Metair Investments Limited (MTA) Earnings Call Transcript & Summary

Good morning. Welcome to the 2021 Year-end Results Presentation for Metair. My name is Riaz Haffejee, I'm the CEO of Metair and I'm joined this morning by Sjoerd Douwenga, our CFO. We're very excited to present to you, this morning, our results for 2021 as we see them as great results, record earnings and we'll take you through some of the insights that we have from 2021. As always, our safety message this morning is still around COVID. It's still a serious disease that can cause problems, not only personally, but within businesses. I know we're at the end of the tail end, what it seems like the tail end of this virus, but it's still necessary to maximize personal prevention and taking care of yourself is also taking care of others around you. So we do recognize still that COVID could cause disruptions that we need to be careful about. Our agenda this morning, after welcome and opening observations, is to talk through the salient features and operational and financial review, some key takeaways and outlook, some Q&A and then some information in the appendices as required. So welcoming and opening observations. I think the first thing to mention is, as you can see in the background of the slide, we have a front cover change in our integrated annual report that reflects what we wish to do this year and in the years ahead, and that is to focus deeper on sustainability, as we see that this drives our future. We know that we've been pretty good at measurement and reporting and transparency around sustainability measures over the years, but I think we now need to start looking and looking closer at how we have initiatives for carbon reduction, for example, and what this means, not only to our various stakeholders, but to our customers as well. And so our theme for this year is around a deepening sustainability topic and that -- recognizing that it does indeed drive our future in the years ahead. My top of mind matters, in terms of operational excellence, there are a number of key projects to deliver in automotive components, not only in terms of facelifts and updates with existing customers, but also, because this is the year of delivery for the new Ford project, which will be active in the end of 2022, by the end of the year. In terms of supply chain normalization, we're expecting a better situation by the end of the year. It is something that's on top of mind -- that's top of mind. It's something we're working on, finding greater coordination for actively. We think that there'll be better results as we move through the year. We still have, as one of the top of mind issues, disruptions that COVID could cause to employees and our operations overall. Although we've handled waves 1, 2, 3, 4, and certainly, as the virus has lost its -- some of its power, certainly, we still had more people, because of the amount of people that can get infected, we've got now more people taking shorter spells of time away from work and that can still cause a disruption for us. So how we handle that, how we find prevention measures for that and what we do to mitigate those effects on us will still be something that we need to take into account. Certainly, from a financial performance perspective, looking at Eastern Europe and monitoring the events that are there and that we have a close eye on, not only potential volume where we export into some of the region, although that's quite small, we wish to mitigate that by finding additional markets that we can work with, and so we lessen the impact or have no impact. But we are also keeping an eye on the region because there are potential supply chain issues that we look at. We've seen no impact to date, but it is certainly something that we have to keep an eye on, and is top of mind. I guess, financial performance also falls in line with the recovery of the South African market and the economic recovery of the country, and how we find a way out of this economic -- this low economic performance we've had over the past years. And certainly, if that improves and we see a recovery in the South African economy, not just in this year, but in the years ahead, that's great news for automakers, that's great news then for us. And certainly, that's something we're keeping an eye on and actively pursuing in however which way we can support South African government to do that. Wage negotiations in all our companies will happen in 2022. As it happens, the 3-year MIBCO wage negotiation will happen in the automotive components, particularly this year, as well as the 2-year negotiation in Mutlu and the annual negotiation in Rombat. So all of our big entities will have wage negotiations coming through. And certainly, by the first half of the year, we should have a very good idea of where they fall and I'm expecting fair result overall. Certainly, we've planned, we've understood and we've organized ourselves for the circumstances or these wage negotiations this year. But from a value creation perspective, Metair is positioning on carbon reduction initiatives, part of our sustainability plan that I spoke about and how we become a more attractive company into the future, bringing in a reduction or a different mix of energy into the future. Those things will certainly -- we'll investigate and start rolling out in this year. Future diversification initiatives in automotive components, the potential here for either new customers or new technology that we bring in, the automotive components will be important for us, and therefore, create future value for our shareholders. The lithium-ion line transport to Turkey with a greater market opportunity, with a greater incentive opportunity and greater access to skills brings us, also, good potential for future earnings. And the value creation opportunity in energy storage, that potential, in the short term, is something we're actively working on. So in terms of top-of-mind issues, these are the issues that I have certainly got to [ consider ] and work -- certainly work towards in 2022. Now, taking a step back for a moment in 2021, I think it was the year of change, recovery and certainly, a herd of black swans. There wasn't just one event that was unexpected, not defined before, and that came upon us. So it was really a year of multiple challenges, especially in the second half of the year in South Africa. But despite that, the company produced a record HEPS in 2021, and that was because of a record energy storage performance, driven specifically by Mutlu, who had a great year. Despite the turmoil and volatility in its own market, we have a business model with great percentage of hard currency business, which protects us. And as a result, with great volumes we saw in recovery and export and OEM, we had a record performance in Mutlu and a record performance in energy and therefore, record performance in Metair. Successful model launches despite multiple challenges in the automotive components vertical. Very proud of the team and what they did and how they did it. Despite all of those challenges in the second half of the year, we were successful with what we had done. And as I mentioned, Sustainability Data Transparency Index, the SDTI of 98.5%, a score we're quite proud of, puts us in the top 1% of the JSE in terms of how Metair measures and monitors, reports on data transparency in sustainability. In addition, our impact and initiatives on lost-time injuries and safety and health of our employees, also bore fruit in our LTIFR, reduced to 0.29 from 0.61, an important measure for us. And the efforts that our teams are putting in place to create the right discipline, the right levels of health and safety environment for our employees is bearing fruit, and we're really happy about that. And I intend to put more focus on that, so we have as safe an environment for our employees as possible. And then it was certainly, 2021, a period of change. On our Board, we had 4 new members, including a new Chair in Michael Fleming and myself, as the new CEO. I joined the company in '21 as well as 2 other nonexecutive directors -- 3 other nonexecutive directors, rather. We had leadership changes in 4 new subsidiary MDs that joined and 4 new head office members, bringing our head office to a total of 10 people. And these changes require alignment, settling, stability and good leadership all around, to bring about the right kinds of synergies and impacts and outcomes overall. And I think we did a great job with that in 2021 despite the challenges we had, really happy about how that worked out. In addition, Metair moved offices to Rosebank from our original home based at Wesco House after many decades. So in a great location and very happy about how that move turned out for us. From a vaccination status, we improved our situation to 68% with at least 1 jab. And I think that number is going to improve over the year as we put more focus on promoting vaccinations throughout the group. We also, in 2021, had a food parcel support to employees in KZN after the civil unrest and riots. And we were proud of how our teams got together and banded it together and really supported our employees in KZN. We also were able to retain BBBEE Level 1 certification for the group, which we're also very proud of. So some great achievements that came out of 2021, overall. That was a great teamwork, great initiative and resilience shown by the team, and I'm really proud of that. So well done to the Metair Group and well done to the team and our employees overall. I wanted to show you some photographs of some of the new project outcomes, some of the buildings that we've had in automotive components, specifically. And I think these show, demonstrate not only the scale but also, the impact that these projects will have on our business in the future. On the top left is the new manufacturing facility for Hesto in KwaDukuza. And that's predominantly for the Ford project, but it includes Isuzu as well. And you can see, our customers, the growth that, that's brought to Hesto. And bottom of that, bottom left is our new facility in the TASEZ area in Silverton next to Ford, that's where the harnesses will be sequenced for delivery onto the Ford line. Top right is the new Lumotech warehouse, which is -- which was necessary as a result of the expansion that they had gone through. And the bottom right was the new auto mold facility in TASEZ, also in Silverton, with new injection molding machines and new robotic plastic painting machines, also with sequenced delivery to the Silverton plant [ failing ]. In addition to that, I wanted to show you pictures of what we did in 2021 as a Metair exhibition, a showcase of all the products we make, just a few examples of the products that we make and the exhibition we had in November. We look forward to having a number of, not only just internal representatives, I came to see this because of the changes we had in Board members and internally. But also, we were able to invite key customers to this exhibition. And we were able to showcase the technology we have, our capabilities and talk to customers around some future prospects. So we were quite proud of this initiative and hope to do it again this year. So moving on to salient features and key performance metrics for the group. Happy to say that from 2020, our revenue increased by 23% to ZAR 12.6 billion. We increased EBITDA by 58% to ZAR 1.4 billion, increasing our operating profit to ZAR 1.2 billion. Our net debt increased to ZAR 1.3 billion from just over ZAR 800 million as a result of a number of factors we'll discuss later on. And we utilize free cash flow of ZAR 229 million over the period. Our headline earnings were ZAR 0.354. As I mentioned, it's a record for the company. And as a result, that produced, in line with our policy, of dividend of ZAR 0.90 per share for 2021. In addition, we were able to refinance our debt, with a successful extension of the RCF and preferred share funding. We achieved Level 1 BBBEE, which I mentioned, as well as all our South African subsidiaries, maintaining a level 4 or better in our BBBEE rankings -- ratings. In addition, our energy storage companies recycled 62,000 tonnes of lead in 2021. Our LTIFR, I should say, improved 0.29. We had a very effective response to COVID-19, with some challenges that still remain potentially. We successfully progressed on new projects in automotive component vertical and we made the decision to move the line -- to move to lithium ion line overall. So what we consider for 2021, a great set of results, some great initiatives, some great outcomes. And I'm happy to say that throughout the challenges of the year, the team's done a great job. Sjoerd, over to you.

Thanks, Riaz. I will now take you through the operational and financial overview for the year. And I'll start with our automotive components. Mainly -- well, South African environment. OEM customer volumes improved by 21% from 2020, supported by continued strong export demand. However, this, too, fell sort of our expectation for the year. We did anticipate higher production during the year, but that stronger recovery, as you can see in the graph, which started off well was hampered by supply chain-related issues, as well as other South African specific issues, which I'll go through. I think initially during the year, the direct impact of COVID disruption was well managed by the industry, but certainly, by the second half of the year, supply chain issues started to escalate, not just to us, but across the world because of the lack of shipping availability. And also, we started to see critical component shortages like semiconductors starting to impact the production levels. That also led to an increased cost in freight, and by freight, we mean sea as well as airfreight, which I'll talk to a bit later. In July, we saw a significant event of civil unrest in KwaZulu-Natal and mainly closing in, but also other areas, which lasted about 8 to 10 days that had a very detrimental impact on production. We continue to experience Board inefficiencies. There was also the cyber-attack in July. And then we also had steel sector stocks in October, which also took production out of from -- away from the OEMs. And so I think importantly, as I mentioned, export demand remains quite high, and there is a market that we can address to a much greater extent, should we be able to produce at higher levels. So as a result, production in SA was about 82% of 2019 and well below our expectation from the start of the year, of about 95%. On the other hand, energy storage business had an exceptional year. We saw continued strong demand in aftermarket OEM and the export automotive battery manufacturing, sales increased 18% to a record ZAR 8.8 million units. So as a result, well ahead of expectation. I mean, in Turkey, we continued to benefit from a normalization of OEM production, but also, increased market share because we continue to supply an increased proportion of new technology, absorbed glass mat start-stop batteries. Aftermarket demand remained high throughout the year across local and in the export, up 37%, but export plus the real standout performer, improving 92%, albeit off a low base for 2020. And we're also very successful in achieving new export contracts, in specific -- specifically, in North America and also, an improvement in traditional export markets. And Romania was very good demand, overall. Factory was operating at very, very high utilization rates throughout the year. And aftermarket increased 22%, supported by strong European demand, also new export business into North America. And OEM volumes were somewhat impacted by chip shortages in the second half of the year. In South Africa, OEM volumes improved in line with the general automotive OEM production. Aftermarket was a bit -- [ callings ] were challenged because of a very competitive environment in South Africa. We've spoken about that before, and there are various initiatives in place to address that. From an industrial perspective, demand recovered slightly, but not sufficient enough to change strategy, and the business has now transitioned into a traded model rather than a manufactured model. So therefore, this translated into this view from a group perspective. I'm going to repeat them. Riaz already mentioned them, but we are proud of it. So I will repeat them again. Headline earnings per share of ZAR 0.354, up 39%, operating profit of ZAR 1.2 billion and EBITDA of ZAR 1.4 billion. We did consume free cash and as we continue to invest in new projects and working capital and operating profit despite order component is not performing as well, still a very, very good 9.2% across the group, and return on invested capital of 16.4%. From a vertical perspective, we're very excited about the performance of energy storage, revenue up 18%. Operating profit up 51% to ZAR 887 million. And from a returns perspective, return on invested capital of 25.5% was quite exceptional. Another then, auto, despite the increase in turnover and increase in volumes, a lot -- although they translated into an increase in profit could have been much more significant, as I mentioned, the short-term disruptions that we experienced, especially in the second half of the year. Therefore, the total result for the year ZAR 12.6 billion turnover, ZAR 1.6 billion operating profit, record performance from the group. Compared to 2019, because this is post-COVID, we did put our post-COVID recovery trajectory, whether it's the V-shape for energy storage, U-shape for automotive components. I think it's fair to say that energy storage is, I think, has exceeded that V-shape recovery, I'm so very proud of that. And then automotive combined is, although from a revenue perspective, has increased beyond 2019. From an operating profit, not quite there, but we do expect further recovery on that as we progress into this year and next. And from a group perspective, achieved, a little bit, the recovery -- recovering then. From an income statement perspective, revenue, an increase, as I've shown, was really driven by volume recovery in both businesses. A big portion of both revenue and profit driver was hard currency export sales in energy storage. The group profit increased by ZAR 518 million due to the record performance of energy storage and in particular, Mutlu, which we'll go through later, which achieved ZAR 643 million for the year. Automotive components was impacted, as I mentioned, and there was also some one-off costs related to supply chain mitigation, air freight of about ZAR 150 million that we had to incur during the year. Therefore, profit after tax, ZAR 693 million, and we had slightly lower interest rates, so there was a saving in net finance costs. We have normalization, effective tax rates, but the corporate income tax rate in Turkey has increased to 25% post COVID. And then, there were significant losses in associates, mainly driven by Hesto, which I'll cover later in this report of ZAR 58 million. The results also include the conclusion or finalization of our business interruption, insurance claim related to COVID of ZAR 50 million, which is included in other operating income. Further on the financial performance, attributable profit increased by ZAR 501 million to ZAR 675 million. Hedge, we've discussed. And in addition, we're proud to say this in addition to investing significantly in new projects in auto and energy that will yield future cash flows and earnings. We're still able to declare a dividend of ZAR 0.90 per share within our dividend policy. Our net debt increase was driven by working capital and investment, but still well below. Our covenants are well within those requirements. From a -- return on invested capital increased to 16.4% and some of the investments that we're currently doing and working capital normalizations are evident in the invested capital base. Further on the balance sheet. Noncurrent assets decreased, mainly due to a combination of Turkish lira devaluation, the devalued 40% on year-end 2020 to year-end 2021, offset by some of the capital investment that we have -- that we mentioned. Inventory levels increased in both energy storage as well as automotive components. Energy storage, mainly driven by higher operating activity levels and also, an increase in commodity price. While in automotive components, we have been increasing our inventory levels to mitigate against some of the supply chain disruption we have experienced globally. So covering more inventory for potential shipping delays. And trade receivables, still performed really well. Recovery was still strong, with no significant exposures or bad debt. Cash decline of ZAR 514 million, largely driven by the working capital and CapEx, as I mentioned, in new projects. Then from an equity point of view, similar as we've seen in the noncurrent assets, total equity reduction driven by the Turkish lira currency devaluation, deviated from TRY 1.98 to the rand to TRY 1.19. That's a 40% having an impact of ZAR 900 million foreign currency translation reserves within the equity. Total debt, ZAR 2.3 billion, slightly lower mainly due to Mutlu currency evaluation as well. From a working capital perspective, the reduction in 2020 was, to an extent, temporary because we had lower activity levels, plus we had lower commodity prices. So the 2021 increase, as expected, as a result of new project investments, new project, new vehicle launches that we saw in 2021, but also, debt normalization of working capital, mainly due to Mutlu and higher commodity prices and much, much higher activity levels and continued higher activity levels. And from a capital and debt structure, we still remain quite strong despite debt levels being slightly higher. Overall covenants is below 1.48x on a covenant measurement methodology and so it's still well below the 2.5x. And as Riaz mentioned, we did successfully extend the maturity of 2 net debt facilities. Firstly, ZAR 750 million 5-year revolving credit facility, now maturing in 2026. And also, ZAR 840 million preference share and extended for 3 years, now maturing in 2024. Plus, at a subsidiary level, we also raised a significant funding for Hesto of ZAR 850 million and ZAR 600 million term facility and a 3-year revolving credit facility. And then finally, from a debt maturity -- excuse me -- point of view, still a very good outlook on the maturity profile of the debt. From a capital expenditure point of view, it was a big year. 2021 will be another important year in 2022. Capital expenditure in '21 was largely aimed at new customer projects, majority being for Ford. Out of the ZAR 800 million in auto components, about ZAR 600 million was specifically aimed at Ford across Hesto and other subsidiaries. And then further commitments for this year, again, is mainly aimed Board Director as well as other customer, slightly smaller projects. And this will, again, include Hesto, Lumotech, Unitrade and automotives with the pictures that Riaz presented earlier. And within energy storage, we'll continue to spend, especially with AgM, absorbent glass mat start-stop technology. We were geared to spend this capital in 2021, but because of supply chain issues, we will now be spending this in 2022. And just to remind you that there is a 55% technology incentive attached to that, which means 55% of the capital that we do get back as a tax incentive. Most of the debt funding has been raised at subsidiary level, but due to the short-term supply cost incurred at Hesto, which is effectively the majority of the ZAR 150 million combined with additional working capital to mitigate against future premium costs. Additional funding of ZAR 250 million will be provided and allocated to Hesto by its new shareholders. Then briefly, looking at the automotive component as a whole, individual performance, good revenue growth, operating profit improvement. As I mentioned, the industry experienced about 8 to 10 days of civil unrest, ZAR 150 million of unbudgeted emergency air freight that we spent to make sure that we can mitigate against that supply can. Hesto, specifically, was also very impacted by customer production variability. It's very sensitive to fluctuations in both volumes and mix. And the free cash within auto was -- consumed was ZAR 820 million, the majority of which was at Hesto, ZAR 520 million. And the return on invested capital, quite imminent, the investment that we're currently making in automotive components, with a return, at the moment, of 10.7% store, well below our internal threshold of 24%. From an energy storage perspective, really good results, driven primarily by new volumes, additional volumes, recovery volumes and excellent margins and good operating leverage. So we achieved ZAR 887 million operating profit across the vertical, 11.7%, being a record operating profit level. And then Mutlu have achieved ZAR 643 million; ZAR Rombat, 84 million; and then FNB achieved ZAR 156 million, which also included a once-off closure cost or restructuring cost of about ZAR 40 million. From return on invested, 25.5% very strong, ahead of 16.3% internal threshold and some working capital improvement. So free cash did decline, but was still positive at 52%. Looking at the segmental performance of the battery business, export auto battery volumes, margin increased from 10.6% to 14.7%. That was primarily volume driven, but the majority of the exports are also hard currency-denominated, which is very important to protect against any Turkish lira volatility. As such, the quality of earnings coming out of Mutlu, both are on hard currency pricing was quite good. Local automotive operating profit improved by 29%, and margins, also slightly improved on the back of additional volume. Industrial performance was still quite weak, low demand both in Turkey as well as -- relatively low demand in Turkey and South Africa. And therefore, we saw a further increased loss in the industrial segment for... [Technical Difficulty] Are we still there? Very good. Although the ZAR 46 million for 2021 does include the restructuring costs. As such, First National Battery, as I mentioned, have now executed on refocusing that business on the trade model and has this production of industrial products. Then from just about company performance, FNB, as I mentioned, great improvement in operating profit, although it's a very challenging environment, aftermarket sales were strong in the last quarter. And late recoveries, through our recycling facility, has been exceptional. And as I mentioned, there was -- is the change in industrial business. Mutlu Aku achieved ZAR 643 million, despite the Turkish lira average devaluation of 28% against the ZAR. Majority of that increase in improvement was hard currency-denominated exports. 2/3 to 70% of Mutlu currency orientated, which is a great position to be. And then Rombat declined slightly to ZAR 84 million. Although the volumes were very good across Europe, including Romania and high energy cost has had a significant input in terms of costing of batteries, and it does take some time to recover the increased input cost from the market, and that is a phase that we're currently going through. Riaz, over to you.

Excellent. Thanks, Sjoerd. So what we thought we'd do is I wanted to just show you a little bit more about our -- one of the biggest projects this year in that the Ford project. Just give you an update on where we are with it. So it is a project that impacts 4 of our automotive component companies in a new way as new business and another 2 as repeat business or replacement business. And obviously, what our customer is intending to do is increase volume along the way, not just bring in a new model, with great export potential. We've had significant additional revenue secured over the model life as a result of the project maturing and as a result of new potential business secured from various of our subsidiaries. We've had some design changes in product complexity and additional portfolio offerings introduced over a period, and our launch date, as communicated to us, still within Q4 '22. Additional capital expenditure approved of ZAR 165 million, with a total CapEx of about ZAR 1 billion, with ZAR 600 million of allocated capital spent in '21 and about ZAR 250 million delayed into $22 million -- or pushed into '22. Project costs of about ZAR 200 million are expected to be incurred ahead of the launch, as well as an investment of about ZAR 400 million into working capital of the period. So overall, we think we're in a good position to support our customer and to bring a good level of performance in the years ahead. In addition to this, from a Metair perspective, the employment potential and opportunity it brings to our group is more than 3,000 jobs over the life cycle of this model. So we have a really good opportunity for jobs in South Africa as a result of this, and certainly, within the communities within which our subsidiaries reside. So what are the key takeaways and outlook for Metair for the future? We had a strong recovery. We had a record HEPS and a record ROIC achieved over the period of '21. We had record performance in the energy storage vertical, driven by Mutlu, as Sjoerd has explained. Our automotive components turnover achieved represents 120% of the 2019 result. We know and we saw from Sjoerd that margins were temporarily depressed due to certain once-off items. But on the whole, our projects are on track. We've got great opportunities from our biggest, most loyal customers, and we're positive about the recovery in both energy and auto. Both volumes in energy and auto lookup. Energy storage volume outlook remained positive, with increased demand for AgM batteries across all channels. Successful execution of projects will result in substantial increase in earnings from '23 onwards. We do realize supply chain challenges and semiconductor shortages are there. We expect them to normalize in the latter half of the year. We think that we've got some mitigation plans we've put in place, better coordination of supply chain, but these are global challenges as well. And our OEMs, knowing what the discussions that I've had with leaders, the leadership of our OEMs, customers that -- they are doing everything they can to bring a stable operating condition to their companies in South Africa. It's not good for anyone. So we think that this will start to normalize in second half of the year. Certainly, there are challenges in Eastern Europe, could be potential issues, but we're keeping a close eye. We've had no great impact thus far and the potential impact, we think, is relatively small, given we are looking actively for mitigation of those problems. And in terms of value creation opportunities, First National Battery will complete that industrial changeover. We would have installed and commissioned our line by the end of the year. We'll continue to position the company for future growth and diversify our customer base in automotive components. And Metair continues actively to work towards value creation opportunities within the energy storage vertical in '22. So overall, we think that it's a positive outlook for the future. We know that, as I've mentioned, our focus this year will also be, in addition to how we see our operational support for customers, our value creation initiatives and that in the short term and then positioning ourselves for long-term value creation. In addition to that, we will take a step forward in sustainability and how we see it, how we deepen our commitment there and what we think will be the right things, not just for our customers, but also for ourselves in the future. So we're very excited about the prospects in '22 and beyond. So with that, I say thank you and look forward to some questions and answers for me.

Thank you, Riaz. [Operator Instructions] The first question comes from Mark Narramore of Excelsia Capital. Can you confirm your current battery production capacity?

Sure, Mark. Current battery capacity is in the region of 10 million units, depending on the mix of batteries. That's across 3 of our companies.

Thank you, Riaz. The next question comes from Warren Riley of Bateleur Capital. Could you give an idea on the shape of automatic components margin as you ramp up the new Ford model? With ZAR 200 million project costs to be incurred this year, could you give a guide on expected EBIT margin range this year and into 2023?

I'm going to ask Sjoerd to handle that.

It depends. So let me put it this way. I think giving specific guidance around 2022 and '23, I think, is a little bit more difficult. It doesn't impact the product -- the project launches. It depends on the mix of vehicles that will be launched, in what sequence they will be launched, et cetera. Needless to say, 2022, given the extent the project costs that we will be incurring will be significantly loss-making, because of the start date for launch of only being in Q4, and typically starts are at much lower volumes than full project volumes. 2023, we should see a significant improvement because project costs will no longer be evident. We don't think that the full year volumes would be still at the full project at dissipated volumes. And as we see it, it could be at 70% or 80% of that. So we should see, probably, mid-single-digit margins. And then longer term, what I can say is all of our projects that we approve, because we don't -- I mean, this is commercially quite sensitive information. So what we can say is all of the projects that we approve in Metair, and this is our investment criteria and that's well known in the market, we do not approve projects that top below 8% operating margin. So what I -- over project labs and certainly, the approval of the Ford project margins, the returns and the operating profit profile certainly meets all of our investment requirements.

Thank you, Sjoerd. The next question comes from [ James Charman ] of Prescient Securities. Could you give your CapEx guidance for 2022, including and excluding Hesto?

Yes. So I think we've done -- it's in the results presentation. We can go back there to this slide. So here's the CapEx guidance, commitments to be undertaken in 2022. So there's 1 -- basically, ZAR 1.2 billion in capital that's been allocated, of which, Hesto is just short of ZAR 400 million.

Thank you, Sjoerd. The next question comes from [ Cuevas Ellise ] of [indiscernible] Capital. On your energy storage value unlock opportunities that you're exploring, can you give an indication of how far along this project is at present?

Thanks, [ Cuevas ]. I think we've tested whether the assumptions for value unlock are evident, they are. We -- as you know, as many of you know, we've talked about this for some time. We started the process in 2019 to establish whether this was a project that we could pursue. We validated that. We tested that in the market at the end of the year. And so we've initiated a process at the start of this year, and we are underway.

Thank you, Riaz. We've got 2 questions from [ Tinashe ] [indiscernible] of Laurion Capital. I'll just go through both of them. Congratulations on the strong results. Can you please elaborate on the changes to the Ford contract from the initial terms and guidance set in 2020 to account for the high-cost environment in which we are currently operating? The second one, can you also elaborate on the extent of synergies between the main Ford plant and the current operations?

I'll do the first?

Yes.

So effectively, what happens, it's a bit long answer, but projects are awarded at a certain project, foreign exchange rates, certain project assumptions around inflation costs, et cetera, and that's kept at a point in time. Then ahead of, what we call, SLP start-up production, there is a final job one, let's call it, costing that takes place between ourselves and the customer, where the rates, in terms of project rates, et cetera, are then adjusted to the current environment, current ForEx and current, I would say, inflation. What Riaz mentioned in the updates, I mean, we also secured new business which required additional capital, especially in the localization of wire through to Ford. So that is one item that has changed. And then ultimately, in terms of negotiating of -- not get into too much detail, but as part of the commercial understanding between us and the customer in all projects, is there's typically a level 1 design in which initial quotations to take place. And as the complexity increases, it might require more commodity, in this case, more copper, more wires, et cetera. And that's all factored into where we finally get to at start of production. Needless to say where we currently are, we have effectively passed all of the required costs, including design changes, including complexity, et cetera, through to the customer on all projects.

[ Tinashe ], the second question was, can you elaborate on the extent of synergies between the main Ford plant and current operations. In some cases, it's an extension of existing operations. And in other cases, for example, Hesto, it was a new second factory that we needed to build. But in all cases, I think it's within the same organization, it's sharing IP knowledge and basic infrastructure. So there's generally a dilution of fixed costs within all of those environments. So you bring some synergy to the companies in terms of overall growth and performance. So in essence, that's where we are. That's our crux.

Thank you, Riaz. We have 2 questions from Tayla Ginsberg from Umthombo Wealth. The first one. Why was there such a turnover in Board members?

Tayla, thanks. It was -- so we had 4 new board members. It was a refresh of the Board. It was Board members who had left, retired. And in addition, CEO, [ in brunt ], had also retired from the company. So it was a refresh of the Board.

The second question from Tayla. Given the success of energy storage, do you see a way to extend on this segment of the business, for example, making acquisitions or going into new markets?

Tayla, thanks for that. I think we are taking a step-by-step approach here, because we obviously can't do too many things at the same time. What we want to do is, firstly, establish that there is an opportunity for value creation within energy storage. That's what we've done. We've had great performance from those companies, certainly, in 2021. Having said that, there's also a great opportunity as well, should we find the right outcomes. And so I want to find with -- I want to find a degree of certainty in the company that then allows me to pursue opportunities, and there certainly are. We are always and will always be open to potential opportunities for the company. So I think there's, firstly, a project underway that we need to complete, and then we'll look further after that.

Thank you, Riaz. The next 2 questions come from [ James Charman ], again, from Prescient Securities. Could you give an idea of air freight costs in 2022? Also, is Mutlu now at full capacity?

Airfreight costs in 2022, we've seen a reduction in airfreight costs. Certainly, at the start of 2022, we -- but that's partly because on the one hand, we're carrying more stock. On the other hand, we're more coordinated. And I think in general, we have better communication all around with either shipping companies, air freight forward as customers, et cetera. So I think there's a better understanding of the impact that this causes and therefore, there's -- the effort is a lot more coordinated than it was before, certainly. But still, we are hit with air freight costs. And I can't yet give an indication of how much that will be. Suffice to say that thus far, it's been much less than 2021. The next question was is Mutlu now at full capacity. Yes, Mutlu is now running at full capacity. We had a record year in volume last year, and we'll have a record year potentially this year.

Another question from James. Hesto was loss-making. How much was start-up costs? And can you give an indication for 2022?

So about -- so Hesto made a profit loss after tax of about ZAR 57 million, but operating loss is about ZAR 90-odd million. The majority of that ZAR 90 million would be airfreight-related, with the balance, probably 2/3 of that would be even more. Total air freight for 2021 was about 150, of which Hesto share -- probably, share was just sort of 2/3 of the total air freight cost. So the start-up cost in 2021, if I recall correctly, it was between ZAR 20 million and ZAR 30 million.

Thank you, Sjoerd. There are a couple of questions relating to the Russia-Ukraine situation at the moment. So I'm going to go through them and then we can you address them all at once. So the first one, on the supply issues that some European OEMs are experiencing sourcing automotive components, given the war in Ukraine, is there any specific short-term export opportunities for Metair and in which subdivision are these specifically? That was from [ Cuevas Ellise ]. We have another question from Craig Shapiro. Can you give us a sense where if -- what countries Mutlu exports are going to? Where there are any new export contract wins for Mutlu? How much exports are going to Russia? And are these exports at any risk?

Sure. [ Cuevas ] and Craig, I think we've got Russian -- we've got exports into Russia, Moldova, Ukraine, Belarus. We've been -- we've got long-standing customers in the region from both Mutlu and from Rombat. In total, they form between 6% and 7% of total volume for Mutlu and Rombat. So sort of mid-single digits in terms of overall volume. We do have potential customers that we can find in other markets in North America and in South America. And so we think that, that's a good potential for us in the future. Certainly, to mitigate this issue, we've now paid much more attention to those opportunities to see how they can be certainly mitigated. And that volume generally comes in the second half of the year, not so much in the first half of the year. It's in the lead-up to winter that we see a lot of that volume coming through. So the impact for the first half of the year, we don't see as being too great. And we think that by the time we get to the second half of the year, where we saw -- we see generally, seasonally, that volume coming through that, that would be mitigated yet.

Part of the question was were there any new export contract wins for Mutlu?

We did have an export win from Mutlu into North America, and that'll continue into '22 and potentially, into '23. And so we're quite confident about growing that order, yes.

So most of the questions from [indiscernible] M&G Investments have been answered as part of these responses. But she also asked if you can comment on the potential impact of Turkey inflation on costs.

Sjoerd, do you want to take that one?

Yes. So Turkey inflation, I mean, it goes into the cost base. I think it's important to understand what percentage of costs are inflation-linked. So the business, about 80% of the cost of a battery is hard currency denominated. So that's plastics, its led, it's various other components. That is currency linked, which is also important to understand, because those are typically euro and dollar pricing. On the other hand, there's about, I would say, 15% to 20% of the cost base that would be local cost, and that would certainly be impacted by the currency. So what we try and do, and we tried to do this over a number of years, is to turn Mutlu into a very much a hard currency-focused market. If 70% or 80% of the cost in the business is hard currency-denominated, then we need at least 70% or 80% of the business to be hard currency linked in terms of its sales. And so the hard currency link in export markets are typically just invoiced and hard currency through OEMs, it's typically an adjustment mechanism in terms of currency. So despite the recent increases in inflation, we still -- given our position in the market, we're the market leader. We're the leading brand given the performance of our cost, our quality, our delivery. And this is not a new phenomenon. I mean, we've been effectively increasing and passing through all currency costs as well as inflation into the 3 sales channels very successfully, and we believe that we will continue to be able to do that.

Maybe a related question from Mark Narramore. Can you give more color around the new AgM demand contracts? Should we expect a higher average battery price coming through over the next few years?

Yes, I think that's -- I mean, across -- I suppose, across all companies that are, specifically at the moment, OEM-focused, I think at the moment, we could produce about or sell about 600,000 to 700,000 AgM batteries. And then I think into next year, on the back, once the -- once this capacity has been installed, that will probably deliver another 200,000 to 300,000 AgM batteries. And those are new contracts. Some of them are export contracts. So that should increase Mutlu's capacity and we should be able to fill additional volumes with AGM. Within Turkey, I mean, we're about 85%, 90% of market share. We're the only provider in OEM, plus we're the only producer of AGM in Turkey. So I think as Turkey OEM production grows and as other export opportunities arise, there's very good potential for AgM.

Second part was will you expect a higher average battery price coming through over the next few years?

Yes, actually, as that mix changes, AgM batteries are typically twice the price of a conventional flood of battery and then certainly, from a -- in the aftermarket, I mean, we're also seeing AGM uptake starting to come through quite well in aftermarket, and that pricing is even more significant, but it does depend on the channel, ultimately.

Thank you, Sjoerd. We've got 2 questions from [ Simon Fillmore ]. The first one, I'd be grateful if you could confirm your long-term return on invested capital target. And the second one, if you can confirm your long-term battery volume target.

So the long-term return on invested capital targets, our cost of capital is about 16.4% -- 13.4%, 13.5%, in that region. And our long-term target would be at least a 3% to 4% excess return on the cost of debt.

Thank you, Sjoerd. We have a question from [ Cuevas Ellise ]. With the current 55% technology incentive, as well as some historic incentives, what is the expected effective tax rate in Mutlu for 2022 and 2023?

Okay. So let me put it this way. The initial investments are the AGM investment that we have approved is about $10 million. 55% of that would be returned through the tax lot. So depending on ultimately where Mutlu's profitability ends up, you could be in a position where you pay much less, even sometimes 0, in terms of tax. On top of that, we have mentioned that we are moving the lithium-ion line to Turkey. That also has a potential incentive scheme attached to it. If we're successful in securing that, then the forecast of that lithium line, which is about, let's say, potentially, EUR 10 million or EUR 12 million would also be recovered through the tax line. So it's very effective in terms of securing modeling incentives. We could be in a 0 taxable position for 2022 and potentially, 2023. Bearing in mind there's a lot of group companies, some of the group companies will still pay tax. So they will be marginal -- could be marginal taxes payable.

Thank you, Sjoerd. And just a comment from [ Debbie ] [indiscernible], she says an excellent set of results, well done, Riaz, Sjoerd, and the Metair group companies. There's no more questions.

And thanks much for your support in our funding. I appreciate it, [ Debbie ].

Great. Thanks, everyone. I appreciate it. If there's no more questions, I think we're going to end. Thanks, everyone, for your attendance, and certainly, thank you for joining us and hearing about our results for 2021 and what we think about 2022 and our outlook, certainly very positive. And we are extremely grateful to all of our employees and everyone who helped us to get to this point. And especially, the staff and head office who've done a great job in preparing everything to this point. Our integrated annual report, all of the results, to get through our audit in great time. So thank you, everyone, for their contribution to Metair. Thank you.