenditure anticipated between ZAR 300 million and ZAR 350 million, as we mentioned before. So all in all, on the energy storage side as well as the component side, a very positive outlook for 2021 but certainly more so for '22 and '23. And with that, we are finished, and we will pause here for Q&A.

We have 2 questions from Mark Narramore of Excelsia Capital. The first one, for the softer margin guidance for the next 2 years in automotive components, does that come with lower revenue guidance as well? That's the first one. The second one, do you know if Haval have plans to set up any local production? And if so, could this be an opportunity for Metair?

I'll take the first one. The revenue guidance -- revenue will be -- will firstly be linked to volumes, excluding any currency movement. So there's no pricing -- let's call it, there's no pricing pressure in the business. The lower margin guidance that we're really referring to is upfront costs that's associated with projects. So that means increased engineering costs, increased -- as we start to employ people, that's training costs, engineering costs. And ultimately, that is recovered throughout the project, but there's a timing mismatch. And that's why there's a margin erosion, but it's not -- it doesn't have anything to do with top line as such.

Thank you, Sjoerd.

Louise, can you just repeat the second question for me?

Will do Riaz. Do you know if Haval have plans to set up any local production? And if so, could this be an opportunity for Metair? I hope I have pronounced the name right.

Okay. Haval, I have heard that only just light investigation so far into whether they are looking at a production facility, and that was probably 12 to 18 months ago. I have not heard anything since. But I think if that didn't -- if that were to happen, I certainly think that we would be very open to doing business with them.

Thank you, Riaz. The next question is from Alistair Lee of Coronation. The head office cost increased from ZAR 52.8 to ZAR 121.5 million. Please explain the increase?

That would be the impairment of Moll. So Moll, we did take the ZAR 108 million impairment, and that would be included in the head office cost.

Thank you, Sjoerd. The next question comes from [ Tommasio Holmes ] of -- I don't have the company name right now. But the question is, is there any evidence of the automotive OEMs increasing volumes or local content-driven by the new APDP 2.0?

Louise, I think, certainly, the automotive volumes will increase. What we've seen in the forecast from all manufacturers is a steady increase, especially as new models come through. So the example is Ford is forced to have gone through what was around 70,000, 80,000, 100,000 units to what could be 150,000, 170,000, 200,000 units by the time we get to the peak of model life. And so that's just an example of what Ford is doing. It could be the same for the other car companies as the models change. Certainly, that's the model, the business model. That's putting through high-volume for each of these model changes. So we do expect that to increase. According to the South African Automotive Masterplan, which has an ambition of 1.4 million units produced in South Africa by 2035. So we are working with OEMs to reach that volume. And certainly, APDP has, in some ways, encouraged; in some ways, pushed OEMs to localize with component suppliers as much as possible their imported content. So I do think it's heading in the right direction, certainly.

Thank you, Riaz. The next question is from [ Brandon Howard ] of [indiscernible]. Demand for solar batteries is crazy, what are Metair plans for solar batteries?

I think what we are looking at is also in this is a review of all our battery businesses, virtually our industrial battery categories. And that's certainly something that we're very strongly looking at, at the moment on how to do that, how to become a solutions provider. We are already doing that for some of the activities we provide with the mining industry, for example. So yes, solar is something that's on our radar. And we started an internal project to determine what scope that would be for the future, certainly.

The next question comes from James Twyman. Can you talk around why the margin in auto components was so weak in the second half compared with H2 2019 when the sales were higher? Do you expect the Ford contract to be profitable next year? Or will exceptional cost here -- sorry, it's not all on the screen -- will exceptional costs here offset the initial profits?

Yes. So I think -- sorry, just remind me what the first one was?

Can you talk around why the margin in auto components were so weak in H2 versus H2 in 2019?

I think if we back to the graph on the operating performance, I think it took a much longer time for that -- for the volumes to adjust. So we were 40%. I think at the half year, we were about 40% to 45% down on volumes, and we ended the year 32% down. But as we track to that out the -- from here, you can still see the gap. And then that's just under-recovery of fixed costs and not getting the volume and the turnover and the margin from turnover 3. So the combination of that, underutilization and loss of revenue contributed to the reduction in the margin.

Thank you. Second part of the question was, do you expect the Ford to be profitable next year? Or will exceptional costs -- sorry, will exceptional cost here offset the initial profits?

Yes. So I think there is an element of project costs certainly again next year. And depending on the timing of the Ford launch, it might well be breakeven or slightly profitable, but we will be incurring additional project costs leading up to start-up production, which is quite likely to be offset by profit post the initial preparation. But that's all dependent on the exact timing of the Ford launch.

Thank you. We have another question from [ Tommasio Holmes ]. He says, with greater throughput from the Ford contract, amongst others, will the medium-term margin target for automotive still be in the 7% to 9% after that contract has ramped up?

Yes. I think the difference between the Ford business and our existing business is Ford will be very much a greenfield investment. So it's not increased utilization in existing facilities and existing equipment. So it is complete greenfield. So I think the Ford contract will certainly be profitable, be in line with our margin expectations. But it's not -- we're not gaining the operating leverage because it's an existing facility. Even in our plastics business, we have to establish new facilities, new service and et cetera. So it's a big change in our historical way that we execute business on existing capital. I think the challenge -- not challenge, but obviously what we would like to secure, and if the Ford business needs a bit of maturity and certainly, then we will be able to be -- continue to be very competitive to support OEMS, but certainly have certain ability to be kind of well within the upper end of our margin targets.

Thank you, Sjoerd. The next question is from [ Roger Ambekan ] of [ Exalta Capital ]. What would you target at a long-term return on equity for the group? And when do you think you'll get there?

So from a -- we don't really target return on equity because we've got substantial debt. So our overall threshold in terms of return on it is return on invested capital. So that's our main return metric. The Metair cost of capital fluctuate depending on this year, but obviously between 13% and 13.4%. And so that's the minimum return, we target a 3% overperformance. And our expectation is that both the forward vehicle launch, a full year of Ford production from 2023, because 2022 will still be a part year -- full year 2023 that we will be able to achieve our target of return on invested capital.

Thank you. There are no questions at the moment. [Operator Instructions] There doesn't appear to be any further questions.

Louise, thanks very much. If there are no more questions, Sjoerd has just reminded me that it's my turn to say goodbye, and thank you all for joining us. We appreciated all 113, 115 of you who were here before. Thank you very much for spending some time with us. I really appreciate it. From all of us here at Metair head offices, goodbye. Thank you.